Leveraging the Loyalty Margin: Rewards Programs That Work

Leveraging the Loyalty Margin: Rewards Programs That Work

          
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Leveraging the Loyalty Margin: Rewards Programs That Work

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    The Current Loyalty Landscape

    Loyalty programs come in all shapes and sizes and demonstrate coincident disparity in their effectiveness. In the retail industry, for example, our analysis of six different company programs showed a range of increases in incremental share from 8 percent for one company to 114 percent for another. The results of the other four were spread across the spectrum.

    Most loyalty programs do an adequate job; few outperform. There is a paradox at work here. Customers want to engage more with loyalty. Program costs are falling. Yet the typical program converts only a fraction of customers, and then only a fraction of those who join actively participate. (Remember those 12 dormant programs per household?) As more competitors use loyalty programs, it becomes increasingly difficult to differentiate and deliver real value to customers.

    Most programs fail to make, dynamically and over time, the right trade-offs about which customers to target and which of the three loyalty levers to target them with. Best-in-class programs have a substantial impact on revenues and distance themselves from the pack on the critical metrics of loyalty margin, incremental share, and program size. They can generate up to 50 percent more traffic and 30 percent more spending among members. But from the company’s point of view, the margin for error is slim. Great programs create value for the brand, but middle-of-the-road programs can often erode value through excessive discounting and high program costs. (See “Devoted Dining: Restaurants Reward Loyalty.”)

    DEVOTED DINING: RESTAURANTS RECOGNIZE LOYALTY

    Loyalty programs have taken hold in the restaurant industry only in the past few years, but they are making their impact felt. BCG consumer researchers found that nearly 40 percent of restaurant-loyalty-program members increased the frequency of their visits after joining full-fledged programs. Nearly 25 percent increased the amount they spent. High-performing, best-in-class loyalty programs, in many cases, see even more significant boosts—nearly 50 percent of members of these programs reported more frequent visits, and nearly 30 percent reported increased spending.

    Little surprise, then, that more restaurants are establishing loyalty programs. More than 90 percent of restaurant chains offer a program of sorts, ranging from an e-mail club to a full-fledged loyalty program.

    At the same time, more customers are becoming loyalty program members. The restaurant industry had more than 26 million loyalty-program members in 2012 and the highest growth in loyalty program membership among all sectors from 2010 through 2012, with incremental membership growth of more than 170 percent, according to Colloquy.

    That said, only about half of all restaurant patrons have joined a loyalty program. They cite lack of awareness of available programs as the number-one reason for not enrolling. For restaurants, signing up customers at the register is the most effective way to increase enrollments, but inconsistent in-store execution remains a prohibitive barrier.

    Like other industries, restaurants report massive variability in the effectiveness—and, consequently, the value—of their loyalty programs. Many programs offer only basic earn-and-burn reward structures. There is a large gap between best-in-class and worst-in-class programs, which is reflected in the critical metrics of loyalty margin, incremental share, and program size. The gaps are significantly greater in comparison with other industries, such as the airline, hotel, and banking industries, that have longer loyalty-program experience.

    Also as in other industries, the mobile-app loyalty experience is growing increasingly important, with major players—including McDonald’s and Burger King—redesigning and relaunching loyalty programs to incorporate new tools, such as digital loyalty cards and mobile wallets.

    Panera Bread, a leading restaurant in the fast-casual segment, has taken care to build a brand-supportive program, and it is experiencing success across all three aspects of the economics of loyalty. Our research indicates that more than 40 percent of its visitors are enrolled—the highest enrollment of all the chains we observed. MyPanera, which offers redeemable rewards on the basis of purchases, drives significant incremental visits and spending after enrollment. Although recognition is not explicit, the value of rewards is based directly on the amount spent. Panera takes its customers’ purchasing habits into account, using its individualized knowledge of each customer to create uniquely tailored rewards. Panera also leverages its loyalty program to “surprise and delight” customers. As opposed to traditional programs with point balances that make redemptions feel transactional, Panera reveals gifts unexpectedly, sometimes even offering items not traditionally for sale, such as exclusive previews, tastings, and special events. The company makes it easy for customers to enroll, engage, and redeem rewards.

    Panera is ahead of competitors today, but the company knows that it cannot rest on its laurels. Management puts a high priority on continual innovation of MyPanera and thinks about ways to refresh the program for the next generation. So far, MyPanera is more the exception than the rule, leaving room for improvement and growth in many restaurant-loyalty programs. (See the exhibit below.)

    exhibit

    Loyalty programs also need time to develop and demonstrate their value. Most companies evolve their programs over a period of years. The American Airlines AAdvantage program, one of the earliest and largest in terms of membership, has gone through multiple iterations since it was established in 1981, and it still undergoes periodic modification. A common mistake many companies make is trying to move too quickly. New programs need to establish a proof of concept that is both attractive to customers and meets the economic tests described above. Companies walk a fine line—investing too little, preventing the program from building incremental share, and investing too much—especially in the early days when it is not yet clear what’s working, and this can lead to misguided spending and erosion of value. It’s fine to be patient, so long as the company has a plan and knows what it is trying to build. (See “Leading to Loyalty.”)

    LEADING TO LOYALTY

    Loyalty programs are dynamic undertakings: it requires time to get them right, and they must be monitored, adjusted, and updated continually to account for evolving economic and business conditions and consumer preferences. Although every company is different, we have seen that for building loyalty, the best companies follow a roadmap that calls for the following approach:

    • Start with a program that is modest but sufficiently substantial to attract members, and establish processes for gathering feedback that enables learning and adjusting as you move forward.
    • Identify rewards and demonstrations of recognition that have low implementation costs but high value to customers—the fundamental components of your loyalty margin. Because these rewards and demonstrations of recognition will be part of your earn-and-burn, or recognition, structure, you must make sure that they are consistent with your brand.
    • Use low-cost loyalty and customer-relationship-management vendors to capture relevant customer data.
    • Mine customer data to create loyalty segments that are based on customers’ long-term value to the brand or company. Offer tailored promotions and products that are both in line with the overall marketing calendar and aimed toward increasing the long-term value of customers in each segment.
    • Create a cross-functional team to support the loyalty effort, ensuring that it is tightly integrated with the overall marketing strategy and other channels of the customer experience.
    • Once you have a proven design, invest in scaling the program.
    • Continually monitor loyalty innovation and customer needs in your industry and update the program accordingly.

    At their best, loyalty programs provide a true competitive advantage. They are tightly linked to the brand and closely integrated with all marketing and sales functions. Their financial contribution is self-evident, but their full value extends beyond the income statement. They provide data and knowledge on customer preferences and behaviors and enable predictive modeling that informs marketing and brand-building strategy. (See Exhibit 3.)

    exhibit