Leveraging the Loyalty Margin: Rewards Programs That Work

Leveraging the Loyalty Margin: Rewards Programs That Work

Title image

Leveraging the Loyalty Margin: Rewards Programs That Work

  • Add To Interests
  • PDF

  • Related Articles
    Getting Your Program Right

    Regardless of the industry or company, successful loyalty programs have economic goals that are consistent with overall company strategy, they use all three types of loyalty levers, and their economic performance—including estimates of brand dilution and sales cannibalization—is closely tracked by the company. (See Exhibit 4.)


    Too many programs focus on only the most basic loyalty lever—earn-and-burn—which does little to deliver incremental share. While these programs reward repeat purchasing, they do not differentiate among customers or recognize a company’s most valuable customers, who often expect more from a loyalty program than just incentives. This is especially true of Millennial customers. These programs also risk “training” customers to buy on the basis of discounts rather than brand or product affinity.

    Brands intent on building loyalty use both rewards and recognition to increase the customer value proposition. Recognition programs provide differentiated services and offerings to customers on the basis of status. They drive incremental revenues from top customers who expect—and value—recognition from the brand. Many provide special surprise-and-delight benefits to top customers at low cost but high perceived value.

    Anyone who flies frequently is familiar with the multiple tiers that airlines have built into their loyalty programs. One leading retailer structures its program in six tiers with the threshold—and rewards—for each tier increasing disproportionately as customers move up the ladder. At the upper tiers, the company offers a variety of surprise-and-delight rewards—such as free in-store dining, no-cost alterations, and free repairs to worn merchandize—that are inexpensive to provide but to which customers assign high value. The goal, of course, is to encourage midtier customers to boost their purchasing to reach top-tier status. The company still benefits significantly from the big mass of lower-tier customers who participate in the interactive and data collection elements of the program without generating substantial program costs.

    The most sophisticated brands leverage customer intelligence with CRM programs to boost program incremental share through targeted promotions. There can be big variances in the importance of program benefits among customer segments. Customer intelligence helps assign the right attributes to the right customers. Understanding what customers buy, where they buy it, and how discount-oriented they are can shape targeted loyalty-program offerings and promotions. Customer intelligence can also inform the strategic expansion of offerings (for example, multiple options to earn and multiple options to redeem). This data is sufficiently valuable in a broader context—setting direction on such issues as pricing, inventory mix, and store locations, for example—that we have seen companies deliberately build break-even loyalty programs with the goal of generating a competitive database of customer data.

    One high-end retail chain installed a new CRM system that takes data from all the company’s sales channels—in-store, catalog, online, credit card, and loyalty program—and uses the information to segment customers into three groups by the amount they spend. It then subdivides these segments into more than a dozen groups on the basis of purchase history and frequency as well as other criteria. It uses the results to tailor not only customer communications and special offers but also store design, product assortment, and promotional campaigns. In the past several years, the cost of CRM and data-mining capabilities has fallen, making the payback on CRM programs more realistic for many brands.

    Successful brands are fanatical about providing the best end-to-end loyalty-program experience for customers. They ensure a seamless experience across all customer touch points, including enrollment, engagement, and redemption. Consumers continue to actively seek out ways to interact with their favorite brands. Today, this increasingly means interacting with loyalty members digitally and on their mobile devices. The mobile-app loyalty experience is gaining importance, with several major players such as McDonald’s and Urban Outfitters redesigning and relaunching programs to incorporate such innovations as digital loyalty cards and mobile wallets.

    There are additional strategic options for maximizing loyalty program economics. Loyalty program partnerships between complementary and mutually reinforcing brands add value for program members and company participants. Companies with more advanced programs are exploring the possibility of monetizing brand and loyalty expertise by reselling customer-segment-definition data and their data-mining capabilities.

    None of this is easy or accomplished using a cookie-cutter approach. Successful loyalty programs are tightly shaped around the individual attributes of each company and brand.