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 Chuck Schaeffer How to Create Loyalty Programs That Work

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Top Customer Loyalty Challenges and Risks

My dad told me that experience is what you get what you don’t get what you expected. Those turned out to be some wise words. Based on my experience and the experiences of others, here are some common challenges and mitigation techniques that may help your journey.

  • Loyalty programs can’t be run by just marketing. The most effective loyalty programs leverage cross-functional teams with representatives from stores, finance, merchandising, strategy and marketing.
  • Loyalty program managers who fail to report the payback of their reward programs put those programs at risk of abandonment. It's essential that any loyalty program demonstrate clear financial rewards to the business.
  • Many loyalty program managers over-concentrate their loyalty objectives and activities toward the most profitable customer segments. While this segment should most certainly be pursued, there’s likely a bigger revenue opportunity with consumers who are not yet in these segments. In my experience, I've always achieved a bigger total revenue impact (but not necessarily bigger margin impact) by applying targeted programs toward a much larger group of lower value customers. This technique can be further aided by identifying profiles and patterns of your most loyal customers and then finding similar traits among customers who are less engaged.
  • Irrelevant marketing communications or blasting loyalty members with irrelevant messaging remains common, and is a top factor in reducing program effectiveness and contributing to member abandonment. A lack of personalized, relevant, timely and contextual communications as well as not using customer preferences, purchase history and digital footprint behaviors results in a failure to turn customer insights into marketing actions. It's similarly critical to test messaging and offers across the four permutations of customer segment, message/offer, channel and timing.
  • Consumers cite unclear value propositions, lackluster program benefits and irrelevant offers as reasons they don’t join loyalty rewards programs.
  • Insufficient incentives are a top cited factor among loyalty members who drop their programs. This will be reflected in your breakage rate calculation.
  • According to a research study by Edgell Knowledge Network, titled "State of the Industry Research Series: Customer Loyalty in Retail", 81% of loyalty members don't know the benefits of their programs, or how and when they will receive rewards. The research cites this as a top reason why consumers are not loyal to the brand.
  • A loyalty survey done by Maritz Loyalty Marketing reported that the majority of consumers abandon loyalty rewards programs because they grow tired of waiting for the points to accumulate. 70% of the consumers polled cited the length of time it takes to accrue points. In the 18 to 24 age group, that figure grew to 79%. It takes six to nine months of spending on average to accrue enough points to redeem them for rewards. The study also found that individuals who earn more than $125,000 annually are willing to increase spend to accumulate points, but that they are very selective and will drop an existing rewards program for a new better program.
  • The top two technology challenges include data integrity issues (having clean customer data) and siloed systems (such as customer data in CRM, marketing data in marketing applications, purchase transaction data in ERP, billing data in legacy systems, survey data in another database, multiple channel conversations in separate databases, and shadow systems.) Retailers often complain of a lack of integration across channels, for example, consumers sign up for loyalty programs online or via email, however, the store loyalty cards or POS systems are not updated. Achieving a unified, cross-channel loyalty program requires a central customer system of record (likely being the CRM application) with real-time integration or synchronization to related applications. There’s a strong benefit if your loyalty application is embedded within your CRM system, as opposed to being a separate system that must then be integrated.
  • Like store layouts and merchandise displays, loyalty programs have a lifecycle. Themes, messaging, promotion and rewards need to be experimented and refreshed periodically (no less than annually).
  • Incentives and rewards must be consistent across channels. If consumers find that different channels deliver difference experiences they will lose faith in the retailer and/or game the system. A pre-requisite to consistent channel offers and communications is to make sure internal departments (such as stores and e-commerce) are not competing with each other.
  • Don’t confuse "loyalty" with "rewards." Loyal customers consider their favorite brands first. Loyalty denotes advocacy while rewards are one small tool used to create loyalty.
  • Don’t confuse "loyalty" with "retention." These terms are both important, but apply different practices to achieve different goals. Loyalty is measured by customer share and uplift, among other metrics. Retention is often gauged by renewals or repeat purchases and measured by customer churn and Customer Lifetime Value.

Closing Remarks

Loyalty programs are more about gaining customer insights than offering discounts or granting rewards.

Analysis from loyalty programs can help retailers build better consumer relationships based on personal relevance.

Best in class retailers take the lead in identifying the most relevant up-sell and cross-sell offers, implanting them within the constructs of loyalty programs to support consumer recognition and VIP treatment, promoting them on the consumers preferred channels and permitting redemption across channels so that loyalty offers are consistently executed and build upon the customer experience.

Consumers expect incentives and rewards from retailers and services organizations. Brands that fail to deliver on these expectations are clearly at risk of losing those customers to competitors that give consumers what they want.

While loyalty programs which act upon consumer insights for more personal engagement do contribute to loyalty, it’s important that retailers also remember that product availability and customer service are two additional drivers proven to achieve the elusive goal of customer loyalty. End

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Comments (8) — Comments for this page are closed —

Guest wetail
  We implemented three loyalty programs and none of them have delivered the benefits and all of them were eventually scrapped. I think we struggle on finding the differentiation you suggest in #2 of your framework. Any suggestions or references of companies that do this well appreciated.
  Chuck Chuck Schaeffer
    Loyalty programs face the same commoditization challenges as products and services. In a Forrester research study that looked at loyalty programs across industries, they noted that credit card companies achieve 70% loyalty (defined as consumers who look to that brand for additional purchases), while individual credit card company USAA achieved 98% loyalty. You have probably seen the USAA commercials indicating that their products "we’re earned" due to military service. They promote this theme heavily and research shows it works. Personally, as a veteran I don't appreciate a credit card company suggesting that their product was earned due to my military service, but I guess that's just me.

Guest Therese Murrey
  You identify a big point that most retailers miss. Loyalty programs cannot buy customer loyalty, but they can acquire customer information that leads to smart business decisions and more loyal customers.

Guest SAfasttrack
  We’re looking for a loyalty system to integrate with What functionality do you think is most important?
  Chuck Chuck Schaeffer
    I’d caution you not to put loyalty software feature sets in front of loyalty objectives and proposed business processes. But that said, from my experience in implementing loyalty systems, I’ve found a key feature to include is flexible program configuration based on the combinations of loyalty programs (i.e. Gold, Silver, Bronze), customer type and reward type (i.e. reward points, accumulated discounts or product redemptions based on activities and/or purchase history). Other frequently used features include member management (enrollment, activation, deactivation), voice of the customer and survey outreach, designated brand/store participation, partner (co-op and coalition) programs, loyalty card processing, member opt-in/opt-out (by loyalty program), program effective dating, tiered programs (i.e. move consumers to higher tiers based on activities (referrals, engagement) or purchases), call-center scripts, automatic creation of loyalty accruals (to post to your GL system), points expiration dates, points-based business rules (i.e. accelerators, bonus point promotions or reward double points for select purchases or activities), intelligent offers (cross-sell, up-sell, next-best-offer suggestions), redemption rules (i.e. kit/bundle, spiff or combination product redemptions, triggered rewards, date effective periods or maximum percentage or points attributed to select products or purchases) and fraud management rules. Key reporting should include loyalty effectiveness (i.e. comparing customer share, sales, margins, CLV, activities, engagement, satisfaction, referrals and the like among loyalty and non-loyalty members), RFM analysis, member statements and loyalty program ROI. Lastly, workflow processing in both the loyalty system and CRM software is extremely beneficial.

Guest Sanjay Peduhimil
  loyalty reward programs are also a big help with stock control and improved merchandising

Guest Nana411
  Good loyalty programs are designed to reinforce their brand's distinctive qualities.

Guest Paul Haines
  Great article, but if there is one single point I would highlight it is that while freebies and discounts are effective loyalty program incentives, they are also costly. Retailers can often achieve the same loyalty program success with status and recognition rewards.


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Consumers cite unclear value propositions, lackluster program benefits and irrelevant offers as reasons they don’t join loyalty rewards programs.


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