A customer loyalty programme is a major boost if it works, but an expensive price-reduction exercise if it doesn't, as Chris Jacobs discovers.
Customer loyalty programmes need to make a profit.
They are a long-term investment and achieve their return from retaining profitable customers and increasing their spending. In contrast, Groupon-like programmes attract promiscuous shoppers, whose spend isn't profitable and who quickly switch to a competitor whenever they are offering a better deal.
Promotions result in sales peaks, but have no effect on longterm loyalty.
Typically, a sales uplift of between 1 and 2 per cent will be needed to break even. The operational and technology costs, although daunting when seeking approval from the board of directors, are small in comparison to the cost of the rewards given to the customer. The percentage of sales issued as rewards will vary by purchasing profile and business sector, and will vary from 1 to 10 per cent.
The costs of implementing and running a programme are significant and, once a scheme is launched, it is difficult to exit without disenfranchising the best customers. The expected return on investment (ROI) needs to be calculated and verified beforehand, and constantly monitored to ensure the programme is delivering on its promises.
- Spend 30 to 50 per cent more per transaction
- Visit three times the average
- Spend four times more a year
- Account for over 50 per cent of sales.
- 2 to 10 per cent in grocery
- 5 to 15 per cent in restaurants
- 5 to 15 per cent in financial services
- 10 to 15 per cent in fashion
- 15 to 20 per cent in petrol.
- Higher frequency of visits
- A Increased spend per visit
- Cross-selling
- Reduction in mark-downs
- Reduced marketing spend (due to targeting)
- Improved retention and lower churn rates.
In the long term, retention produces the biggest gain. Keeping customers just that little bit longer can have a very significant effect. For example, increasing retention from 80 to 90 per cent doubles the lifetime value of the customer base.
When should we expect the programme to be producing a return? It varies, of course, depending upon lots of factors. Nevertheless, payback (ROI) should be achieved in two to three years, with positive annual profit generated in the second year.
As rewards are the largest single cost area, the cumulative liability of which has to be accounted for on the balance sheet, breakage (unredeemed points) has a significant effect on profitability. High-frequency retailers (grocers, for example) will have redemption rates of 80 per cent and above, whereas low-frequency retailers (leisure, restaurants) could be as low as 20 per cent.
The rich behavioural data that is collected can be used to generate other revenue streams, particularly from supplying brands that do not have easy access to the end consumer. However, this should be seen as a spin-off benefit in later years, not a basis for cost justification.
It is very important that marketing spend is directed at those customer segments that have room for improvement and at those customers who do actually respond. Money should not be wasted on marketing to customers who don't change their behaviour or are deal-seekers.
Getting approval to launch a programme is always a necessary step and will involve a board decision to commit to spending the money. It is never easy and shouldn't be so. Finance departments are inherently more easily persuaded by plans to cut costs rather than initiatives to increase revenue.
The best way to verify any theories about customer loyalty and its benefits is to run a pilot in a representative number of outlets, the results from which can be extrapolated to forecast the full potential of a rolledout scheme. The length of the test will depend upon frequency of purchase and the size of the expected gains. There is no point in running a test for three months if the annual frequency is six. It is necessary to measure the difference in the non-participating outlets with the difference in the test group because there will obviously be other factors which affect spending.
This article orginally appeared in a special report on Customer Loyalty, produced by Raconteur Media and published with The Times (UK). For further content by Raconteur Media click here.