3 ways to improve your loyalty program

Revenue is vanity, profit is sanity, value is king

Loyalty programs are widely spread. Accenture stated in 2020 that 90% of all companies have some sort of initiative to improve retention, increase life time value and ameliorate brand attachment. Doing a comparison of various loyalty schemes, I ended up surprised by the generosity companies show when it comes to granting free shipping, standard discounts and other perks. As a consequence, I started asking myself if this can be profitable. While one can argue that all those measures increase loyalty, bind the customer and are therefore fully justified, the monetary benefits are often hard to measure and it remains unclear if investments into loyalty finally pay off. Admittedly, judging the return on investment of loyalty activities can be a tough nut to crack. For example, a direct comparison of consumers inside and outside the loyalty framework shows a distorted picture that is caused by self-selection of the program which finally leads to overstating the profitability and effect. Moreover, signing up is a no regret move from a client perspective that grants access to benefits without any disadvantage (paid VIP services aside); hence, it is not clear if positive results on consumption and tenure are a direct result of the loyalty measures (loyalty programs increase loyalty), or the result of a self-selection (loyal customers benefit most from signing up). Ultimately, the key question for any organisation is if the financial benefits exceed the cost and what is the financial impact. However, this seems to be a challenging question and analysing loyalty data and accurately measuring the effect of loyalty programs seems to be a slippery slope overall. Harvard Business Review published an article where the impact of a retailer’s loyalty program in Asia was investigated. The results suggest that on average spendings doubled after subscribing, consumers bought a wider range of products and 75% of the increase comes from products that consumers had not previously bought. I would argue that at least part of this is the reflection of a standard customer behaviour, because mostly people will enrol early when they start buying from a new business; therefore, the observed uplift is maybe just the consequence of this. New buyers show an increase in spendings and buy products they have not bought before. Is this a direct effect of a loyalty program?

Some aspects where a loyalty program might backfire on financials are granted discounts and free shipping which I found to be most common perks. Both increase cost for the organisation, but free shipping is also likely to decrease basket size, because there is less need to bulk purchases. ?On the decreased basket size one can counterargue that this yields to higher frequency and could increase consumption; however, this is not given.

Where am I heading at? Designing and tracking a loyalty program is far away from being easy. Below are three thoughts you might want to consider when it comes to measuring profitability, increase the impact of discounts and join forces with a referral scheme.

?

1.??????Improve value tracking

The only way to fully understand the impact of a loyalty program on purchase, tenure and customer value would be to introduce a control group i.e., people that do not have access to the initiative and represent a standard for non-treatment. This approach is relatively easy for other marketing measures such as e-mailing campaigns; however, for loyalty programs it seems hard to implement (if you know how, please drop me a line). However, even without a perfect control group there is a proxy to estimate the uplift. The question to ask is, “Which customers within the loyalty program are hardly affected by it and therefore exhibit by and large the behaviour of a control group?” The answe: non-redeemers; hence, people who have signed up, but do not really care about their benefits. Non-redeemers show little engagement in the program and the rewards marginally influence their behaviour; in contrast, redeemers exhibit higher engagement and take action to enjoy their benefits. How to compare the two groups in detail? I found an article suggesting to compare redeemers and non-redeemers within the same value tiers; however, I think this is not sufficiently accurate, because it is based on the assumption that redeemers would be in the same value tier without incentives which could underestimate the difference. I would rather suggest to compare redeemers and non-redeemers of the same age, gender, location and tenure regarding purchase frequency, value etc. and assume the delta as the program uplift.

2.??????Consider earned discounts and benefits

Giving discounts is for sure the most widely spread marketing tactics. However, discounts come with a cost, not only on transaction value, but also more indirectly for example on perceived product and service quality or brand image. Beside those drawbacks it raises the question how much a discount is valued by consumers. Interestingly, research in the field of behavioural economics suggests that humans value a discount more when they have to put in some kind of effort to receive it and accordingly attribute higher value to “earned discounts”. This is known as “effort justification” which states that to justify an effort, individuals tend to like objects and outcomes more when they are obtained through effort. ?

Applying this knowledge to loyalty concepts means that instead of granting discounts and other perks to anyone unconditionally, customers need to earn discounts and benefits. Tiered loyalty concepts, where clients that spend more receive more or better rewards, are one form of this, because individuals who invest more earn higher benefits. But there is more to this and by linking perks and benefits to desired customer behaviour (=effort) a company can kill three birds with one stone, means triggering valuable behaviour, increase the perceived value of the granted perks and improve engagement. ?Thinking about desired customer behaviour in context of loyalty programs this would be for instance repurchase, opening newsletters, following on social media, referring friends, writing reviews, signing up for communication channels such as SMS or WhatsApp, participating in surveys, sharing data, trying new products etc. To this end, it is worth considering to link the actions mentioned above to rewards that finally translate into a remuneration. This could mean for example that in order to reach the next tier of a loyalty program consumers need to accomplish a couple of tasks and exhibit ongoing engagement with newsletters etc.

Beside the higher appreciation for the benefits this approach has another positive angle. It is beneficial for the brand, because a discount that was earned by the client does not devalue brand perception; ergo, it is possible to grant discounts without depreciating brand value. ?

?

3.??????Join forces with your referral program

Referral programs are frequently operated in a stand-alone mode where referrers receive a reward for generating new leads. However, to fully leverage the potential of referral and loyalty programs and drive retention and acquisition at the same time it can be fruitful to join forces. Why is the combination of loyalty and referral very effective? The engaged members of a loyalty program are the perfect target group for referrals, mainly for three reasons:

1. Customers that are highly engaged in a loyalty program, most probably have a positive attitude towards the business and therefore a higher likelihood to promote a business compared to customers that show less engagement. In short, they are more likely to promote you.

2. Customers that engage with a loyalty program are more likely to change their behaviour when offered an incentive which makes them an excellent target group for referrals. In short, they are receptive to incentives.

3. Extending loyalty benefits with referral rewards offers an additional source of advantages to customers that strongly appreciate receiving rewards; this further strengthens the attractiveness of the loyalty program for clients. In short, they will appreciate.

To summarize, individuals with high engagement in your loyalty program are most probably your most powerful referrers. But not only with respect to quantity, also regarding quality. A prospect who is referred by a friend is four times more likely to buy and moreover has higher chance of being loyal. All of this creates a powerful mix to grow and maintain a loyal and profitable customer base.

I hope you find the points on value tracking, earned discounts and referral programs helpful and can use it to improve the success of your loyalty program.

About me: I am a marketer focusing on CAC, CLTV management and demand generation in B2C digital business. My passion is to create products and services that are in demand, because they create true value for customers. I hope you find the article helpful! Please do not hesitate to reach out directly, if you have any questions or want to discuss further.

Let’s grow!

Julia

?#loyaltyprogram #marketing #marketingstrategy #behavioraleconomics