How to Create a Customer Loyalty Program That Works

We’ve all heard that it's 3 to 5 times more expensive to acquire a new retail consumer than to upsell an existing one. Or that the top 20-25% of consumers contribute 75-80% of the margins and profits. But even with these time tested adages, too few retailers systemically capitalize on these consumer behaviors because they don't have a process of acquiring, analyzing and making consumer data actionable toward specific retail objectives. Loyalty programs offer such an opportunity to make the link and apply consumer activities toward repeatable processes and forecasted business objectives.

It’s also not lost on retailers that loyalty programs are a key tool to increasing consumer purchase transactions, margins and top line revenues. Returning customers spend on average 67% more than first-time customers (source: Bain and company) and in some retail industries up to 15% of a business’s most loyal customers account for 55-70% of the company’s total sales (source: The Center for Retail Management at Northwestern University).

Customer loyalty programs are also appreciated by consumers, as they segment customers based on how they want to be served, understand what's needed to delight customers and deliver relevant, personalized and contextual communications and offers at just the right time. And as a result, customers develop a deeper emotional connection with the brand, while at the same time aiding retailers in their most strategic retail business objectives.

And while loyalty programs are most attributed to retail businesses, research consistently shows that these programs are effective in related business to consumer (B2C) industries such as financial services and can even deliver substantive benefits in business to business (B2B) industries. Don’t lose fact that B2B businesses are made up entirely of people and people want to feel recognized and appreciated by their suppliers.

The Retailers Business Problem

Too many retailers focus their marketing efforts on new customer acquisitions and discount customer retention. Seemingly, they somehow believe that once a customer is acquired the customer will automatically continue their patronage. That's naïve thinking. As barriers to switching brands continue to dissipate and consumers continue to become even more connected and informed, the cost to retailers who neglect their customer base will most certainly continue to rise.

Loyalty programs are often turned to in order to reduce churn, grow customer share and increase profits.

However, while Forrester research cites that 80% of all retailers offer loyalty programs, nearly two-thirds of them are under-utilized or ineffective, which explains why only 12% to 15% of customers are loyal to retailers.

Similarly, Aberdeen Group reports that 74% of retailers report "partial to no tangible improvements" from their customer loyalty programs. Aberdeen goes on to report that "Our analysis shows that loyalty campaigns are being executed without due consideration to ideal customer segments, tools, coordinated cross-channel marketing needs, and long term customer relationships." The report also points out that while deploying successful loyalty programs is difficult, not deploying them is even more catastrophic, as based on their survey results they cite that "retailers without a loyalty program, indicate dismal results on sales and customer retention increases."

Clearly too many retailers are giving short rift to their loyalty programs and failing to take advantage of a top retail strategy that is proven to grow sales and margins, and particularly among the retailers most profitable customer segments.

It's a grim picture but fortunately there is a better way.

A 10 Step Loyalty Framework To Increase Customer Lift, Margins and Profits

For many retailers, the impetus of a loyalty program is the ability to identify customers, measure their behaviors and engage them for increased patronage. Unlike B2B industries which have customer lists, many retailers deploy loyalty programs to build a customer database and begin acquiring deeper customer intelligence.

With increased customer intelligence, retailers are equipped to design engagement and promotion strategies which increase new customer acquisitions, grow customer share, improve customer retention and shift consumer spend toward higher margin goods. But succeeding requires a strategic and thoughtful approach.

Here is a 10 step framework to designing and deploying a loyalty program that we have successfully used with several clients.


Begin with Loyalty Objectives

A customer loyalty program can be a powerful tool in advancing consumers along a continuum from browsers to buyers to repeat customers to advocates. But for programs to support business cases and forecasted payback results, more specific objectives are needed.

Two overarching goals are to increase customer profitability (probably by increasing customer sales of high margin products) and to transition customer affinity from products to the brand. This later goal actually works to achieve the first goal, as when consumers evolve from purchasing individual goods to a broader range of products from the retailer, profits grow comparably.

Loyalty program objectives may include things like:

  • Grow customer share with our most profitable customers
  • Acquire new customers with traits similar to our most profitable customers
  • Identify existing customers who are not yet most profitable customers but possess similar traits as most profitable customers
  • Use consumer loyalty attributes and behaviors to deliver more relevant and personalized campaigns to improve up-sell, cross-sell and customer share
  • Use loyalty program communications and nurture campaigns to increase customer tenure and decrease customer churn
  • Use loyalty program attributes and behaviors with retention campaigns to reengage idle or lapsed customers

The most strategic and successful loyalty programs look beyond simple points and redemption practices and instead design a system which offers consumers a wide variety of options and incentives which permit the retailer to collect useful data about customer preferences, interests, motivations, lifestyles and purchase choices. When retailers possess the customer intelligence needed to understand how to best engage and delight consumers, they are also equipped to meet their business objectives.


Position Your Program

Simply creating an undifferentiated loyalty program will probably not achieve your business objectives or the benefits of a loyalty program. Retail research and publishing firm Colloquy estimates that there are 2.647 billion loyalty program memberships in just the US, with the average US household enrolled in 21.9 programs. 56% of those members were inactive (defined as no engagement within a 12 month period).

Consumers face information overload and unless your loyalty message stands out, it won’t break through the noise. Innovation, differentiation, relevance and making an emotional connection with your customers are essential program requirements to help your loyalty program stand apart in a crowded market.

Also recognize consumers react most positively to three loyalty program qualities, being simplicity, transparency and trust. Successful loyalty programs will make the consumers life simple, clearly state program terms and honor their promises to consumers.


Design Customer Incentives

The challenge here is find out exactly what it takes to achieve an emotional connection and reaction from each customer. Customers are not homogenous, and different customers are motivated by different rewards. It's a good idea to begin with a Voice of the Customer analysis and then ascribe rewards by programs which designate recognition (i.e., you’re a Platinum customer) and award incentives pursuant to customer personas or customer segments.

Incentives must be relevant and valuable enough for consumers to join and remain in the loyalty program. Incentives should be allocated using a tiered approach to encourage higher spending levels with more significant rewards. Also recognize that non-financial rewards are more motivating to many customers than discount, rebate, coupon, gift, gift card, voucher, certificate, product or cashback rewards.

There is a clear trend of perks (soft benefits) over discounts (hard benefits) among several consumer segments. Many customers prefer recognition, inside or early access to private events, early product access or lifestyle event awards more so than discounts or possessions. These customer experience rewards also help provide differentiation and a more memorable incentive. It's important to tweak reward options periodically to keep the programs fresh and experiment to see which rewards best deliver the intended results.


Know Your Critical Success Factors

There are both loyalty best practices and known success factors. Consider the following when designing your program.

  • Relevance is a top critical success factor with loyalty programs and campaigns. Loyalty programs must be relevant to member interests. Campaigns, messages, offers and incentives must be personalized, relevant and contextual in order to motivate loyalty members and achieve success with loyalty programs. Relevance can be measured using campaign metrics (opens, reads, click-throughs, conversions, etc.) in your marketing system as well as activities in your CRM system.
  • Recognition is another essential success factor. Customers want to feel recognized and appreciated. There is a high correlation between members who feel their brand knows (and engages) them and customer share. Drip campaigns and nurture campaigns go a long way in maintaining just the right recognition frequency.
  • In building customer affinity, royal equals loyal. Strive to create programs that deliver the VIP treatment. Loyalty is an emotional reaction. Making customers feel special is highly correlated to achieving customer loyalty.
  • Unexpected surprises also go a long way with consumers. Irregular reward grants may be more effective in maintaining top of brand awareness than routinely delivered awards. This is something that needs to be tested by customer segment in order to find the optimal balance.

Identify Key Performance Indicators

It's critical to identify the metrics that matter in order to make informed business decisions, measure and improve loyalty performance, and verify loyalty programs are meeting slated objectives. However, that can be a challenge as these metrics reside in multiple systems.

For example, the loyalty application itself normally measures key performance indicators such as reward rate and break rate while measures such as program relevance, recognition and Customer Lifetime Value are measured in either marketing automation software or CRM software depending upon your configuration. Your ERP system will also house valuable financial performance measures.

A top mistake made by loyalty program managers is simply viewing the default metrics provided in the out of the box loyalty software, as those figures in many cases are not the metrics that most matter. Consider the below success factors and measures as those that provide actionable insight and contribute to highly successful loyalty programs.

  • Customer share (aka wallet share) and profitability contribution are top measures of customer loyalty.
  • Customer Lifetime Value (CLV) should be a top measured key performance indicator. Measuring customer margins and profits are important, but are historical indicators. CLV is different because it measures future customer value, and is a powerful metric that allows management to understand how actions implemented today will impact CLV and financial streams in the future.
  • Customer Experience (CX) is the customer's emotional perception of the brand based on his or her totality of interactions and is highly correlated to customer affinity or churn. This may be reflected using RFM analysis or methods such as NPS (Net Promote Score) or CSAT (Customer Satisfaction).
  • Reward Rate should be budgeted and monitored closely. The reward rate is the percentage of rewards relative to customer spend. For example, a reward rate of 2 would mean that customers receive $2 of incentive for every $100 of spend.
  • Break Rate goes hand in glove with the reward rate. Breakage is the measure of accrued rewards that will not get redeemed. It's essentially the difference between points issued and points converted and an important metric when budgeting your reward program. For example, a 25-35% break rate (which is common) indicates that 25-35% of outstanding rewards (in points or dollars) will never get redeemed. If your break rate is too low, you are likely operating an unprofitable program. If your break rate is too high, your program probably lacks relevance to consumers and will fail to meet its business objectives. Finding the right balance to match your program objectives is key.
  • Top retail key performance indicators should be tracked both pre- and post-loyalty program participation. Similarly, same store year over year growth, repeat visits, incremental sales, customer share, customer attrition, customer retention and customer satisfaction should be broken out by loyalty members and non-loyalty participants.
  • A retail best practice is to display key performance indicators in online dashboards, so that they are highly visible, can be easily shared and will show variances in real-time that can be acted upon quickly.
  • It is important that retail analytics and reporting take into account weekly variations (i.e., holiday periods which occur on the same dates but in different weeks of the year), seasonal fluctuations (such as holidays and back to school), environmental variances (extreme weather which keeps consumers from shopping) and non-seasonal selling (slack sales during certain months of the year) in order to deliver relevant year over year analysis. Reporting with date sensitivity is often a function in your ERP system.
  • Performance measures can also be used to identify patterns that can predict loyal customers or show when consumers are about to defect.
  • It is a good idea to also create metrics which show your least profitable or unprofitable customers so analysis leads to actions which may support customer deselection.
  • Lastly, simply viewing loyalty program Net Ads and Membership Size is a mistake because by themselves they are influenced by different activities. For example, these metrics may be based on new customer acquisitions or a reduction in customer churn, either of which is achieved from different initiatives.

Begin Your Technology Journey with CRM

To achieve a single and complete view of each customer relationship, it is essential that a loyalty program be tightly integrated with your customer system of record, which for most retailers and service organizations will be the retail CRM system. CRM software manages the customer profile record which includes customer preferences, purchase history, marketing outreach and response, customer service history, social profile attributes and loyalty program activities.

The loyalty application, as well as other sources of customer information, should append and enrich the CRM customer record. This central customer data repository can then be used to deliver more relevant, personalized and contextual engagement and offers – which in turn increases up-sell, cross-sell, loyalty participation, customer share and Customer Lifetime Value (CLV).


Integrate Enterprise Systems

To promote a single customer system of record, avoid staged data and manual rekeying, automate workflow processes across departments and channels, and achieve real-time reporting, the loyalty system should be integrated with several other business systems, including:

  • POS systems – for purchase transactions that update member loyalty programs and even permit loyalty enrollment and redemption at the POS
  • CRM software – integration to CRM account, contact, opportunity, campaign and case records
  • Marketing automation software – to create segmented and personalized campaigns for highly relevant offers based on deep member criterion as well as track campaign budgets and payback
  • ERP systems – especially customer records, inventory items, price lists and cash receipts processing (for flexible redemption and claims handling)
  • GIS applications – geographic information systems are used by many retailers for targeting customers based on specific location or proximity to a store

Apply Loyalty Marketing

For most retailers, it's a mistake to try to make your loyalty program perform loyalty marketing campaigns as they are just not equipped to do this well. Instead, integration with a marketing automation system will leverage customer activity history (from the CRM system), purchase history (from the accounting or ERP system) and each member’s online behaviors (from the marketing automation software) and deliver much more relevant, personalized, contextual and even real-time messaging and offers.

The marketing automation software will also track each consumer's digital footprints (response rates, conversions and engagement) with every campaign interaction in order to know what works and doesn't and modify future campaigns based on that learning.

Marketing automation software also offers advanced functionality such as trigger campaigns (which deliver the highest conversion yields of any campaign type), next-best-offer campaigns (which also yield particularly high conversions) and in combination with the CRM system identifies purchase patterns and cross-shopping propensities which will aid up-sell and cross-sell campaigns.


Segment Customers

Customer segmentation provides three big advantages with loyalty programs. First, it allows you to send more personalized and relevant content to targeted groups which then generates higher engagement, conversions and yields. When creating customer segments for improved marketing effectiveness, think beyond demographics and purchase histories and include attributes such as interests, life styles and life stages. Best Buy does a great job here by classifying consumers along the four personas of Buzz (the techy), Barry (high wealth individual), Ray (family man) and Jill (soccer mom).

Second, we can identify those customer segments that contribute the most profits to the company as well as those that eat into profits. For example, most retailers understand the Pareto Principle which shows that somewhere around the top 20% of customers contribute a majority (often as much as 80%) of the company's profits. However, fewer take the time to identify and act on the bottom ~25% which claw back about 50% of the profits earned from the top tier.

Third, we can apply uplift modeling by combining consumer intelligence acquired from loyalty program tracking (and other sources such as product purchase history and online behaviors using marketing automation software) with predictive analytics to determine which consumer segments will respond to offers in a way that maximizes the retailer’s margin. For example, consider the four uplift modeling segments.

  • Offer-induced customers. Sometimes called persuadables, these customers make incremental purchases if the offers are relevant and personally motivating. Identifying this customer segment offers the greatest margin and revenue upside to the retailer.
  • Offer-unnecessary customers. These customers respond positively to offers, however, would have purchased anyway without the offers. Although marketers often include these sales in their campaign payback results, these purchases actually represent a margin decrease to the company. Examining customer class patterns can identify expected product lifecycle sales which can then be removed from promotions. The best strategy here is to only offer new products or products from complimentary classes from which the consumer has never made a purchase.
  • Offer-denied customers. These customers decline all offers and instead only purchase when they have an explicit need. Offering incentives for purchases where there is a predictable need or the absence of alternatives lowers the retailers' margin.
  • Offer-adverse customers. Sometimes called sleeping dogs, these customers not only discard offers, but also react negatively and may unsubscribe, complain or even cancel their loyalty membership. These customers are often loyal, but simply want to be left alone.

There are several segmentation techniques to uncover these types of consumer behaviors. However, from my experience the most effective methods for marketing and margin purposes have been Lifetime Value (LTV or CLV), RFM (Recency Frequency Monetary), Decile and Cluster Analysis. Applying these metrics will assist you in getting to the optimal hyper-personalization and micro-targeting which achieves best-in-class retail performance.


Support Omni-Channel Communications

Omni-channel retail communications now represents both the biggest challenge and upside to retailers. Permitting loyalty members to update their accounts or enabling brands to deliver consistent information such as Earned Points, Offers/Incentives or redemption processing across channels which include the website, chat, e-commerce, contact center, mobile, social networks, email, direct mail, newsletters, member statements, events, in-store kiosks and POS can be a daunting technical challenge.

According to Aberdeen, "a majority of Best-in-Class loyalty campaigns are operating in siloes and not realizing the combined cross-selling efficiency of coordinated loyalty campaigns in the store, web, call-center, and direct to consumer."

Consumers want to connect with their new and favorite retailers, however, retailers need to meet those consumers in their preferred channels and support their favorite devices for tasks such as loyalty program member management. In addition to different consumers favoring different channels, different business processes are generally best supported on specific channels.

For example, flash sales or daily deals will be best served on mobile. And in this example, flash sales are proven to work particularly well with loyalty members and benefit the retailer by aiding the supply chain, reducing excess inventory and improving cash flow objectives. The retailer or service organization can also gain even more customer intelligence by acquiring data that is unique to each channel.

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 cannot 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 is 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 is 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 struggle with automated retail technologies and 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 is 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, integrating 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.