How to Create a Retail Loyalty Program That Works

We have all heard that it's 3 to 5 times more expensive to acquire a new 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 the consumer behaviors that drive these financial results.

Many times it's because they don't have a process of acquiring, analyzing and making consumer data actionable toward specific objectives. A retail loyalty program is an opportunity to make the link and apply consumer activities toward repeatable processes and forecasted business objectives.

It's also not lost on brands that customer loyalty programs are a key tool to increasing purchase transactions, margins and top line revenues. Returning customers spend on average 67% more than first-time customers (source: Bain and company) and in several retail industries about 15% of the most loyal customers deliver 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. These programs can segment customers based on how they want to be served. They can apply data to 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 objectives.

And while customer loyalty programs are most attributed to consumer industries, research consistently shows that these programs 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 Business Problem to be Solved

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 he or she will automatically continue their patronage. That's naïve thinking.

Consumers are more socially connected and informed. Barriers to switching brands continue to erode. This means the cost to retailers who neglect their customer base will most certainly continue to rise.

Consumer loyalty programs are often turned to in order to improve RFM, grow customer share, increase customer lifetime value, and reduce churn.

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

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 retail loyalty programs is difficult, not deploying them is even more catastrophic. 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 consumer loyalty programs and failing to take advantage of a top retail strategy that is proven to grow sales and margins, and particularly among the most profitable customer segments.

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

Consumer Loyalty Program

A Proven 10 Step Retail Loyalty Program Framework

For many retailers, the impetus of a consumer 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, you 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 systemic approach.

Here is a 10 step framework to designing and deploying a customer loyalty program that we have successfully used for more than two decades.


Begin with Clear 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 forecasted payback results, more specific objectives are needed.

Two overarching goals are to increase customer profitability (most often by increasing sales of higher 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, profits grow comparably.

Retail 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 the most profitable customers but share similar traits as the 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
  • Apply communications and nurture campaigns to increase customer tenure and decrease churn
  • Use retail loyalty program attributes and behaviors with retention campaigns to reengage idle or lapsed customers

The most strategic and successful programs look beyond simple points and redemption practices and instead design a system which offers consumers a wide variety of options and incentives. That in turn permits the company to collect useful data about customer preferences, interests, motivations, lifestyles and purchase choices.

When brands possess the customer intelligence needed to understand how to best engage and delight consumers, they are equipped to meet their business objectives.


Position Your Program

Simply creating an undifferentiated retail loyalty program will probably not achieve your business objectives. 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 program message stands out, it won't break through the noise.

Innovation, differentiation, relevance and making an emotional connection are essential requirements to help your retail 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 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 type of 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 are a Platinum customer). You can award incentives pursuant to customer personas or customer segments.

Incentives must be relevant and valuable enough for consumers to join and remain in the 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 is a short list of known success factors. Consider the following when designing your program.

  • Relevance is a top critical success factor to achieve allegiance. Any program must be relevant to member interests. Campaigns, messages, offers and incentives must be personalized, relevant and contextual in order to engage and motivate loyalty members. 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 them and customer share. Drip and nurture campaigns go a long way in maintaining just the right recognition frequency.
  • In building customer affinity, royal equals loyal. Strive to create messaging that delivers the VIP treatment. Loyalty is an emotional reaction. Making customers feel special is highly correlated to program success.
  • 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 programs are meeting slated objectives. However, that can be a challenge as these metrics often reside in multiple systems.

For example, the loyalty application itself normally measures key performance indicators (KPI) such as reward rate and break rate. But 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 retail loyalty program managers is simply viewing the default metrics provided in packaged software. In many cases those are just not the metrics that most matter. Consider the below success factors and measures as those that provide actionable insight and contribute to highly successful programs.

  • Customer share (aka wallet share) and profitability contribution are top measures.
  • 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 KPIs 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 participants.
  • A best practice is to display KPIs in online dashboards. This makes them highly visible and easily shared. The dashboard also shows variances in real-time so they can be acted upon quickly.
  • It is important that 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 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. This analysis leads to actions which may support customer deselection.
  • Lastly, simply viewing retail 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. For most retailers and service organizations this will be the retail CRM system. CRM software manages the customer profile record which includes customer preferences, purchase history, marketing outreach, 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

You want to maintain a single customer system of record, avoid staged data and achieve real-time information reporting. You also want to automate workflow processes across departments and channels. But to achieve these things, 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 – for centralized management of the 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 and also 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 Marketing

For most retailers, it is a mistake to try to make your customer loyalty program perform 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). This wider data set will 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. This engagement data shows what works and doesn't and how to modify future campaigns for improved performance.

Marketing automation software also offers advanced functionality such as trigger campaigns (which deliver the highest conversion yields of any campaign type) and next-best-offer campaigns (which also yield particularly high conversions). And the combination of marketing software 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, you 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. This shows which consumer segments will respond to offers in a way that maximizes margins. 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.
  • Offer-unnecessary customers. These customers respond positively to offers. However, they 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 margins.
  • 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 financial performance.


Support Omnichannel Communications

Omnichannel retail communications now represents both the biggest challenge and upside to brands. Brands that deliver consistent information such as Earned Points, Offers/Incentives or redemption processing across channels accelerate engagement.

Channels may include the website, chat, e-commerce, contact center, mobile, social networks, email, direct mail, newsletters, member statements, events, in-store kiosks and POS. But supporting all these channels can be a daunting technical challenge.

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

Consumers want to connect with their new and favorite brands. However, the brands 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. They also benefit the retailer by aiding the supply chain, reducing excess inventory and improving cash flow objectives. The company can also gain even more customer intelligence by acquiring data that is unique to each channel.

The Point is This

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

Analysis from these programs can help companies 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 and integrating them within the constructs of loyalty programs. They support consumer recognition and VIP treatment, promote offers on the consumers preferred channels and permit redemption across channels so that engagement is maximized.

Consumers expect incentives and rewards. Brands that fail to deliver on these expectations are clearly at risk of losing customers to competitors that give them what they want.

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