Can Loyalty Programs Really Increase Sales?

Search through the wallet of any American consumer and you're sure to find a stash of loyalty or rewards cards. Stand in line at a retailer who has a loyalty program and you will likely see someone fumbling frantically for their card or trying to recall which phone number is tied to the membership so they receive credit for the purchase. Loyalty programs are the "It" factor in today's customer retention efforts and they likely are here to stay.

Loyalty programs have been in existence for years and every industry from airlines to zoos use loyalty programs to retain customers and increase sales. Airline frequent flyer programs have provided vast amounts of information on consumer travel habits and revolutionized the travel industry. Since the days of S&H Green Stamps (if you're younger than 45, ask your parents about these), the Raleigh cigarette coupons and cereal box top programs, rewarding customer loyalty has been a valuable way to encourage repeat business. Even cable and satellite television providers are offering discounts for customer referrals.

But it's not just big retailers, travel companies or other large corporations managing loyalty programs. Local retailers, restaurants, dry cleaners and other small businesses are also jumping into the loyalty business. Why? Because the statistics show that they work. So if you're considering adding a loyalty program to your marketing arsenal but aren't sure if it would be worth it, consider these research nuggets from Access Development:
  • Membership in loyalty programs is growing at a rate of 26.7 percent with 2.65 billion loyalty memberships in the U.S.
  • 84 percent of consumers say they are more likely to visit the website of a retailer with a loyalty program.
  • 70 percent of members feel loyalty programs are part of their relationship with a company.
  • Loyalty programs can increase a brand's market share by 20 percent.
When a consumer is in the process of making a buying decision, they travel along what is known as the "decision journey," a sequence of steps that a customer follows leading up to a decision. These steps include gathering information about options, then evaluating and narrowing the options. Loyalty programs assist a merchant in influencing the customer's evaluation of their options, thus narrowing the options. These programs together with a great product and good customer shopping experience will help in increasing sales.

In loyalty, data is your BFF
Okay, let's all admit it right now: the word "data" sends a chill up the spine of most marketers. But with a loyalty program, data will be your best friend.

The goal for any successful loyalty program is that an offer equals retention and sales, but how a program gets to that point is just as important. The program should yield data — lots and lots of data — and how a company manages that data is critical. Businesses, particularly retailers, have amassed vast amounts of information on their loyalty program customers. Demographics, customer preferences, buying patterns, preferred payment method (credit, debit, cash, check), preferred shopping mode such as online versus in-store and even the specific store a customer frequents is being tracked. In addition, customer feedback, important dates such as birthdays and anniversaries, brand preferences and on and on are collected, tracked and reported and the most successful programs analyze the data to the nth degree.

Understanding what the data indicates will ensure that information can be leveraged in a way that allows for actionable insights. If this is not done, the ROI on loyalty programs cannot be maximized.

To capture the best data, customer engagement should be personal yet non-intrusive, so the best outcome for analyzing the data is one that is tailored to each customer. The best outcome is an offer that is so spot-on and relevant (back-to-school offers to parents of school-aged children just prior to the start of a school year), that the customer can't help but participate. That being said, it's best to be mindful of the current privacy/information climate so as not to alarm a customer. Requests for information should be sincere and cognizant of a consumer's privacy.

Technology has played a major role in the evolution of loyalty programs. Smartphones can replace the loyalty card, receive digital coupons and offers; enable redemption of offers; and provide retailers an opportunity to send relevant, timely offers to consumers. In fact, retailers will soon be able to track movement within a store and send specific offers to customers while they are shopping. As scary as that sounds to many consumers, they will likely be happy to reap the savings.

Recently, IQR Analytics conducted analysis and data modeling for a U.S. apparel company that allowed the merchant to identify inactive customer segments. That analysis resulted in attractive and personalized offers designed to win back and retain customers.

For another apparel company, IQR analyzed information for a credit card that was co-branded with the issuing bank. Based on that work, the merchant and the issuing bank could identify those customers who are most likely to churn. Armed with this knowledge, the merchant and the bank designed an attractive "spend marketing campaign" to reengage with those customers and reduce churn — and that not only retains customers, it reduces cost in the long run.

Not all loyalty programs are alike
There are a variety of ways in which loyalty programs are implemented by merchants. A few of the most popular programs include membership cards and co-branded credit cards.

Membership cards: By issuing a membership card, merchants can gather the demographic information, track purchases and understand how loyalty benefits are being used. This information will be used to develop customized offers, measure repeat purchases and compare per capita spend of loyalty card members versus non-loyalty members.

Co-branded credit cards: More and more merchants are moving out of loyalty cards and utilizing credit cards that are co-branded with the issuing bank. These cards serve as the foundation of a loyalty program. The loyalty card member base are offered the cards and the issuing bank will then track the card member purchases (on-us purchases) and outside of the merchant purchases (off-us purchases). The trends and spend patterns can be utilized to measure the customer engagement with the merchant, customer's spend on the merchant versus her spend in the entire category (such as apparel) and customer's lifetime value to the merchant.

For example, IQR recently worked with a children's clothing chain and issuing bank to analyze the spending habits of the cardholders. The analysis revealed that 65 percent of all spending within the children clothing category was happening with the partnering merchant. With this information, the merchant, together with the issuing bank, can focus on customers who are spending on competitors and try to win them back.

A win-win for customers and merchants
Kohl's Department Store has been piloting a loyalty program in several markets. During a recent earnings call Kevin Mansell, CEO, noted, "…the [loyalty] program is now available to customers in almost 30 percent of our stores…our current plans are to expand the pilot to additional stores beginning in spring."

What does that say about loyalty programs? Although sometimes complicated to administer, they can increase the bottom line and be a game changer for customers and merchants. Through preferential treatment, the consumer has more money-saving opportunities and merchants gain a vast amount of revealing information about their customers' buying habits, which should yield happier and more loyal customers.

So if you're one of the 22 percent of companies with no relationship marketing program and your goal is to rectify that through a loyalty program, do so with your eyes wide open and your finger on the pulse of the data, and you're sure to have a positive outcome.

Nagendra Sastry is head of analytics for IQR Consulting.
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