Best Practices to Increase ROI in Retail Loyalty Programs

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By: David Slavick |

Posted on April 26, 2019

Philosophically and financially, realizing the financial return from a customer loyalty strategy requires patience, it is a marathon, not a sprint.  Always keeping in mind that incremental behaviors are a dominant goal of every loyalty program. We have plenty of proof that incremental lift can be achieved from all customer personas over time, even the brand advocate who shops regularly. So, what's the catch to increasing your marketing ROI?

A short-list of desired behaviors from program members looks like this:

  1. Show your card/ID/say your member number or phone number to get credit
  2. Complete your profile/share your preferences online
  3. Opt-in when asked to for mobile communications
  4. Receive and pay attention to direct mail vs. in the past perhaps tossing or not considering it of value
  5. Adding the email from the loyalty program to preferred contacts to ensure delivery 
  6. Opening as well as flagging the email address as “important” so it “rises to the top” and gets opened in anticipation of value
  7. Sharing preferences via an online center or responding to surveys to inform future communications at a personalized level

The process of improving ROI in marketing starts from the time a customer first learns about the loyalty program. At that point, the customer is typically introduced to the program in-store, online or via social/mobile channels. The metrics of a first purchase following enrollment (when the person becomes an “identified member”) usually parallels historical metrics.  In other words, Average Daily Sale value, Units Per Transaction, Margin on Goods sold will all “look like” the behavior of a non-member.  The only exception to this rule is in hardlines where a new member will willingly join in order to earn significant points or equity from a high value purchase.  They would be silly not to join, given the value of reward.

What might surprise you is that, for proforma modeling purposes, the impact of second purchase is usually no different than the first, i.e. there’s little to no significant lift in sales/profit metrics. The member is just getting warmed up and has not quite realized the full potential of the program. 

Here’s an example of the dynamics of behavior change in a high frequency business:

  1. A member joins and accumulates value over time.  Typically, it takes a few visits to earn a reward.  So, you want to plan your promotions after a significant segment of your membership is eligible to redeem their first reward. Try to plan for promotional offers (deep % off or BOGO) after a redemption event, not before.
  2. Know that with a reward redemption a member typically spends 2x vs. historical average order value. This is due to having “free money” to spend at their new favorite store.
  3. Ideally, you want the member to make that 3rd purchase without holding back in anticipation of a 2x point bonus, or even 3x bonus. It is wise to not cause the member to anticipate bonus offers. While they are waiting for that big incentive, they could be shopping with your competition. 

Members have so many values that go beyond incremental lift in metrics from a transaction, these benefits go beyond financial modeling, but do contribute to program success and marketing ROI:

  1. A believer in the program – will eventually refer others to join – friends and family
  2. A brand advocate – become a key influencer in social media, post user generated content, etc.

A feedback source – participate in panels, crowdsourcing surveys, share in-store experiences highlighting outstanding customer service.

Also Read: Gen Z is Taking Retailers Back to School

In summary, what can you expect from a program member, especially early on behavior:

  • Average Order Value increases 5-10%,
  • Units increase from 1 to 1.3 or “more”,
  • Gross margin improves by 10% or more as loyalty takes the member’s eye off price

And one final metric that many program owners do not plan for, but it is a very pleasant surprise – a reward program can effectively reduce your internal markdown rate. Through cooperative planning with the merchant organization, marketing can leverage program promotional timing to drive traffic and purchases in advance of the normal sequence where markdowns are taken on price.  Thus, leveraging a much less expensive markdown via points or alternate currency vs. a hard markdown on price/item. 

Happy planning and remember, hire an expert to do an expert’s job when it comes to program design, strategy, increasing marketing ROI, financial modeling and implementation in CRM/Loyalty.

David Slavick is a Digital Global Strategist, Technology Expert in CRM/Loyalty Innovation.