The Case for a Customer Loyalty Program vs. Other Strategic Business Investments

Editor’s Note:

Despite volumes of research and market experiences validating the positive financial impact of loyalty programs to brands, justifying the impact of a customer loyalty program always seems open to debate. We just recently read an article by the Loyalty Science Lab that asked the question “Do Loyalty Programs Work?”. The article concluded “So oftentimes the more important question to ask is not whether or not to have a loyalty program, but how best to design the loyalty program.” The Loyalty Science Lab is a loyalty think tank housed in the Strome College of Business at Old Dominion University and led by Dr. Yuping Liu-Thompkins.

This article answers the question via a real-life case study. Richard Schenker shares the details of how a loyalty project team was under pressure to deliver results for a client and how they delivered results leading to enormous success for an organization through a well-designed and optimally operationalized program. Richard Schenker is a well recognized force in the global marketing community. Based in Canada, Richard is Founder & Chief Customer Engagement Officer Loyal Strategy Consulting.

The Case for a Customer Loyalty Program vs. Other Strategic Business Investments

Throughout my customer engagement career, there has always been a particularly riveting and important question that I have been asked - Why should a brand invest an extraordinary amount of capital to support the initiation of a customer loyalty program, versus using those funds toward other business initiatives? There is a prevailing perception by CFOs that the ROI of a loyalty program is less predictable and less profitable than other proven corporate capital investments.

Practically speaking, it is a responsible question for a brand’s CFO to be asking prior to committing to a major investment in a customer loyalty program. It demonstrates that the brand is seeking to deploy the best use of capital and looking to mitigate risk for corporate stakeholders. I believe that the best means of helping loyalty professionals deal with this type of predicament is through the illustration of a real live case study.

Several years ago, I was confronted with this exact challenge. I was the loyalty lead for a large high frequency retail organization and their board of directors agreed to proceed with the design and implementation of several pilots for a new loyalty program, which I meticulously designed.  Twelve months into the pilot program, the company was sold for $2.55B (CDN) to one of the largest leverage buyout specialists out of New York. They also had several co-investors, a top tier consulting firm, a major international bank and a renowned pension fund.

Suddenly there was a new ownership consortium in place whose sole focus was on cutting costs and rapidly propping up the value of the company, in order to sell it in a few years. This ownership group was focused on growing sales exponentially by building many new and modern bigger retail store formats, expanding the breadth and depth of merchandising categories and modernizing existing retail footprints.

There was little, if any, appetite for investing tens of millions of dollars in a national loyalty program roll-out vs. using such funds to propel the business’ expansion objectives. This ownership group had a repeatable and predictable formula and an impeccable track record of success. Most importantly, they could predict with great certainty the costs of building new stores, the return on investment and the payback period. They were less familiar and less interested with a loyalty program’s return on investment and payback period. They viewed the benefits of such an initiative as a short-term sales bump requiring a significant amount of capital which would divert funding away from their 3-year store network expansion plans.

As a loyalty professional, this was a devastating blow since there were now discussions at the new board level to consider winding down the pilot program and forgo a rollout. This felt unconscionable to me, my CMO and store owner/operators in the pilot markets. The pilot was in full swing and was greeted with enormous fanfare by customers, store owner/operators and employees who were very active member participants. We were witnessing unprecedented results on enrollment, activation, transaction penetration, basket size growth, shopping frequency and even margin improvement, which are all the intended results of a successful loyalty program.

My CMO and I knew that we were going to have a monumental uphill battle to save this precious and highly successful loyalty program. We put together a strategic, financial and operational plan as we knew our “day in court” with the new ownership consortium was imminent and we wanted to pre-empt a final decision.  

Here are several of the considerations and evidence we assembled to support our assertion to move the pilot into a national roll-out vs. redeploying this investment towards store expansion:

1. Pilot Metrics – We took stock of every pilot program metric and were able to formulate compelling and unequivocal evidence in regard to the demonstrative impact that the pilot had in these markets. The program was yielding rapid and sustained enrollment, activation, average order value, frequency of shop, unit movement, category cross sell, and margin improvement results compared to control markets. As well, there was incredibly positive member and employee qualitative and quantitative research enthusiasm and passion for the loyalty program.
2. Incremental Vendor Contributions – The pilot was set up with no vendor participation. All SKU and category bonusing was funded by the organization so as not to be influenced by vendors during the pilot. This created a groundswell of pent-up demand by vendors to participate in a roll-out as they were privy to pilot vs. control product unit movement and sales. The delta was astonishing. This allowed us to project sales growth across all priority categories and an enormous projected increase in co-op funding from vendors. Vendors were clamoring on the sidelines waiting for the national roll-out, with open pockets.
3. Return on Investment (ROI) - Given the monumental pilot results vs. control markets metric differentials, we were able to easily project the financial upside of the program. Thankfully many of the fixed costs to design and implement the loyalty program were already incurred. This relieved a portion of the investment burden required for a national rollout and therefore positively impacted the ROI and payback period. We were able to compare the national roll-out ROI vs. investing in new store expansion and demonstrated a greater and more expeditious ROI at the same level of expenditure.
4. Data Monetization – We concluded with great confidence from the pilot that at least 80% of transactions in a roll-out would be by members and therefore identifiable. As such, the company would be sitting on one of the largest retail consumer databases in the country. We designed a clear plan as to how customer loyalty data could help optimize business decisions across marketing, merchandising, operations and real estate to foster cost savings and deliver incremental perpetual revenue. We knew that this would be a very attractive strategic asset for any new buyer of the business, when the ownership consortium would be ready to sell.
5. Store Owner/Operators – We harnessed the incredible passion and testimonials of the evangelical store owner/operators who were pilot ambassadors. We ensured that these very critical store owner/operators were highly involved in our pitch to save the program. These program ambassadors could authentically and credibly provide the new ownership consortium with a real on the ground perspective as to the seismic impact that the loyalty program has had on their stores KPIs and the value it was delivering to the company.

We had our day in court along with our store owner/operators who joined us to make our case. While we were confident in our assertions, we knew that we were up against a very financially savvy group of owners. We put our case forward based on the aforementioned evidence and much to our surprise, the ownership group was captivated by the results, projections and testimonial assertions.  Together with the store owner/operators, we were able to convince them that staying on the path of loyalty would be financially and strategically advantageous in both the short and long terms and would be highly attractive for a prospective buyer given the trajectory of a national roll-out.

After several weeks of further deliberations, the board of directors agreed to give the green light to a national roll-out with the provision that this had to be a success and there was no room for error or failure. The CEO was directed by the ownership consortium to ensure that for the first two months of the roll-out, the sole focus of the organization would be on a successful roll-out. No other corporate initiatives could be in play to distract the corporate office and stores. All compensation from the CEO down to store operators would be tied to the “overachievement” of several customer loyalty KPIs.

Needless to say, after a 16-month pilot in three different markets, we were ready to launch with the full unwavering commitment from the entire company. All eyes were on the launch. I am pleased to report that the launch of the program blew every pilot KPI out of the water. This program became the most successful launch of any loyalty program in North America and today is a strategic and financial asset.

When this high frequency retailer was purchased in 2013 by another high frequency retailer, for $12.4 B (CDN), they cited the customer loyalty data base, reach and efficacy of the loyalty program as one of the key reasons for the purchase. Incidentally, the prior ownership group did also execute their store network expansion in conjunction with the loyalty roll-out. They came to a realization that this two-prong approach would breed enormous success.

This case study illustrates that a loyalty program that is well designed and optimally operationalized, can facilitate enormous success for an organization. Having the right qualitative and quantitative metrics in place is vital to provide organizations with the confidence that an investment in loyalty can deliver a better ROI than many other corporate investments.

Lastly, always involve the organization’s operators in the strategic decision-making process. They are on the frontlines with customers. When they are included at the strategic table, they feel like they have a stake and will advocate with credibility and conviction as loyalty operators can at times be perceived as biased and perhaps self serving in the eyes of a board of directors.

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