Any brand’s loyalty strategy is designed to increase customer engagement and ultimately drive commercial profitability. Tracking and measuring its cost, value and success involves the whole organisation, not just the marketing department. Whilst it can be relatively easy to measure the impact of marketing activity to drive short term, specific consumer behaviour, greater scrutiny and time needs to be applied to understand the commercial performance, overall impact and return on the loyalty investment for the business.
But what's the best way to analyse the direct costs of loyalty, and to spot opportunities to grow the bottom line?
Understanding the cost of loyalty
Critical to the success of any loyalty initiative is to evaluate the value a customer contributes, compared to the cost of the value offered to them by the programme. This includes accounting for the fact that during the course of a typical year, a proportion of customers will migrate across to a different value segment either as a result of increasing engagement or lapsing behaviour.
The direct costs associated with a loyalty programme can be easily identifiable such as creating and distributing loyalty collateral and marketing communications that are devoted solely to members. However it is harder apportioning the cost of employees who support but are not dedicated to loyalty, or infrastructure that is shared. Most difficult can be the cost of delivering the rewards, benefits and recognition. In particular, attention needs to be paid to the two ‘Ds’:
- Displacement - when an item is given away for free as a reward leaving none left to sell to the next customer who wants to buy one
- Dilution - when the item given for free is not a discretionary purchase, and the customer would have been willing to pay cash but instead pays with points.
In addition, with points-based programmes, IFRIC13 means the cost of every loyalty point issued must be financially accounted for, not as a cost but as deferred revenue. Given the impact this has on the bottom line, there has been a much greater focus on redemption initiatives however this also needs to be carefully assessed, tracked and managed so as not to unbalance the important modelling metrics around breakage.
Realising the value of customer touch point analysis
At the same time as monitoring and applying insights from the costs which can be more directly associated with their impact, brands are also trying to gain insight from the combined measurement of customer interactions as well as transactions. With the multi-channel nature of interactions, brands are finding it increasingly complicated to calculate and determine the commercial attribution of each channel interaction in driving the desired consumer behaviour and revenue.
The implication is that brands need to continue to strive to determine those moments of truth that drive loyalty to ensure they are investing in supporting the interactions which will make a positive commercial difference in addition to enhancing the customer experience. To do this means better understanding of the influence of multiple channels on engagement and the purchasing process. Behaviourally targeted campaigns can demonstrate a direct return on investment based on simple response metrics and resulting purchase trends. The best programmes measure their value and then adapt accordingly; such a feedback loop adds value and creates a business checkpoint to ensure marketing is investing in the right channels to drive the right results.
Demonstrating commercial value from mobile & social
The increasing adoption of newer channels, such as social and mobile have brought added complexity to modelling customer interactions and commercial valuation. The return on interaction between a customer and a brand can be measured whether from online activity, via mobile and through social media networks. Brands are finding that a strong social media presence can pay dividends in terms of brand engagement. Facebook plays an important part of any retailer’s digital strategy, and interactions can actually be measured by tangible results. For example, Burberry equated its first 2 million Facebook fans with a 10% increase in same-store sales.
Mobile retail customer relationship initiatives can also be measured easily, as every interaction is highly trackable. Mobile metrics can be integrated with other digital performance measures to provide a clear view of the relationship, engagement, and incremental profit per customer. Brands that have transitioned to a targeted multi-channel strategy based on customer behaviours have benefited from consumers' desire for truly targeted offers.
For example, UK fashion retailer New Look's mobile-optimised site provides access to its Fashion Blog, store locations, and allows users to share links on Facebook and Twitter. New Look tracked browsing habits, channel preferences and behaviours to identify customers accessing the mobile site, allowing them to automate personalised emails designed to drive traffic to the m-commerce site, increase sales, and boost customer loyalty. Mobile users showed a greater level of brand interaction than non-mobile users, resulting in a 300% increase in mobile-optimised campaign programme performance.
Measuring the impact of loyalty & advocacy
Marketing teams need to be numerate and analytically curious and not just creative. Loyalty marketing KPIs should contain hard financial numbers covering the penetration of high yielding profitable revenue by programme members. The aim should be for at least 50% of profitable revenue, however defined, to be generated by customers who are known, tracked and regularly engaged by impactful dialogue.
With recent developments in technology, consumers now have a complete view of the brands they engage with, and they expect value to be added consistently across all channels, direct or indirect. The challenge is to ensure the infrastructure is right to support this expectation, which also means having the right measurement tools in place to evaluate loyal behaviour.
Net Promoter Score (NPS) is quickly gaining popularity as a measure of loyalty, due to its simplicity and proven correlation to business growth. But measuring NPS is not what leads to growth, but rather the actions being taken based on the results and analysis.
For example, American Express has been able to track NPS all the way to shareholder value. For a “promoter” who is positive on American Express, they see a 10% to 15% increase in spending and four to five times increased retention, both of which drive shareholder value. Furthermore operating expenses associated with customer service have gone down because they have become more streamlined in being able to limit friction points, errors and other areas resulting in a “detractor”.
Growing the bottom line through ancillary revenues
As the bottom line value of loyalty initiatives are increasingly under the spotlight, managers are looking to alternative methods to increase sales revenues outside of shifting share or demand generation of existing products and services. Loyalty programmes and their prized data are becoming commodities that can be commercialised to maximise 'return on customer'.
Smart brands are extending their value proposition to leverage ancillary opportunities, which can provide new incremental revenue streams and, if based on data analysis, can actually increase customer satisfaction by recognising what else matters to them. Most brand owners are comfortable about growing ancillary revenues from complementary products and airlines are probably the most advanced proponents of this. Many airlines like British Airways, are now allowing customers to purchase complementary ancillary offerings like car rental and hotel accommodation independently of a flight to try and secure a share of the customer’s travel budget even if they choose to fly with a competitor.
For really large, mature programmes there is a potentially huge revenue stream from selling their own points to partners, especially to co-branded payment cards. American Airlines, for example, openly boast of having more than 60% of their issued points funded by partners.
Investing in loyalty
A loyalty initiative is not just a marketing tool, even if it starts out as a cost centre within the marketing department. As the activity matures more and more programmes migrate to become internal profit centres that use transfer pricing to ‘sell’ points to the business and ‘buy’ rewards and services. Shareholders, the board and senior management must all therefore be given a complete understanding of their loyalty initiative, and the company's strategy must support its own core business goals. Only by measuring and evaluating current investments in loyalty and understanding how the loyalty business is performing, can opportunities be identified to drive greater ROI in the future.
In some mature sectors and brand circumstances, loyalty initiatives and programmes can develop into a business unit in its own right. This can be evaluated once all its costs and revenues are properly understood and transparent. It is only then that it will become a truly attractive opportunity for external investors. The most quoted example of this Air Canada’s frequent flyer programme that was separated from the airline and sold off with a market capitalisation in excess of that of the airline itself.
Deciding on exploring this approach where control is ultimately relinquished or even a situation where equity stakes or other ownership models are investigated is not something to be considered lightly. Whilst the accounting landscape and taxation rules change dramatically in a positive manner, significant specialist advice is required to evaluate the trade-off between the sale price and the loss of control over the brand’s customer data, programme strategy and direction.
Loyalty should be acknowledged as a responsibility across the organisation even if its heart sits within and is driven by the marketing function. It is only when the true costs and resultant value of a customer loyalty or engagement initiative are continually evaluated, can the current commercial value be determined and their future potential to grow bottom line revenue and business value be determined.
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