Maximizing Customer Value Through Engagement

A report on the findings of the 2013 LoyaltyOne Customer Engagement Study

Maximizing Customer Value Through Engagement

By Dennis Armbruster

Introduction

Although customer satisfaction is a key measure of any loyalty program, attracting, retaining and growing the value of high-profit customers requires a relationship that goes to the root of the matter: member engagement.

In fact, a benchmarking study of the loyalty programs of more than 40 major U.S. brands—representing the categories of financial services, retail and travel—reveals that innovation and member engagement are more successful at increasing the value of the most-profitable and most-loyal customers than earn-and-burn alone. That study is the 2013 LoyaltyOne Customer Engagement Study, a survey of more than 6,300 loyalty program members.

In the 30 years since the first loyalty programs were introduced, a broad range of brand initiatives have attempted to differentiate themselves from the competition by providing members with the same incentive: points earned, points redeemed, rinse and repeat. Offering rewards is certainly essential to engage customers; otherwise programs would have no raison

d’être. But our perspective is that points have become too commoditized,

with programs lacking innovative ways to create additional forms of

engagement. The power to drive economic returns remains a challenge when left to “currency only.”

Data from the 2013 COLLOQUY Loyalty Censusreveals that the average household divides its loyalty among 22 different rewards programs. That’s an impressive number, but let’s break it down a bit more. Of those 22 memberships, only 9.5 are maintaining an active relationship with their customers.

These numbers strongly suggest that knowing your members, their needs and wants, and their current value and potential value is vital to creating a unique and sustainable customer experience. In other words, don’t be one of the dozen programs that gets ignored.

15%

Source: 2013 LoyaltyOne Customer Engagement Study

Getting to the Points—and Beyond

To be clear, there is no shortage of points earned. Each year the loyalty market is saturated with the equivalent of nearly $50 billion in issued rewards. But more often, points are going unused.

The 2011 Forecast of U.S. Consumer Loyalty Program Points Value, the outcome of a collaboration

between COLLOQUY and SWIFT EXCHANGE, shows the average value of points earned per household is $622, yet only two-thirds, or $417, are redeemed. All too often, companies turn to

currency as the easy answer. The fact is, companies on their own often lack the ability to provide enough value in currency alone resulting in unused benefit and limited shifts in consumer behavior. Let’s look at an example: A specialty retailer with an average $50 transaction and a 5x average annual visit frequency for best customers can generate $12.50 in value if offering a currency-based program with a 5% funding rate. The key question: Will $12.50 in currency earned over the course of 12 months motivate behavior change when com-pared to 25-50% discount offers that run each week? So, if currency alone has lost its distinctive allure and no longer sparks engagement to lift revenue, how can marketers re-engage customers in meaningful relationships?

Beginning in June 2011, we set out to get answers. The 2013 LoyaltyOne Customer Engagement

Studyasked loyalty program members questions about the importance and brand performance on

12 factors of loyalty program management to determine how these individual factors correlated with the consumer’s intention to choose one company or product more frequently. We also examined Net Promoter Score (NPS), the measure of the willingness of a brand’s customers to recommend the loyalty program to friends and family. We discovered a member’s intimacy with their program revealed a lot about their brand loyalty.

We should point out that NPS and other metric variants have become common success measures, and that increased scores in such metrics have proven to correlate to increased sales and profits.

44%

That's the ratio of memberships that have been active in the average household in the previous year, indicating room for lifting engagement.

Source: The 2013 COLLOQUY Loyalty Census.

Familiarity Breeds Content

The key determinant as to how customers viewed the value of their membership in any given loyalty program was engagement. Active participants were much more positive about their programs. Logically, more customer activity leads to higher redemption—in other words, reaping higher benefit in the value exchange, which has a strong influence on happiness and increases the likelihood of incremental sales. In fact, the 2013 LoyaltyOne Customer Engagement Studyshows that those who took fuller advantage of their memberships, receiving sufficient value through redemption, recognition and other benefits, experienced a satisfaction or “happiness” level twice that of those who disengaged.

-0.05 0 0.05

I am happy with the value I get from the program.

The program is helpful in teaching me how to get the most from my membership. The program offers special perks, privileges, services, or other personal benefits. The program recognizes me as a valuable customer.

The program provides me with valuable discounts and savings.

The program allows me to earn a reward within a reasonable amount of time. The program provides me with opportunities to earn a reward faster. The program offers rewards that appeal to me.

The program sends me relevant offers or individualized deals. The program makes it easy for me to redeem for a reward. The program sends me the right amount of communication. The program is easy for me to understand.

The 12 Factors of Loyalty Program Performance

Source:June 2011 LoyaltyOne Compass Survey of U.S. loyalty program members. Output depicts a correlation analysis of responses to two questions in the study.

• Q:Those responding with a rating of 9 or 10 on an 11-point scale, where 0 and 1 = “Strongly Disagree” and 9 and 10 = “Strongly Agree” for each of the items listed in the graphic.

• Q:Those responding with a rating of 9 or 10 on an 11-point scale, where 0 and 1 = “Strongly Disagree” and 9 and 10 = “Strongly Agree” for the following ques-tion:“My membership in this loyalty program influences me to choose this company/brand more frequently.”

• The average correlation of the twelve items listed in the graphic is .686. The graphic depicts the relative derived importance of each of the individual items above by showing a ranking of the variance between the individual and average correlations for all twelve items.

Of the 12 factors evaluated by members in our performance model, three gaps afflicting program execution were common across all categories. These might be considered universal gaffes, reflecting customer perceptions of where most programs drop the ball.

1. “The program is helpful in teaching me how to get the most from my membership.”

This factor was calculated as “very important” to selecting a brand on the basis of its high correlation to brand preference, yet members in every category thought programs failed to deliver “how-tos” on membership.

2. “The program offers special perks, privileges, services, or other personal benefits that appeal to me.” Supporting the data that shows engagement as vital, customers felt this factor was critical to building a preferred relationship. But again the survey showed – especially in everyday-spend categories like credit cards and grocery/drug – that the need for recognition through soft benefits was not being met. Constant earn-and-burn, without that personal touch of customer recognition, can lead to burnout.

3. “The program sends me relevant offers and individualized deals.” This factor strongly correlated to brand preference in specialty retail, airlines, hotels and rental cars, categories with less-frequent purchase cycles. Overall, members felt the

communication chain between themselves and their programs was weak, if not broken.

Companies that bridge these universal gaps earn better grades from members. A direct comparison of leading and lagging programs shows performance ratings higher for those engaged in a well-designed mix of hard and soft benefits. It’s not a coincidence that customers have stronger perceptions of the value of programs that combine those elements, and that such programs consequently earn superior Net Promoter Scores. Happiness comes in a blend of earnings and recognition that enhance engagement.

The 15/50 Rule

But not all efforts at increasing customer satisfaction and NPS should be directed at every customer. Focus instead on the most loyal members. The 80/20 rule defines 20% of top customers as driving 80% of sales, but what we see in loyalty is that the top 15% of loyalty program members drive 50% of sales. This group already demonstrates the highest levels of

redemption and therefore “happiness,” so maintaining their positive engagement is key. Don’t underestimate the incremental share to be gained from your best customers. We’ve found that a prime place to look for share is from this group.

And reinforcing the need for innovation and new means of customer engagement, the type of investment made in marketing to this group will generally differ from that made to other segments. Higher-value/engaged customers will likely value currency less than mid-tier customers, so they must be treated differently—and in marketing to this segment, relevance increases in importance.

An industry rule of thumb is that

middle-tier program members, those with middling financial impact, account for 35% of business revenues. That’s an easy percentage to remember, because that revenue figure parallels the

percentage of middle program memberships: 35%. The customers in this segment are engaged, but

not as engagedas they could be. This middle tier comprises best-customers in waiting—waiting to be

motivated to spend more.

Program tweaks aimed at increasing satisfaction and NPS among this near-best customer group can be a prime target. This group provides a strong opportunity to test treatments. And in fact, investing in “near-best” customers who have not yet redeemed but are close to redemption thresholds, and moving those members toward redemption or other clear benefit, will transform their low satisfaction or dissatisfaction to “happiness” and a higher NPS. In response, brainstorm ways to encourage them to participate more in your program. Then put as many of these concepts into action as feasible.

15%

50%

50%

15%

35%

35%

The 15/50 Rule of Customers to Business

This approach is consistent with a two-fold segmentation and investment strategy:

• “Keep and hold”current best customers with appropriate and somewhat modest marketing investments

• “Keep and grow”near-best customers with more aggressive, goal-oriented investments to grow sales.

Of course, the strategy presumes reducing or eliminating investments in less-involved customer tiers to maximize profitability.

As the inverse pyramid graphic on page 5 depicts, the top half of all customers accounts for 85% of total business. They deserve the program’s attention; and among them, the near-best group, the 35% under the top 15%, deserves special attention. A boost in near-best redemption makes the most

dramatic impact on overall program evaluations and NPS. Aim for the middle and see results at the top. Keep in mind, too, that the 15/50 applies to metrics. In other words, listen to the voices with the most power and impact. Efforts to measure loyalty programs should focus on feedback from the best and near-best customer tiers, and not on all members. That’s because the bottom 50% or so will “belong” to the program but not be very active in it, and therefore they will be less engaged, much less likely to have redeemed, and therefore much less happy with it. But because their financial impact is less, measurements of their level of happiness should be given less weight. NPS analysis and similar measurement efforts must take this factor into account.

Loyalty Practitioners to Loyalty Perfectionists

In the following checklist, we share a few ideas about how to build program engagement, focusing on closing the three satisfaction gaps discussed earlier—understanding the program, program perks and special benefits, and program relevance. The high-level view: Ensure that employees at all levels personally recognize and show appreciation to your most loyal and near-best members. Perfecting a relationship takes commitment.

Put pedal to the metal on achieving value.

As best customers and especially middle-tier customers get closer to redemption, make offers to accelerate earn velocity and time-to-reward. As well, investigate earn-and-burn partnerships with complementary brands that can speed member engagement frequency.

Check the relevance factor.Are your offers, communications and other elements of your engagement strategy targeted and customized? A good example can be seen in the experience of one of our colleagues. She responded to a brief survey from a major hotel brand that she frequents, noting that she was considering a vacation to Latin America. The brand began offering her deals on vacations to that region. This is such a simple tactic that it’s surprising more travel companies don’t query loyalty program members on where they hope to go. Help a member’s wishful thinking turn into a wish fulfilled and chances are the gratitude won’t soon be forgotten. Reevaluate the program’s communications plan and media choices with a focus on social media and marketing via emails with the goal of “keeping the fire lit” as customer relationships progress.

Reward members with unexpected perks and privileges beyond points. Small but important actions—whether communicated in some form of digital communication or face-to-face—will promote much-needed engagement where members least expect it. Surprise and delight your best customers with one-time benefits to further cement their relationships with the brand. One excellent example comes from a grocery store chain that has its store managers carry groceries to the car for its top customers. This tactic can be particularly effective in “everyday spend” categories like grocery, fuel and pharmaceutical where purchase frequency is high.

Evaluate if you truly provide great experience to your most important customers.How prominent is your integration of operational/service value propositions? Ensure that the program maintains a focus on soft benefits for best and near-best customers across all communication and offer channels.

Engage your advocates.How successfully does your strategy harness the power of

Promoters? How have social currency strategies, gamification mechanics and mobile solutions shaped your value proposition?

Coordinate customer engagement throughout your company.Are all elements of your

enterprise pulling in the same direction? Resources that are largely designed to drive the same set of preferred customer behaviors/attitudes exist throughout the organization. Are you aggregating your resources and putting everything on the table? You may not need to spend more; you simply may need to spend the same (or less) more effectively.

Track the NPS of the loyalty program itself and not just the brand alone.But make sure you prep your organization’s senior leaders to remember: Focus on active redeemers, not the entire member base. To reiterate, de-emphasize low-impact customer feedback from members who don’t spend enough to qualify for redemptions because of their lack of involvement.

Stay in touch.This advice applies to all programs, but is particularly important for industries in which customers transact less frequently (discretionary airline travel and specialty retail, for instance). Members of these programs accept that it takes them longer to achieve rewards, so remind them that the program is monitoring their progress toward that longed-for reward, and wants to help whenever and however it can.

The Payoff

Two key metrics move the needle of success for loyalty programs: customer happiness with the program, and NPS. Quantify the impact of those measures. Analyze, for instance, how a one-point increase or decrease correlates to fluctuations in sales/profits. On a more tactical level, score the customer database and arm front-line staff with this information wherever they interact with customers.

Both customer happiness and willingness to recommend are driven by engagement. Loyalty marketers must read the pulse of those for whom they are creating and maintaining programs. Blending rational benefits (for instance, cash-back, utilitarian redemption options and discounts) and emotional benefits (for example, dream vacations, unique experiences and recognition) to personalize member experiences solidifies the brand-member relationship as more incentives lead to accelerated earnings.

Once members are on the road to faster redemption, keep the fire lit through special offers to your most-loyal program participants, and special efforts with middle-tier members, pushing them to the top of the pyramid.

Need more expert advice? For additional tips on how to transform your loyalty program, visit loyalty.com/7steps or call one of our consultants at 1.888.515.8515.

Appendix: Methodology

The 2013 LoyaltyOne Customer Engagement Studysurveyed 6,329 loyalty program members with at

least one membership in 41 different loyalty programs in Banking, Credit Card, Department Stores, Grocery and Gasoline retail, Hotel and Airlines. The research used Net Promoter Score as the measure of program member engagement, and correlated each of 12 factors of program performance with responses related to how the loyalty program influenced the choice of that brand more often.

ABOUT

The Author

As Managing Partner, LoyaltyOne Consulting, Dennis Armbrusterleads the development of innovative, analytics-driven loyalty strategies for clients throughout North America. He directs a team of internationally recognized practitioners working with companies across the business spectrum, including Walgreens, Hertz, Best Buy, Canadian Tire, Tim Horton’s, Kellogg’s, Saks Fifth Avenue and Visa International. Looking at loyalty from an enterprise-wide perspective rather than in the context of a specific program, the team’s mandate is to build on LoyaltyOne’s leadership in sophisticated analytics, financial modeling and concept innovation to develop breakthrough initiatives in customer strategy and experience design. The solutions they deliver are grounded in deep con-sumer insights and custom-tailored to create new economic opportunities.

ABOUT

LoyaltyOne

LoyaltyOne is a global leader in the design and implementation of coalition loyalty programs, customer analytics and loyalty management solutions for Fortune 1000 clients around the world. LoyaltyOne’s unparalleled track record delivering sustained business performance improvement for clients in the loyalty marketplace stems from its unique combination of pragmatic, hands-on experience and continuous thought leadership. LoyaltyOne has over 20 years’ history leveraging data-driven insights to develop and operate some of the world’s most effective loyalty programs and customer-centric solutions. These include the AIR MILES Reward Program, North America’s premier coalition loyalty program and a working partnership with Latin America’s leading coalition program, dotz. LoyaltyOne is also the owner of COLLOQUY, a group dedicated to research, publishing and education for the global loyalty industry. LoyaltyOne is an Alliance Data company. For more information, visit www.loyalty.com.

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