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What is the Right Financial Approach to Loyalty Programs?

The financial approach to loyalty programs vary by company. There are many different financial considerations.

Some retailers value the membership fees associated with the program. Others look at the program as a necessary cost of doing business. Others look to loyalty programs to improve consumer behavior and metrics like purchase frequency or average order value.

None of these approaches are wrong.

In fact, I would argue that if companies were not considering all these options, they are not doing their due diligence.

 

Loyalty Isn’t Just About the Pure Incremental Revenue

In my previous lives, I worked with many retailers that were focused on the pure dollars a marketing or loyalty program drove to their bottom line.

They often saw these programs as incremental revenue opportunities. Once they saw the dollars these programs generated, they were hooked.  The only metric they cared about was the number of memberships upsold at the register.

I believe that thinking is outdated. Why?

Maybe the biggest reason is that consumers are smarter and more educated.

 

Loyalty Needs to Evolve with Consumers

A loyalty program with standard benefits that are barely used are no longer valuable to consumers.  They have learned that they have options.

Consumer behavior and shopping habits have changed so much. That’s why a premium loyalty program is more valuable in today’s market than a program with limited benefits focused solely on driving incremental revenues.

Amazon Prime became a part of our daily lives. Consumers want programs like Amazon Prime that impact their daily routine. A retailer that does not have some type of loyalty program is somewhat of a dinosaur.

Consumers can shop anywhere now – At stores, online and on their mobile devices.  As a result,  bareboned loyalty programs will not be the impetus to stay with one brand or change consumer behavior.

 

Tying Loyalty Back to Financial Considerations

So how does this all tie back to financial considerations in developing the right loyalty program?

First, in today’s loyalty programs, the metrics retailers should be considering go well beyond the incremental membership revenues a loyalty program generates.

Retailers have to consider metrics such as average order value, purchase frequency and customer service satisfaction, as well as program metrics such as attrition and benefit usage.

Second, retailers have the option to build programs that are free or paid – or a combination of both.

See how adding a paid loyalty tier can supercharge a free loyalty program.

Free programs with minimal benefits may change consumer behavior slightly, but paid programs with stronger benefits may move metrics in a meaningful way.  Retailers have to be in a position to be able to measure that impact.

Finally, retailers need to determine what resources developing a loyalty program will take. These resources can go far beyond the dollars they spend.  It involves looking at how building a loyalty program will impact the organizations human capital and focus.

 

Loyalty is Getting More Complex

As loyalty programs become more complex, retailers need to remember to focus on the new metrics of these programs.

It all starts with how much time and dollars will building a loyalty program cost. If a decision is made to develop a program, retailers need to consider what type of program they want.

Will it be free or paid? What is the investment to be made in benefits?

And once all those decisions are made, retailers have to determine the metrics that are important to them and constantly analyze those metrics.

If retailers put the time and effort into this exercise, either internally or with loyalty program solution providers, they have the opportunity to drive their revenues and profitability, even if the program itself is not profitable.

Bob Breunig

Bob Breunig is our Chief Financial Officer. He has over 15 years of experience at marketing and subscription commerce and media companies, including Time Warner, working in both financial and business roles.

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