Why a loyalty program?

Loyalty programs are being leveraged as part of customer loyalty strategy more than ever, thus becoming an important part of the value equation for brands and organizations. The importance of retaining existing customers and building positive experiences are the driving forces behind this evolution. Like all marketing efforts, a well-crafted loyalty program requires resources and funds and when executed correctly, turn out to be one of the most profitable strategy.

Implementing a loyalty program is not a tactical decision; such a venture has far reaching potential and consequences and therefore requires strategic thinking.

For a number of organizations, the decision to launch a loyalty program has been a wise one, think of Metro (metro&moi), Shoppers Drug Mart (Optimum), Starbucks, Tesco and others in various sectors.

Most companies do not have the internal resources with the necessary knowledge to develop and implement a strong loyalty program. An ill-conceived program will not yield expected results and likely waste human and financial resources.

7 steps to developing a profitable loyalty program

Step 1

The first step is to involve key players from all business units, senior management as well as managers who will be implicated in the development of the program. The teams that should be part of the process at this point include marketing, operations, IT, finance, legal, HR and merchandising.

Having managers of all key departments involved from the very beginning of the development of the program brings an understanding of the implications of such a program, its functioning and best practices. This leads to better planning and implementation and ensures a company-wide loyalty mindset.

Step 2

The second step is to define the program’s objectives. In order to do so, answering key questions and extracting important organizations’ information will help set up the loyalty strategy moving forward.  For a program to be profitable, it must be adapted to an organization’s business strategy.

Questions to consider:

  1. Does the program align with the brand?
  2. Should the program target all customers or only the most profitable segment?
  3. Should the organization consider being part of a coalition program?
  4. What changes in behaviour will the program generate?
  5. How will the organization segment its customer base and which of these segments will become a priority?
  6. Should the focus be on increasing frequency or average spent?
  7. How can the program be leveraged with vendors and partners?
  8. What is the best way to involve and train employees at store level, franchisees or store managers?
  9. Is the organization ready to test and learn?

Step 3

Understanding loyalty best practices in an industry (ex. food, pharmacy, retail fashion, travel, etc.) is an important step that is sometimes overlooked. Loyalty marketing keeps evolving thus knowing best practices, trends and the best program in a specific business sector will help define the value proposition and program positioning in relation to competitive offers in the marketplace.  It is extremely helpful to analyze what the major actors of a sector are doing, locally, nationally and internationally.

Step 4

The fourth step focus on the development of the program’s parameters.

All key elements are addressed:

  • Value proposition – points vs no points, tiered levels or not
  • Acquisition, activation – enrollment to program and first action/purchase
  • Retention, re-activation – Type & frequency of promotions, initiatives to drive behaviour, increase in average spent and generation of incremental revenue
  • Technology – required platform & systems
  • Systems integration – POS, call center, online etc..
  • Branding & communications – branding, communication plan
  • Launch – pilot test, deployment plan
  • KPIs – pre-launch and ongoing key performance indicators
  • Investment – identification of all investments and costs

At this stage, it is important to work with all key players identified in step 1. Decision-making is done by the group and the concept and parameters are set so as to optimize KPI’s and business objectives.

Step 5

With all decisions and parameters outlined, a ROI model can be created. The purpose is to derive a detailed financial model that will showcase different financial scenarios before implementing the program.

The model needs to consider current financial data, forecasted sales growth (or decline) and segmentation. Revenue projections must include elements related to communication elements introduced to acquire, retain, upsell etc. … Any participation by external partners also need to be taken in consideration.

All costs have to be evaluated and integrated within the model (program development, technology systems, pilot and launch of program, acquisition campaign, ongoing communications, promotions, etc.)

This type of model will analyze each decision and its relative impact on ROI. All assumptions regarding revenues and costs can be reviewed and adjusted in order for the model to be realistic and receive approval by the financial body of the organization.

With this exercise completed, a detailed vision of the profitability (annual ROI) of the program is generated and therefore helps in deciding to go ahead with the loyalty strategy.

Step 6

Research is the next step. Current customers and non-clients of the organization must be surveyed. This phase is usually done through an external research firm using trade-off analysis. This will validate the program’s positioning and understanding, rewards structure, member’s advantages & privileges, promotions and communication process and intent to enroll and remain active.

Step 7

The last step is to integrate research findings in the ROI model exercise developed in step 5. This will help refine the analysis using customer’s input while adding intentions of enrollment and participation. This improves the accuracy of the ROI model.

This 7-step process allows an organization to make a more informed decision in deciding to introduce a loyalty program while understanding the financial impacts of such a strategy. This should lead to the possibility to reply to the questions for which all managers need answers; how much will a program cost and what will be its ROI?