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Badges & Benefits: Is your loyalty program delivering value?


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Loyalty programs are an important marketing lever in their own right, and can accelerate the value from other channels as well. While loyal customers have always driven the bulk of revenue (and profits), trends are creating a mandate for more sophisticated loyalty marketing. Loyalty marketing capabilities and delivery mechanisms continue to evolve as a result, getting more rich but also more complex to manage. Are you asking the right questions about your loyalty program?

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Badges & Benefits: Is your loyalty program delivering value?

  1. 1. WORKING DRAFT Last Modified 3/19/2014 4:28 PM Eastern Standard Time Printed Badges and Benefits: Is Your Loyalty Program Delivering Value? Discussion document Any use of this material without specific permission of McKinsey & Company is strictly prohibited McKinsey on Marketing & Sales – Slideshare Brief September, 2012
  2. 2. McKinsey & Company | 1 Loyalty programs are an important marketing lever in their own right, and can accelerate the value from other channels as well ▪ Often the primary vehicle for a 1:1 customer relationship ▪ Establishes “permission to market” ▪ Provides aspirational rewards for continued engagement ▪ Allows for focused investments based on customer value Loyalty programs ▪ Physical manifestation of the brand promise ▪ Key differentiator for the brand ▪ Delivers on most important moments in the customer journey ▪ Central component of the brand promise and overall value proposition ▪ Merchandising a key differentiator for brand ▪ Enables highly targeted offers to incentive specific behaviors ▪ Tailors brand experience to specific needs and attitudes of a customer ▪ Enables 24/7, 1:1 access to consumers across the decision journey ▪ Provides platform for most loyal customers to unleash advocacy for brand Allows for delivery of targeted, segment-specific experiences Provides a channel and currency to deliver tailored offers, e.g., tied to spending Captures rich customer-level data to help inform future pricing and merch decisions, e.g., online next product to buy Allows for delivery of targeted, segment- specific experiences, e.g., geo-targeted offers Customer experience CLM/ Personalization Pricing/ merchandising Digital/social marketing Role of Loyalty across other channels
  3. 3. McKinsey & Company | 2 While loyal customers have always driven the bulk of revenue (and profits), trends are creating a mandate for more sophisticated loyalty marketing 70 30 Existing customers New customers 1 McKinsey CLM practice, consolidated results from across retail subsectors Media fragmentation with newer channels taking ~20 points of share – mass marketing less effective Explosion of data with storage and processing costs plummeting 30-40% – enables better analysis/targeting Smart phone usage up 3X in past 4 years – creating “constant touch” opportunities Maturing markets and consolidating competition – increasing intensity of fight for loyal customers Loyalty program marketing spend is expected to grow at 5% annually between 2010 and 2015, versus only 2.2% for all consumer promotional spend Loyalty programs are proliferating – the average US household now belongs to 18 programs Pertcent revenue at risk, retail example1 Year-over-year “value at stake” Trends driving loyalty marketing focus
  4. 4. McKinsey & Company | 3 Loyalty marketing capabilities and delivery mechanisms continue to evolve as a result, getting more rich but also more complex to manage Point of evolution Loyalty marketing implication  Loyalty solution providers are investing in scale and capabilities (e.g., AIMIA), with new and credible players entrants (e.g., American Express), making outsourcing options even more attractive…  …however, weeding through the “pack” of solution providers can be daunting Partnering options  Expanded customer communication options and new purchase consideration points  Additional data collection and personalization opportunities Digital technology integration  More companies are looking to their programs to generate standalone economics, not just drive share of wallet (e.g., point sales, capability sales) Program profit potential  Builds loyalty through less commoditized, non-”point” mechanisms, relying on experiential solutions (i.e., the power of recognition/”badging”) to drive behaviors Currency diversification  Enables companies to take a role in a broader range of consumer behaviors (e.g., shopping), and generate incremental value from payment economics Payments integration  Coalition, or merchant funded, programs are becoming increasingly pervasive, providing an alternative to go-it-alone loyalty solutions Coalition opportunities
  5. 5. McKinsey & Company | 4 “Loyalty” strategies can take many forms, each of which can be successful in the right situations Degree of focus Broad appeal/ high universe “capture” “Niche” offering/ highly targeted Unpublished Published Degree of visibility “Experience- oriented” solutions “Analytically oriented” solutions “Coalition” solution “Premium rewards” solutions “Fee-based” programs “Best customer” programs
  6. 6. McKinsey & Company | 5 Case: Hospitality company attracts and maintains loyalty program members by offering both published as well as “unpublished” benefits SOURCE: McKinsey team analysis; client interviews, published data Target customer segment(s): High value entertainment seekers (high spend and/or high frequency) 3 12 20 65 202219 39 1-2 trips 3-4 trips 5-9 trips +567% +83% 10 or more trips -40% Members Non-MembersVisitation volumes Percent of customers Significantly fewer customers with just 1-2 trips a year Significantly more customers with 5 or more trips a year What makes it successful: Aspirational segment delivery “Tiered” program design with a set of exclusive and attainable benefits Unique access Ability to earn access a set of experiences that only available through the program (e.g., celebrity chefs) Ubiquity Earn and redeem points before, during and after trip, as well as partnerships with hundreds of brands Analytical rigor Culture and capabilities to support analytics approach to CRM, focused on customer profitability and preferences Frontline empowerment Employees can deliver benefits that matter most based on a discretionary budget
  7. 7. McKinsey & Company | 6 Amazon has leveraged Prime to target customers who would not “cross the aisle”, with spend more than doubling pre- and post-sign up SOURCE: Analyst and expert interviews 2010 ~11.5 2011 ~14.0 Prime users Millions Prime users spend Indexed to 100 Grows cross-aisle shopping behavior and creates more loyal customers – 92% of Prime customers are likely to renew, and customer spend more than doubles following enrollment Program description ▪ Membership program introduced in 2005 ▪ The plan costs $79 per year after one- month free trial ▪ The company has added movie and TV streaming, and eBooks on loan to the Prime membership for no additional charge Program benefits ▪ Free two-day shipping ▪ No minimum order size and a flat rate of $44 per item for one-day shipping ▪ Unlimited instant streaming of movies and TV shows with Prime Instant Videos ▪ A Kindle book to borrow for free each month from Kindle Owners’ Lending Library Results Prime 250-400 Non-Prime 100 +22% p.a. 2.5-4x
  8. 8. McKinsey & Company | 7 Consumer benefits Loyalty coalitions provide both consumer and partner benefits Faster earning Members accumulate value faster by earning across their daily spend Simplicity Members can rationalize loyalty program participation (especially in long tail/low frequency retail categories) Flexible redemption Members can redeem in a broader selection of categories across partners Cross-marketing Partners can cross-market to each other’s customer bases, making coalitions a valuable tool for customer acquisition in addition to retention Shared infrastructure Coalitions pool and share costs related to data environments, CRM tools and technology, analytical expertise/talent Richer data Coalitions have a broader, richer data pool to inform segmentation and targeting Partner (points issuer) benefits
  9. 9. McKinsey & Company | 8 However, executing on customer loyalty is not easy – many companies have fallen prey to a typical set of pitfalls Program design Common pitfalls Targeting the wrong customers Creating a “copy and paste” program Designing to cost, not perceived value Focusing on benefits, not “badges” Failing to innovate Not linking the experience to the front-line Ignoring the greatest assets - data Investing in strategy, without investing in capabilities Program implemen- tation
  10. 10. McKinsey & Company | 9 Are you asking the right questions about your loyalty program? How can I improve my loyalty program’s ROI? How can I take a best-in-class program to the next level? Should I create (or partner with) a loyalty program? ▪ What business problem am I trying to solve with a program? ▪ What customer segment am I targeting, and what problem of his/hers am I trying to solve? ▪ How should I structure my program for maximum value creation? ▪ What capabilities and infrastructure are required? ▪ What is the best way to get to scale quickly, and how to think about partners and providers? ▪ What are the keys to a successful program launch? ▪ Is my program design optimized around the biggest opportunities in my customer base? ▪ Does the program have the right mix of hard benefits (rewards) and soft benefits (recognition)? ▪ Is my program differentiated and defensible (hard to copy cat)? ▪ Is my program capitalizing on monetization opportunities (e.g., data monetization, co- brand)? ▪ Is the program integrated and capturing customer data across all channels (e.g., in- store, online, on the web)? ▪ Does my program touch customers across their decision journey? ▪ How is the program leveraging mobile to provide greater localization and immediacy? ▪ How will mobile payments affect my loyalty program? ▪ Is my program staying “fresh”?
  11. 11. McKinsey & Company | 10 Learn more