The document discusses loyalty programs and their role in marketing. It notes that loyalty programs are an important lever for developing one-to-one customer relationships and accelerating value from other marketing channels. However, executing effective loyalty programs can be challenging, as companies often fall victim to pitfalls like targeting the wrong customers, failing to innovate their programs over time, and not fully leveraging customer data. The document examines best practices for loyalty program design, implementation, and ongoing optimization through a customer-centric lens.

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Badges and Benefits:
Is Your Loyalty Program
Delivering Value?
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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. 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. 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. 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. 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. 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. 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. 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. 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. McKinsey & Company | 10
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