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Making loyalty pay: How to build - not destroy - value
The document discusses the growth and challenges of loyalty programs across various sectors, indicating a 10% annual increase in memberships from 2008 to 2012. It highlights the difficulty in proving the impact of these programs on spending, revealing that many companies experience minimal revenue growth despite significant investments. Successful loyalty programs often integrate user experience, address customer pain points, and focus on high-value consumers while learning from data analytics.
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Making loyalty pay: How to build - not destroy - value
- 1. Making Loyalty Pay Sept.30, 2013 Any use of this material without specific permission of McKinsey & Company is strictly prohibited McKinsey on Marketing & Sales – Slideshare Brief
- 2. McKinsey & Company| Loyalty is growing across sectors, with memberships increasing 10% per year from 2008 to 2012… 1SOURCE: Colloquy, VSS CAGR Percent 18 20 3 89 17 8 7 201220102008 Loyalty memberships by Sector Millions of members 422 277 191 162153 106 93 74 429 325 287 177174 133 114 98 548 371361 224 172 150 194 142 Financial Services AirlineHome, ap parel & hardlines HotelGroceryGamingDepart- ment store Drug
- 3. McKinsey & Company| … however, impact of programs can be difficult to prove 2SOURCE: McKinsey Loyalty Practice; team analysis Change in spending after joining program Percent of shoppers who … 18% 100% Spend less Spend more Casual clothing 82% Grocery 52% 48% Evidence is mixed on program impact on behavior change … …leaving companies unsure about their program’s value “Despite the money and resources we put behind our pro- gram, it takes a leap of faith to declare our efforts successful.” Typical grocer program requires 5% sales increase to break even
- 4. McKinsey & Company| Across 50 companies and 7 industries, loyalty programs do not appear to drive stronger revenue growth SOURCE: McKinsey Corporate Performance Analysis Tool (Oct. 2012); team analysis 3 Revenue increase of 55 major companies with low- and high-focus on loyalty Indexed High focus on loyalty 2012100908 170 210 200 190 180 11 160 150 140 130 120 110 S&P 500 Low focus on loyalty 07060504032002 100
- 5. McKinsey & Company| Additionally, companies with high reliance on loyalty appear to have consistently lower EBITDA margins 4SOURCE: McKinsey Corporate Performance Analysis Tool (Oct. 2012); team analysis Weighted average EBITDA margin of 55 major companies with low and high reliance on loyalty, percent 17 16 15 14 13 12 0 Low focus on loyalty High focus on loyalty 201110090807060504032002
- 6. McKinsey & Company| Yet in recent years, loyalty-focused players have seen faster increases in market value 5SOURCE: McKinsey Corporate Performance Analysis Tool (Oct. 2012); team analysis Weighted increase in market capitalization Indexed, 2002 = 100 240 220 200 180 160 140 120 S&P 500 Low focus on loyalty High focus on loyalty 20121110090807 340 320 300 280 260 060504032002 100
- 7. McKinsey & Company| Food retail Drug retail Hospitality Loyalty impact on revenue growth is neutral overall, but highly differentiated by industry 0 100 200 300 400 500 2002 2004 2006 2008 2010 2012 SOURCE: McKinsey Corporate Performance Analysis Tool (Oct. 2012); team analysis 70 80 90 100 110 120 130 140 2002 2004 2006 2008 2010 2012 80 100 120 140 160 180 200 2002 2004 2006 2008 2010 2012 80 90 100 110 120 130 140 150 2002 2004 2006 2008 2010 2012 50 100 150 200 250 300 350 2002 2004 2006 2008 2010 2012 80 90 100 110 120 130 140 150 160 2002 2004 2006 2008 2010 2012 60 80 100 120 140 160 2002 2004 2006 2008 2010 2012 Low loyalty focusHigh loyalty focus Airlines Coffee shops Car rental Discount stores Indexed, 2002 = 100
- 8. McKinsey & Company| Why do many loyalty programs fail to deliver value? 7SOURCE: Source Noise and me-too mentality Forced-discount program Lack of data capabilities Choosing the wrong metric
- 9. McKinsey & Company| Use the data Integrate loyalty program into the full experience Hallmarks of success for loyalty programs that buck the trend (1/3) 8 Starbucks integrated payments and mobile technology with their signature coffee shop experience to make the transaction more enjoyable With the REDcard, Target moved past the flat “discount-only” model by building out industry- leading data capabilities, and using the data gathered to target highest-value consumers
- 10. McKinsey & Company| Solve customer and industry pain points Build partnerships Hallmarks of success for loyalty programs that buck the trend (2/3) 9 Additional partners Anchor partners The Nectar coalition allows consumers to collect rewards across many non-competing UK retailers. As Nectar’s anchor retailer, Sainsbury offers a broader value proposition to its customers, and captures external data from coalition partners Amazon Prime solves one of online shoppers’ primary pain points: slow, unreliable delivery. It also creates loyalty for suppliers, who rely on Fulfillment By Amazon for access to customers.
- 11. McKinsey & Company| Allocate loyalty reinvestment to the most profitable customers Maximize difference between perceived value and real cost Hallmarks of success for loyalty programs that buck the trend (3/3) 10 Starwood free nights are generally redeemed on weekends, when hotels have low occupancy. Other offerings (e.g., upgrades, flexible check- in, Internet) are highly valuable to top customers, but bear little marginal cost. While most airlines attach rewards to miles flown, Southwest rewards are proportional to ticket price. Their loyalty spend remains similar to that of other loyalty-focused airlines but directly targets more profitable customers