Is Your Loyalty Program Betraying You?

A Loyalty Program Manager, a Marketing Manager and a Chief Financial Officer walked into a bar…

Loyalty Program Manager to bartender (John Wanamaker): “Barkeeper, your best Champagne!” gestured the Loyalty Program Manager.

Bartender: “What’s the occasion?” pausing his glass polishing.

Loyalty Program Manager: “Our loyalty program is now one year old, 60% of our sales are from members, and 16% of customers have enrolled. Members are spending 4.5 times more than non-members; time to celebrate a resounding success! I have a bonus coming.”

Bartender to the despondent Marketing Manager: “What can I get you?”

Despondent Marketing Manager: “I’ll have a double shot of your cheapest whiskey, I need it. Our online customer churn rates have doubled since Covid, response rates to our emails are down, we’ve increased our discounting every month to get them to notice, and our competition has jumped ahead in SEO rankings!”

Bartender to Depressed Chief Financial Officer: “And for you?”

Depressed Chief Financial Officer (mumbling): “Just water for me; I can’t afford anything else. Our top-line sales are holding up, but margins are in the toilet.”

Bartender: “Wow,” said the barkeeper, “I would rather be working for Loyalty Program Manager’s company, that’s for sure,” as he served the drinks.

All three: “Oh, we all work for the same company!” John popped the champagne and served the drinks, then stood by until there was a lull in the conversation. “Do you mind if I make a few observations? It is traditional in these metaphors…” Nods from the trio of drinkers encouraged him to continue. “I am willing to bet that 16% of your customers gave you 60% of your retail sales before you had a loyalty program. You are offering cheap beer at 10:30 on a Monday morning; they are already here for the beer and will not buy more or less because of the loyalty offer. It won’t get you new drinkers or sell more beer overall; it just reduces your profit. Sure, these members buy more beer than the average customer, but that is not because of the Monday morning member’s special; they are just heavy beer buyers. Better to offer member rewards on Tuesday nights when Joe’s Bar around the corner empties the bar by offering free food with trivia. Then you can sell incremental beer, and the members bring their friends.” “I am happy to sell you the champagne Loyalty Program Manager, but what you have is self-selection, not a return on your loyalty investment.” Measuring Your Return on Loyalty® Loyalty programs are irresistible to customers already engaged with your brand, who love the idea that they will receive rewards for spending they intend to make anyway. They enrol first, it makes sense, and they notice the program because they are already paying attention. Light buyers are less likely to enrol (I don’t drink enough beer to make it worthwhile), so a smaller proportion of them sign up or notice.

Measuring the difference in spending between members and non-members is not a measure of program performance, it is misleading. Members already buy more beer than non-members; that’s why they joined the program. The program investment cannot take credit for this difference in customer value without more evidence.

Working with clients, Ellipsis consistently proves that well-run loyalty programs deliver high levels of return on investment, removing the bias of self-selection and that poorly run programs waste money.

Better to know the facts than accept a flawed comparison guaranteed to give a positive result. Just order the champagne.

Ellipsis Return on Loyalty® uses a library of techniques to ensure incremental sales are correctly attributed to program investment. For example,

• If the data is available, changes in individual customer behaviour after they enrol are quantified.

• Statistical pairing, a technique to isolate the difference the program makes to individual customers, is highly effective – it can compare members with non-members who buy the same amount of beer.

• Comparing the value of members who are engaged with/by the program to members who are not influenced by the program uses ‘Engagement Scores,’ a range of behavioural data that quantifies program effects on members. This helps isolate the value changes driven by program investment specifically.

• Every program has members who do enough to qualify for a reward but are not engaged, so they do not bother to collect their reward; ‘non-redeemers.’ Comparing value differences (within program tiers if they exist) between redeemers and non-redeemers is a simpler alternative to engagement scoring and gives accurate results.

• Note that these techniques provide the control group routinely used in many marketing metrics but so often missing from measures of loyalty program effectiveness.

Back at the bar… The three colleagues finish their drinks and head over to the bartender to pay: Bartender handing a stamp card to the Loyalty Manager: “That’s $100 for the Champagne and you’ve now got three stamps on your new loyalty card. See you tomorrow. Your Champagne’s already on ice”. The self-selecting and soon to return, high spender paid and left with a smile.

Bartender to the Marketing Manager: “That’s $5 for the cheap whiskey but $3 if you join my paid loyalty subscription of $30 a month right now. It comes with complimentary peanuts and a designated driver”. The churn affected Marketing Manager joined the subscription, paid and wistfully wished he’d thought of subscription loyalty for his own customer churn problem.

The bartender handed a small piece of paper to the Chief Financial Officer and said: “No charge for the water. This is Joe Bar’s address – they’re around the corner.”

This article was first published by Customer Strategy Network. Permission to use has been granted by the publisher.