Are customer loyalty programs a good thing?

CHALLENGE:
Keeping the customers you already have in a down economy is especially challenging. Companies frequently spend much more to attract than to keep customers. Do customer loyalty programs deliver in this economy?

How they researched it:
Loyalty programs are systems that track and reward customers who keep coming back to repeat purchase. Consulting firm Aberdeen Group surveyed 165 retail enterprises between January and March 2009, to learn if loyalty programs lead to business success. The sample included supermarkets/grocery, (10%), specialty (9%), hospitality/leisure (8%), apparel/footwear (7%), retail banking (14%), consumer products (9%), and department store/general merchandise (5%). The respondents were from North America (61%), Asia-Pacific (20%), Europe (13%, South/Central America/Caribbean (3%), and Middle East/Africa (3%). The size of firms ranged from over US$1B (33%), $50M-$1B (27%), and under $50M (40%).

What happened?
The top performing retailers (20%) had a year-over-year average basket size increase of 19%, customer retention rate increase of 16% and customer attrition rate decrease of 5%. The bottom 30% of retailers suffered a 2% decrease in average basket size, 6% decrease in retention, and 5% increase in attrition. What are the differences between the top and bottom performers? Top retailers reward for increased customer purchase frequency or total customer spend. For example, a $3 off coupon for an ink cartridge and double reward points for a twin-pack purchase. Best Buy recently reinvented its loyalty program by introducing a premier tier and offering these members no-fee membership, free shipping, priority access to limited supply products, more liberal return/exchange policy and access to exclusive events. Since its launch two years earlier, membership has risen from 8 million to 30 million. In general, multi-tier programs are a current trend among top performing retailers.

In addition to the reward component, top performers also tended to capture the required CRM data at POP. This allows customer segmentation (especially to identify new customer acquisition), wallet share analysis and market basket analysis, thereby facilitating personalized promotions. Many retailers develop new acquisition programs, where new customers receive a coupon upon checkout for their next purchase. Web couponing is an extremely cost efficient mode of delivery, particularly when correlated to purchase history.

Another component of the loyalty program that top performers have is loyalty card application and redemption. Application refers to the capability of card scanning, capturing purchase data, and compiling loyalty credits. Redemption refers to the capability of tracking customer use of the loyalty credits.

Why managers should care:
Top performing retailers have better average market basket size, retention and attrition rates. In addition, they have 53% higher Compound Annual Growth Rate (CAGR). While solid loyalty programs do not automatically yield such returns, they are part of the mentality and management orientation that can lead to such stellar performance.

Can you help?
Comment back by sharing your experiences with customer loyalty programs, especially if you’ve found an inexpensive way to collect and use application and redemption data.

Sahir Anand and Chris Cunnane (2009), “Cutting Edge Customer Loyalty,” Aberdeen Group, March. A copy of this report may be found at
http://www.aberdeen.com/includes/asp/sponsored_registration.asp?ci=/launch/report/benchmark/5803-RA-customer-loyalty-retention.asp&spid=30410182