July 4, 2024
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What’s Holding Back ROI for Loyalty Programs?
According to the fifth edition of Salesforce’s Connected Shoppers Report, retailers still struggle to capitalize on all the customer data flowing into their loyalty programs.
The top five barriers to loyalty program ROI (return on investment) were:
- Lack of customer insights for targeting
- Inability to rapidly react to market opportunities/competition
- Inability to predict promotional revenue
- Disparate systems to manage the promotion lifecycle (conceptualize, configure, distribute, measure)
- Lack of clarity into which promotion types resonate with loyalty members
The study, based on a survey of 2,400 shoppers and 1,125 retail decision-makers, also found that a loyalty program’s heavy emphasis on discounting impacts profitability. When asked what they value in loyalty programs, the top five responses from consumers were earning points to redeem, cited by 58%; special discounts and promotions, 53%; free shipping, 44%; birthday perks, 22%; and free or discounted services (tailoring, styling, installation), 20%.
However, shoppers love those discounts. In 2023, shoppers belonged to 3.4 loyalty programs, on average, with 58% indicating in Salesforce’s survey that a loyalty program makes them more likely to buy from a brand or retailer.
Among the retailers surveyed, 75% already offer a loyalty program, with another 22% planning to introduce one in the next 24 months. The top goal for a loyalty program was customer retention, but other benefits — including increased customer engagement, repeat purchasing, and customer acquisition — were found to be nearly as important. The study also found the arrival of retail media networks ratcheting up the value of such programs.
A survey of 600 marketing professionals as part of Antavo’s “2024 Global Customer Loyalty Report” found customer retention to be a priority, with two-thirds of respondents planning to increase investment in retention, slightly more than double those planning to invest more in customer acquisition.
Beyond considering subscription programs, Antavo’s recommendations on improving the payback from loyalty programs include putting experiential rewards or other higher value-add rewards, like free shipping, at the top of the tier list to motivate most-loyal shoppers to “stick around and level up,” while reserving games and instantly available discounts for recruiting new members.
The loyalty management tech firm also advises combining both rational elements, such as points and savings, and emotional elements. Antavo said, “While emotional elements, such as personalized experiences and exclusive access, will build engagement and sense of belonging, the rational elements provide essential tangible, practical and financial benefits to customers.”
In its “Customer Loyalty Executive Survey 2023” report, PwC advises brands to lean into first-party data to “personalize customer engagement for a better experience, more relevancy and continued growth.” Other recommendations include matching perks to customers.
“You can’t be everything to everyone, but with a little resource reallocation you can offer a wide range of benefits to all your customers,” said PwC. “Prioritize your most popular rewards, but maintain a healthy balance of secondary perks depending on what interests your customers.”
BrainTrust
Chuck Ehredt
CEO, Currency Alliance
David Slavick
Co-Founder & Partner, Ascendant Loyalty
Jeff Sward
Founding Partner, Merchandising Metrics
Recent Discussions
Discussion Questions
What obvious and less obvious factors are holding back profitability within loyalty programs for retailers?
What’s your advice on segmenting experiential versus transactional perks to balance customer retention versus customer acquisition?
Are the heavy discounts driving many loyalty programs worth it as a driver of purchase frequency?
Poll
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The biggest problem with paid for loyalty programs is that there are so many of them and consumers will only subscribe to a handful. With free loyalty programs, the key is to ensure that data is utilized properly. So many loyalty programs are hopeless at personalizing deals and offers and so do not activate and drive spending from members as much as they should. The other key is to look beyond conventional uses, including integrating loyalty into retail media networks, to maximize the return.
Paid only works if you give back 2x what you charge. Otherwise, you get 1x annual subscribers based on trial or a highly valuable initial offering to join and then have to deal with early cancellations and/or lack of renewal in Year 2. Emulating Amazon is not practical for 90% of all companies out there – not a silver bullet by any means.
Absolutely! It’s why weak programs – like Target’s paid for option – really won’t move the dial. Amazon adds so much value and keeps adding more over time!
Feedback from consumers surveyed is precisely aligned with what we all hear time and again when asking what benefit they wish to receive in return for their patronage. ROI must EXCEED the investment in the program to deliver true incremental lift. Thus, a program built on points/rewards plus discounts is simply a transactional relationship that has zero chance of driving incremental lift. Rational plus Emotional or Experiential benefits that are differentiated by member value segment so that you drive upward value migration is but one key component to program design. However, a design with 4-5 published tiers looks good on paper but is not practical. Make it easy to understand, easy to play and worth referring friends and family to join/participate.
The primary challenge today is lack of imagination, innovation, progressive roadmap for program evolution fueled by constant commitment to listening to both members, store personnel, field sales personnel and more. A program with too many exceptions, disappointing rules, limitations and lack of customer choice/flexibility will always fail. Programs that are 100% driven by a credit card issuer value proposition are limiting business success – give real value to shoppers regardless of tender and yes give much more to those who pay with preferred co-brand. Likewise, a program that has a weak value proposition overall provides LESS than 5% in hard + soft benefits is not worth paying attention to and will likewise not deliver satisfactory ROI. All of this is known, documented from over 25 years of observation and practice in the field.
Today, more and more MarTech partners are indeed providing the capability to enable timely action based rules, logic, machine learning and AI driven decisioning to respond to real and predictive behavior in order to influence conversion, lift average ticket, improve recency and more.
With few exceptions, loyalty programs are incapable of generating positive ROIs — much less building a strong customer future. But rather than natter on at length, let me suggest reading Byron Sharp’s excellent work on this — available through the Ehrenberg-Bass Institute. Sharp has researched these programs since the 1990s across a wide range of businesses.
This link takes you to one of Sharp’s articles. His work is always thorough and reliable. https://www.researchgate.net/publication/222484984_Loyalty_Programs_and_Their_Impact_on_Repeat_Purchase_Loyalty_Patterns
It is possible to accelerate the loyalty life cycle of new customers by implementing rewards programs, encouraging them to behave like the company’s most profitable tenth-year customers. Loyalty management must be integrated with rewards programs to achieve this.
Companies must maximize profitability by sharing value with customers proportionate to the value created by customer loyalty. The goal is to motivate customers to earn loyalty by continuously educating them about its benefits. You must develop a long-term loyalty strategy.
Rewards programs, however, are frequently misunderstood and misapplied. When it comes to design and implementation, most companies treat rewards like short-range promotional giveaways. As a result, rewards may provide some value to new and existing customers by encouraging them to try a product or service. If they are not designed in such a way as to build loyalty, they will only return a tiny fraction of their potential.
Companies treat all customers equally, providing them with products of equal value regardless of how much they spend or how long they have been customers.
To design rewards programs that build long-term customer loyalty, companies should consider implementing tiered loyalty programs that offer increasingly valuable rewards as customers reach higher levels of loyalty.
Personalizing rewards based on individual customer preferences and behaviors can provide a sense of exclusivity and enhance the customer experience.
The integration of rewards programs with customer relationship management systems can enable companies to monitor and analyze customer data, allowing them to tailor rewards based on customer needs and preferences.
Whenever a company over-satisfies less profitable customers, it wastes resources on loyal customers who are less valuable. The outcomes are predictable. Low-profit customers are kept by the company, while higher-profit customers defect. -Db
Maybe the root of the problem is the way ROI is measured? Many retailers look at one of Loyalty’s key metrics as avoiding consumer atrition. Most loyalty programs need to be looked at a component of a broader marketing and promotion plan. Trying to measure ROI of just loyalty is a very challenging effort that we find most retailers do a poor job understanding which levers to pull. This combined with most peoples saturated mail box, and text box makes the traditional communications processes obsolete.
Retailers will see ROI when they give customers a significant ROI first. I gladly pay my Costco and Amazon membership fees because I know my ROI on those fees will be several hundred % in savings vs the fees. It’s my ROI that keeps me going back to those retailers. It’s math, not loyalty. I’m happy, thrilled even, to shop there. Then it’s up to the retailers to manage their content and margins to make their ROI.
I’m not sure why these programs are referred to as loyalty programs. It’s simple bribery. “Here’s a discount, or a coupon, or some points. Come back and shop me first.” In most cases, if I received a better discount or coupon, I’d drive down the road. That’s the root of the ROI problem. Customers aren’t loyal, but they are bribe-able. And the amount of discounts, coupons, and points floating around every day is mind boggling.
Yes, most retailers need some kind of rewards program. It’s almost table stakes. But please, don’t call it a loyalty program. It’s math, not loyalty.
You are spot on. In particular, “It’s my ROI that keeps me going back to those retailers. It’s math, not loyalty. I’m happy, thrilled even, to shop there. Then it’s up to the retailers to manage their content and margins to make their ROI.”
Wow. Discounting impacts….profitability! Amazing! I think more consulting expenditure needs to happen in order to really figure that one out.
The problems here are many, starting with you really do not know what is going on in the minds of your customers. Oh, sure, you can see that, over time, I purchase, say blueberries but never raspberries, but really, what can you do about it? Offer me free raspberries in an attempt to switch my preferences? See what brand of blueberries I tend to purchase, then work with other vendors for offers they can support in order to swtch my allegiance? Print out a 5 foot long thermal receipt with offers on it in the hope that I actually read the offers and act, as opposed to throwing that receipt into the bin as soon as I pass it?
Look-profitability is only one measurement worth looking at. The true metric is cost of customer acquisition, and if losing some profitability keeps people coming back, and lowers churn…well, I suspect that makes the lost profitability a LOT more palatable. Look at these programs with the right metrics, because the technology driven “vision” of making an offer at “the moment of truth” that impacts a buying decision is pure fantasy most/all of the time.
Mark, I see some very clear thinking here.
Jeff’s thoughts that it’s math not loyalty is the right starting point. However loyalty is real and with enough math, loyalty can be attained. The biggest problems with loyalty programs has been and shall always include leaving money on the table. Reducing price points through discounts and deals to where it is no longer profitable has been a common theme- and usually because retailers have not personalized their data to the customer and their context. We train our customers to buy with a discount. Why in the world would a retailer offer a 15% discount if the customer is willing to pay full price. Better yet why would I offer that discount when 5% will do to keep them on board. But the training kicks in as customers wait for that special deal they always wanted. The challenge for profitability has always reigned in customer motivation and using data responsibly enough to establish just the right price points. Building experiences that support value – in the form of easier shopping, better engagement, easier selection, overall affordability, slowly converts into loyalty. Even concepts such as an easy to use drive through to pick up coffee on the way to work builds the familiarity and value that customers crave. At the end of the day, loyalty programs must deliver value that’s experiential to retain customers- otherwise our retail store will be quickly forgotten across the competition. Few of us are so rational that we’ll assess actual value every time we purchase something- especially for routine or low cost items, but we definitely will remember our feelings when the experiences were an exceptional buying experience.
Loyalty programs work wonders when they are differentiated and focused on what a brand’s customers value. Points-based programs are effective in measuring engagement across transactional engagement and non-transactional (emotional) engagement. Where most programs suffer is that they are not unique in the value proposition and customers don´t see much benefit in joining in the first place – largely because most customers simply cannot spend enough money with any one brand (other than their grocer) to ever get to interesting rewards.
Loyalty programs are the key in moving away from heavy discounting to get customers’ attention. The mix of rewards should include points for purchases and other behaviors that increase the lifetime value of the customer, special discounts that are relevant to individual customers, opportunities to experience something special from the brand, and a few “thank you” messages along the way to recognize that the brand values the customer’s patronage.
Each brand should start by asking their frequent customers AND their less frequent customers what they value – which is almost certainly going to be focused more around experience interacting with the brand, and overall value. That value does not have to come from low prices, but needs to differentiate the business in the eyes of the customer. Points are largely a prop that compensates for lack of experience or value.
Of course, most customers may value the points from another loyalty program if they can’t earn enough of the brand’s points to get to interesting rewards, so consider issuing popular airline, hotel group, or coalition loyalty points as an alternative to your own.
If you are looking forward to ROI on a loyalty program, the only one that counts is does it keep the customer coming back. Customer acquisition is the most expensive issue in marketing. Keeping customers is incredibly valuable.
Do not make programs so convoluted that the customer just gives up. Make the shopper’s decisions easy. The shopper will not make a shopping list of the various retailers based on loyalty programs. Both Jeff Sward and Mark Self (above) make insightful comments.
In my work with personalized offers and shopper data, several issues reduced loyalty program success.
Shoppers want discounts, which erodes profit. Brands and retailers want to increase profits, which de-emphasizes discounts. Expand consumption, convenience, trial and replenishment programs can serve all groups but take a bit more work.
Static targeting of shoppers is safe and critical but less effective than dynamic targeting. Shoppers move through phases, life stages, preferences and trends. By the time you put them in a bucket and execute a program, they’ve moved on. Relevance needs to be dynamic and data driven. Use data and rules to support, “When this, then that” campaigns.
Offer gamers corrupt loyalty program success. I recall seeing fewer than 10% of offers redeemed by individual shoppers. 90% were multiple (tens of offers per) redeemers. Systems need to identify and limit these offer gamers where promotion dollars are wasted.
Finally, loyalty programs need to be focused on the shopper.
Doesn’t it always go back to the value proposition? Customers exchange loyalty for better experiences and/or lower prices.
Why would a customer bother if the retailer can’t provide one or the other? And why would a retailer be surprised?
Creating loyalty programs to ‘meet the bar’ rather than ‘raising’ it seems they’ve misnamed the program.
Many of these problems center around how retailer intake and store data. Without clear processes and structure they wind up with data that does not allow them to understand the customer and how promotions are performing. They may also lack the talent to analyze the data together or the tools to appropriately target. Building the back end infrastructure to support and analyze these programs will cause even the best thought out Loyalty program to fail.
Some thoughts on areas that could be limiting loyalty scheme return on investment are:
- Over-confidence as to when and how best to monetize the data that is attained. This could relate to the difficulty creating a data sharing ecosystem to determine the best way to build and use the insights that might be possible.
- Large discounts could erode profit margins, making it difficult for loyalty programs to be financially sustainable.
- Customers expect more than just discounts – they value personalized experiences, exclusive access, and practical benefits like free shipping – often they will happily pay for this – as is the case with Amazon Prime.
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The biggest problem with paid for loyalty programs is that there are so many of them and consumers will only subscribe to a handful. With free loyalty programs, the key is to ensure that data is utilized properly. So many loyalty programs are hopeless at personalizing deals and offers and so do not activate and drive spending from members as much as they should. The other key is to look beyond conventional uses, including integrating loyalty into retail media networks, to maximize the return.
Paid only works if you give back 2x what you charge. Otherwise, you get 1x annual subscribers based on trial or a highly valuable initial offering to join and then have to deal with early cancellations and/or lack of renewal in Year 2. Emulating Amazon is not practical for 90% of all companies out there – not a silver bullet by any means.
Absolutely! It’s why weak programs – like Target’s paid for option – really won’t move the dial. Amazon adds so much value and keeps adding more over time!
Feedback from consumers surveyed is precisely aligned with what we all hear time and again when asking what benefit they wish to receive in return for their patronage. ROI must EXCEED the investment in the program to deliver true incremental lift. Thus, a program built on points/rewards plus discounts is simply a transactional relationship that has zero chance of driving incremental lift. Rational plus Emotional or Experiential benefits that are differentiated by member value segment so that you drive upward value migration is but one key component to program design. However, a design with 4-5 published tiers looks good on paper but is not practical. Make it easy to understand, easy to play and worth referring friends and family to join/participate.
The primary challenge today is lack of imagination, innovation, progressive roadmap for program evolution fueled by constant commitment to listening to both members, store personnel, field sales personnel and more. A program with too many exceptions, disappointing rules, limitations and lack of customer choice/flexibility will always fail. Programs that are 100% driven by a credit card issuer value proposition are limiting business success – give real value to shoppers regardless of tender and yes give much more to those who pay with preferred co-brand. Likewise, a program that has a weak value proposition overall provides LESS than 5% in hard + soft benefits is not worth paying attention to and will likewise not deliver satisfactory ROI. All of this is known, documented from over 25 years of observation and practice in the field.
Today, more and more MarTech partners are indeed providing the capability to enable timely action based rules, logic, machine learning and AI driven decisioning to respond to real and predictive behavior in order to influence conversion, lift average ticket, improve recency and more.
With few exceptions, loyalty programs are incapable of generating positive ROIs — much less building a strong customer future. But rather than natter on at length, let me suggest reading Byron Sharp’s excellent work on this — available through the Ehrenberg-Bass Institute. Sharp has researched these programs since the 1990s across a wide range of businesses.
This link takes you to one of Sharp’s articles. His work is always thorough and reliable. https://www.researchgate.net/publication/222484984_Loyalty_Programs_and_Their_Impact_on_Repeat_Purchase_Loyalty_Patterns
It is possible to accelerate the loyalty life cycle of new customers by implementing rewards programs, encouraging them to behave like the company’s most profitable tenth-year customers. Loyalty management must be integrated with rewards programs to achieve this.
Companies must maximize profitability by sharing value with customers proportionate to the value created by customer loyalty. The goal is to motivate customers to earn loyalty by continuously educating them about its benefits. You must develop a long-term loyalty strategy.
Rewards programs, however, are frequently misunderstood and misapplied. When it comes to design and implementation, most companies treat rewards like short-range promotional giveaways. As a result, rewards may provide some value to new and existing customers by encouraging them to try a product or service. If they are not designed in such a way as to build loyalty, they will only return a tiny fraction of their potential.
Companies treat all customers equally, providing them with products of equal value regardless of how much they spend or how long they have been customers.
To design rewards programs that build long-term customer loyalty, companies should consider implementing tiered loyalty programs that offer increasingly valuable rewards as customers reach higher levels of loyalty.
Personalizing rewards based on individual customer preferences and behaviors can provide a sense of exclusivity and enhance the customer experience.
The integration of rewards programs with customer relationship management systems can enable companies to monitor and analyze customer data, allowing them to tailor rewards based on customer needs and preferences.
Whenever a company over-satisfies less profitable customers, it wastes resources on loyal customers who are less valuable. The outcomes are predictable. Low-profit customers are kept by the company, while higher-profit customers defect. -Db
Maybe the root of the problem is the way ROI is measured? Many retailers look at one of Loyalty’s key metrics as avoiding consumer atrition. Most loyalty programs need to be looked at a component of a broader marketing and promotion plan. Trying to measure ROI of just loyalty is a very challenging effort that we find most retailers do a poor job understanding which levers to pull. This combined with most peoples saturated mail box, and text box makes the traditional communications processes obsolete.
Retailers will see ROI when they give customers a significant ROI first. I gladly pay my Costco and Amazon membership fees because I know my ROI on those fees will be several hundred % in savings vs the fees. It’s my ROI that keeps me going back to those retailers. It’s math, not loyalty. I’m happy, thrilled even, to shop there. Then it’s up to the retailers to manage their content and margins to make their ROI.
I’m not sure why these programs are referred to as loyalty programs. It’s simple bribery. “Here’s a discount, or a coupon, or some points. Come back and shop me first.” In most cases, if I received a better discount or coupon, I’d drive down the road. That’s the root of the ROI problem. Customers aren’t loyal, but they are bribe-able. And the amount of discounts, coupons, and points floating around every day is mind boggling.
Yes, most retailers need some kind of rewards program. It’s almost table stakes. But please, don’t call it a loyalty program. It’s math, not loyalty.
You are spot on. In particular, “It’s my ROI that keeps me going back to those retailers. It’s math, not loyalty. I’m happy, thrilled even, to shop there. Then it’s up to the retailers to manage their content and margins to make their ROI.”
Wow. Discounting impacts….profitability! Amazing! I think more consulting expenditure needs to happen in order to really figure that one out.
The problems here are many, starting with you really do not know what is going on in the minds of your customers. Oh, sure, you can see that, over time, I purchase, say blueberries but never raspberries, but really, what can you do about it? Offer me free raspberries in an attempt to switch my preferences? See what brand of blueberries I tend to purchase, then work with other vendors for offers they can support in order to swtch my allegiance? Print out a 5 foot long thermal receipt with offers on it in the hope that I actually read the offers and act, as opposed to throwing that receipt into the bin as soon as I pass it?
Look-profitability is only one measurement worth looking at. The true metric is cost of customer acquisition, and if losing some profitability keeps people coming back, and lowers churn…well, I suspect that makes the lost profitability a LOT more palatable. Look at these programs with the right metrics, because the technology driven “vision” of making an offer at “the moment of truth” that impacts a buying decision is pure fantasy most/all of the time.
Mark, I see some very clear thinking here.
Jeff’s thoughts that it’s math not loyalty is the right starting point. However loyalty is real and with enough math, loyalty can be attained. The biggest problems with loyalty programs has been and shall always include leaving money on the table. Reducing price points through discounts and deals to where it is no longer profitable has been a common theme- and usually because retailers have not personalized their data to the customer and their context. We train our customers to buy with a discount. Why in the world would a retailer offer a 15% discount if the customer is willing to pay full price. Better yet why would I offer that discount when 5% will do to keep them on board. But the training kicks in as customers wait for that special deal they always wanted. The challenge for profitability has always reigned in customer motivation and using data responsibly enough to establish just the right price points. Building experiences that support value – in the form of easier shopping, better engagement, easier selection, overall affordability, slowly converts into loyalty. Even concepts such as an easy to use drive through to pick up coffee on the way to work builds the familiarity and value that customers crave. At the end of the day, loyalty programs must deliver value that’s experiential to retain customers- otherwise our retail store will be quickly forgotten across the competition. Few of us are so rational that we’ll assess actual value every time we purchase something- especially for routine or low cost items, but we definitely will remember our feelings when the experiences were an exceptional buying experience.
Loyalty programs work wonders when they are differentiated and focused on what a brand’s customers value. Points-based programs are effective in measuring engagement across transactional engagement and non-transactional (emotional) engagement. Where most programs suffer is that they are not unique in the value proposition and customers don´t see much benefit in joining in the first place – largely because most customers simply cannot spend enough money with any one brand (other than their grocer) to ever get to interesting rewards.
Loyalty programs are the key in moving away from heavy discounting to get customers’ attention. The mix of rewards should include points for purchases and other behaviors that increase the lifetime value of the customer, special discounts that are relevant to individual customers, opportunities to experience something special from the brand, and a few “thank you” messages along the way to recognize that the brand values the customer’s patronage.
Each brand should start by asking their frequent customers AND their less frequent customers what they value – which is almost certainly going to be focused more around experience interacting with the brand, and overall value. That value does not have to come from low prices, but needs to differentiate the business in the eyes of the customer. Points are largely a prop that compensates for lack of experience or value.
Of course, most customers may value the points from another loyalty program if they can’t earn enough of the brand’s points to get to interesting rewards, so consider issuing popular airline, hotel group, or coalition loyalty points as an alternative to your own.
If you are looking forward to ROI on a loyalty program, the only one that counts is does it keep the customer coming back. Customer acquisition is the most expensive issue in marketing. Keeping customers is incredibly valuable.
Do not make programs so convoluted that the customer just gives up. Make the shopper’s decisions easy. The shopper will not make a shopping list of the various retailers based on loyalty programs. Both Jeff Sward and Mark Self (above) make insightful comments.
In my work with personalized offers and shopper data, several issues reduced loyalty program success.
Shoppers want discounts, which erodes profit. Brands and retailers want to increase profits, which de-emphasizes discounts. Expand consumption, convenience, trial and replenishment programs can serve all groups but take a bit more work.
Static targeting of shoppers is safe and critical but less effective than dynamic targeting. Shoppers move through phases, life stages, preferences and trends. By the time you put them in a bucket and execute a program, they’ve moved on. Relevance needs to be dynamic and data driven. Use data and rules to support, “When this, then that” campaigns.
Offer gamers corrupt loyalty program success. I recall seeing fewer than 10% of offers redeemed by individual shoppers. 90% were multiple (tens of offers per) redeemers. Systems need to identify and limit these offer gamers where promotion dollars are wasted.
Finally, loyalty programs need to be focused on the shopper.
Doesn’t it always go back to the value proposition? Customers exchange loyalty for better experiences and/or lower prices.
Why would a customer bother if the retailer can’t provide one or the other? And why would a retailer be surprised?
Creating loyalty programs to ‘meet the bar’ rather than ‘raising’ it seems they’ve misnamed the program.
Many of these problems center around how retailer intake and store data. Without clear processes and structure they wind up with data that does not allow them to understand the customer and how promotions are performing. They may also lack the talent to analyze the data together or the tools to appropriately target. Building the back end infrastructure to support and analyze these programs will cause even the best thought out Loyalty program to fail.
Some thoughts on areas that could be limiting loyalty scheme return on investment are: