The resurgence of the loyalty strategy

Loyalty is making a comeback, and here's why marketers should be ensuring it's a core part of their marketing strategy, writes Mark Gretton, chief technology officer at CHEP Network.

As the pendulum of industry buzz swings towards a greater focus on long-term brand building strategies versus short term activations (with sound justification), one of the unfortunate casualties of that discourse has been the loyalty program.

They’ve taken a bit of a reputational hit in recent times as we collectively shift away from performance and the often perceived as less sexy ‘below the line’ channels.

I’d argue that reputational hit and shift in focus away from loyalty programs and loyalty strategy has been unfair and unwarranted, and that we are on the cusp of loyalty as a strategy coming back with a vengeance due to a converging mix of political, environmental, social and technological drivers all hitting at once.

Gretton asserts that if you get loyalty right, it can work

I’ve had the good fortune of working with and for some of the best loyalty programs our country has to offer. From Flybuys to Velocity Frequent Flyer right through to the likes of American Express and MyerOne, and my time spent working on those programs has only grown my conviction that they work, and they drive value – if you get it right.

If you’re considering loyalty strategy investment, which can (and arguably should) also be used as part of your overarching brand building approach, there’s a range of things to consider in making the business case and delivering a valuable experience to the customer.

The economics of cost per engagement in owned vs. paid channels

Creating scaled channels where you can reach your customers at a much lower cost per engagement (ie. email, push or mobile app notification) with greater insight and control of that experience compared to paid environments clearly holds value and makes a compelling argument to your CEO and CFO.

I’ve run and observed enough control group studies across e-mail programs that show customers that receive five offers from your brand each week spend more with you than those that don’t receive any. It’s nudge theory in e-mail form. Retailers I know describe it as a ‘drug’; the more e-mails they send, the more money they make, so they constantly want to send more.

Those that take a more disparaging view towards loyalty programs will point to correlation-based arguments that say that people who signed up for your offers were more naturally pre-disposed. Yet control groups and time-based tracking studies can easily disprove this. Even the theory of ‘mental availability’ supports the idea that a higher frequency of visibility / salience drives greater purchase behaviour and the theory of ‘physical availability’ in digital terms is supported through the fact that an e-mail itself can be a shoppable touchpoint (or at least one click removed from one) as can a mobile application.

A mobile application with commerce capability in fact puts you one step closer to the point of conversion than sitting behind a Google search layer. If you can reach one million customers for 0.001c per engagement vs. 0.05c / engagement, it’s clearly a more economic path to reaching them.

Loyalty strategies vs. programs

So, if we establish that owned channel economics are advantageous vs. paid and there is value in building audience concentration there, what potentially remains in debate is whether a points-driven loyalty program is right for everyone.

This is where I think that purchase frequency becomes a really important factor in loyalty strategy design. The financially astute will certainly bemoan the balance sheet impact of holding points as a liability that may never get taken up, and I certainly have some sympathy for this. Straight off the bat, I don’t think a points program is right for every customer.

However, it’s more pertinent to view that argument from a customer perspective. If loads of people are holding points balances, they aren’t extracting value from the program because the reward thresholds may not be appropriately calibrated or they’re not easy enough to understand. I see lots of customers with this challenge.

It’s kind of like having extras cover in your private health insurance. If you never use it, you’re more likely to attrite. In reality, health funds actually want you to use just enough of your extras to convince you that they’re adding value, which is why they often remind you about your dental check-ups, or your balance for optometry.

I’m personally a massive fan of the RFM (Recency, Frequency, Monetary value) driven data models behind loyalty systems. It’s sort of like having a digital personal trainer sitting behind the programme shouting ‘just one more… you can do it’. These mechanics can be much more easily designed to work as well for someone that only shops once / year to someone that shops 20 times / year.

This is where brands are able to create value – by incentivising the extra sale that they wouldn’t have otherwise generated if they had only relied on broadcast techniques. Yes, there is likely to be margin trade-off in making these additional sales through some form of incentive (although that doesn’t have to be just monetary rewards), however what you are really doing is distorting the price elasticity of your products to known, higher value customers with the objective of trading up their volume.

The role of incentives and rewards

Regarding incentives, there is definitely a myth that loyalty strategies are solely about ‘giving away stuff’ (points, vouchers, discounts etc.).

When I was part of a pitch on a well-known Australian brand many years ago, I think I once related price discounting to ‘brand cancer’.

As marketers, we spend so much time building up the sense of value in our products through the stories we tell and value narrative we create, price discounting creates an erosion effect where consumers lose trust in the RRP and come to expect a lower tier. This is certainly a trap here. As an old boss said to me, ‘any idiot can sell stuff cheap’. However as the world’s richest man, Bernard Arnaud clearly understands, if you can both build brand equity through your engagements and make consumers feel that the price is justified, the profitability gains can be immeasurable.

There’s a great tool that CHEP uses – The Loyalty Spiral – based on a framework developed over many years in the global Proximity network that extolls the virtues of taking a more balanced view on building loyalty strategies.

To build a relationship with a customer after all, you don’t just have to give them free stuff and money off vouchers. Taking time to provide them with content that educates them about your product more can increase the sense of value in it. Building interactive service experiences that immerse them more into your digital brand world can also have the same effect.

That said, if you’re like Mecca and can find a way to distribute manufacturer-funded samples with low cost to yourself and exceptionally high incentive value to your customers through its brilliant ‘Beauty Loop’ programme, then you’re definitely on to something too.

Drivers in loyalty resurgence

So, why should we be thinking about loyalty strategies again in a growing sea of brand-led thinking? Well, I think there are a few factors:

  1. Longer term bleak business outlook – I think COVID was a very reactive time where it was all about chasing immediate sales. We saw a lot of focus on conversion rate optimisation in digital channels during that time. I think with a looming recession in play, people know that budgets / consumers’ disposable income is going to be under pressure for a while. With that in mind, they’re looking at shifting the economics of their marketing program into a world where marketing effects can be more easily surfaced through cheaper ‘owned channel’ impacts.
  2. Media fragmentation – The ability to deliver ‘broadcast’ effects is becoming harder. With TV audiences dropping and dropping and more channels moving to programmatic buying strategies, the importance of 1st party data increases. As this can no longer be delivered via cookies the drive for authenticated 1st party data increases.
  3. Value exchange for data – In a post Cambridge Analytica world, customers are much more aware of the value of their own data. As such they expect a higher bar in value exchange.
  4. Retail oligopolies – Whilst I hope Australia doesn’t experience as extreme Walmart Effect-like impacts as have played out in rural US towns, there is no doubt that in the ‘race to own the interface’ for digital commerce there will be casualties along the way. The likes of Uber Eats have already driven out competition such as Foodora and Deliveroo… Amazon’s Australian sales jumped almost 50% last year. Whilst they are nowhere near their c. 40% US share of eCommerce, we know the power that Prime subscription has once consumers are locked into a free delivery model.
  5. Labour costs – We’ve seen labour shortages driving wage inflation effects. This has driven up the cost to service customer needs. AI-enriched chatbot services built into loyalty apps have provided a method for businesses to help counteract these rises.
  6. New technologies – The sophistication of data models, accessible through cloud-based computing, the integration of IoT connections to your mobile phone, native AR features in mobile devices, more accessible and shareable API connections mean that loyalty apps have more potential now to create interesting and innovative features.

If you’re not already considering loyalty as part of your overarching strategy, I’d encourage you to do so, because I believe that the evidence – and the environment – are all pointing to loyalty taking back its place as a driver of growth.

Mark Gretton is the chief technology officer at CHEP Network.


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