Unravelling the magic of successful loyalty programmes | KPMG | DK

Unravelling the magic of successful loyalty programmes

Unravelling the magic of successful loyalty programmes

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Director, Advisory

KPMG in Denmark

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Make me feel important

Make me feel important!

This is a request from many of your existing and potential customers. We all want to feel special and unique. A company should see us as important individuals, and not just like anonymous customers. Hopefully you are thinking in a similar way about your customers, wanting to make them feel that your company is unique and not just another provider of commodity services or products. It thus seems companies and customers are aligned; companies want loyal customers, and customers are often willing to be loyal as long as they are treated as individuals. This is something most companies have understood, which is the reason for all the different loyalty programmes currently available in the market.

The loyalty equation


The principle behind loyalty programmes is simple: tie your customers closer through some sort of membership programme, often involving rewards for frequent purchases, and your customers will stay longer, buy more, and hopefully tell their friends and families how good your company is. This allows you to boost both loyalty and advocacy. Provided that you have attracted the right type of customers to your programme, advocacy can be a very important factor since your customers often have similar personas as friends, so you get a higher share of the right customer type.
The programme might cost a bit, but the cost of acquiring new customers is significantly higher than the cost of retaining existing ones, so paying for loyalty seems like a smart equation. There is just one minor challenge with this equation; all companies are willing to pay for loyal customers, but customers can't be loyal to all companies. Just check your wallet (physical or digital) and count how many membership cards you have. Are you loyal to all those firms?
This leads us to the conclusion that it is not enough to create a loyalty programme - we need to create an effective loyalty programme. And that is slightly more difficult.

Three basic principles for successful loyalty programmes

Let's imagine you are planning to launch a loyalty programme for your products or services. How should it be designed in the most optimal manner? A good first step is to put yourself in the shoes of your customers. What would you value if you were to enrol in your loyalty scheme? It of course depends on the nature of your offering but three basic principles that often apply include:

    Transparency:

Make it clear to the customer how points are awarded and how rewards can be achieved. Random point allocations and gifts popping up when you least expect them often creates more confusion than loyalty. We all like competitions and to score more and more points as long as we know how our efforts are affecting the result. However, there are a few successful programmes that are not completely transparent in terms of how you reach their highest loyalty levels, mainly with the purpose of creating a special VIP feeling for invites only.

    Acceleration:

No customer becomes loyal from day one. You need to gradually bring them closer to you. This can be achieved through a tier-based loyalty programme, where you make it very easy to reach lower levels and then building an accelerating ladder. This allows customers to quickly become hooked on the concept, while at the same time always having something better to strive for. There is nothing more boring than reaching the highest level too quick, while knowing that you still have a lot of spending potential that could have brought you higher. It is just like reaching the summit of Mount Everest and realising that you are not tired yet.

    Value:

Most customers do business with you because they like your product. Therefore, if you are planning to reward their loyalty, a wise idea is to offer them your product or something closely related to your product when they reach a certain milestone. By doing this, the benefit is three-fold

    1. Customers get something they like, impacting satisfaction

    2. They get inspired to buy even more from you, impacting upselling (at     least if you reward them with a new cool item and not leftovers from last     year)

    3. Finally, it is the safest option for you as a company, since you can offer     your own products at a marginal cost.

This is why it is smart to offer a free book after a customer has purchased 10 books at your store or to offer free trips after your customer has collected a certain number of air miles. It is less smart to offer a Bluetooth speaker to customers spending more than a given amount in your online grocery store over the course of a year unless you know that the majority of your grocery shopping customer base coincidentally belongs to the less common category of people who loves portable music, but does not already own a wireless device.

Measuring success

As we already concluded, loyalty programmes are part of an equation, where you want to make more money on loyalty and advocacy. So how do you actually track the benefits of your programme? Many companies count the number of people they have in their loyalty programme. Have you ever seen the promotion "We now have X million members"? Sounds more like a sect than a compelling loyalty scheme to me. There are two fundamental issues with this way of measuring and promoting success; 1) It makes the members feel less special, since they are just a part of a big anonymous mass, and 2) the number of members is not adding any value to your company – in fact, they just increase the cost of administering the programme. What adds value is members who purchase more as a result of the programme. Just remember all the membership cards in your wallet, which you are never really using.

So let's agree that we should try to measure the true impact of our programme. This is being done by some companies through standard measures focusing on either the experience, such as Net Promoter Score or Customer Effort Score, the behaviour, e.g. negative churn or referrals, or on the actual financial impact by seeing if they spend more as a result of the programme. This is all nice and dandy but it assumes that you can isolate the effect of your programme. Yes, you can do A/B tests comparing people who are part of your loyalty scheme with those who are not. However, I would argue that many customers are part of your loyalty programme because they already are frequent customers and not the other way around. I sign up for memberships with companies where I know I consume a lot so I get some benefits out of my consumption. Of course, the membership will hopefully trigger additional consumption but it is impossible to isolate the effect just by comparing two groups. One way of doing it is to look over time and comparing the situation before and after launch of a programme, while assuming everything else equal, which is a rather unrealistic assumption in real life.

So am I saying that it is impossible to understand the impact of your programme? Not at all. How would you do it then? I would suggest that you ask your members. Customers who have taken the effort to sign up for your programme do have an interest in your company and what you offer. They also want to be treated as individuals. So stop seeing them as an anonymous mass which you can A/B test every now and then. Reach out to them, solicit their input, and be grateful that you have access to the best source of customer information that anyone could ever ask for.

Whether you already have a loyalty programme or are planning to launch one, I hope this inspired you to reflect on how it is designed and what can be improved. At the end of the day, the litmus test is to ask yourself whether you would be attracted to your own scheme and put your loyalty card on top of the stack you have in your wallet or just let it slip to the bottom of your card collection and never be more than just a card.

 

© 2017 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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