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The cost-effective loyalty program

Five steps to designing a program that generates cash

As a retailer or consumer business that runs a loyalty program, generating cash may not be your prime objective. Other objectives may include enhancing customer loyalty, building your brand or capturing detailed customer data. But loyalty programs can be expensive to maintain, particularly if you offer hard discounts.

To keep costs in line, especially in today’s budget-conscious environment, you need to identify ways to reduce the costs of your program without diminishing its value. Here are five steps for designing a cost-effective loyalty program:

  1. Know what you want
    To understand your program’s effectiveness, you need to measure its performance. Start by defining your objectives and success measures. “Are you trying to attract new customers? Gain a greater share of wallet from existing customers?” asks Richard Carson, national leader of Deloitte’s Customer practice. Or are you aiming to drive more frequent store visits or higher spends? All of these objectives suggest a different program design and different measures of success.
  2. Know what your customers want
    Different customers have different motives. Some may want discounts or price savings, but others may be seeking better service, convenience or early notification of new products. By understanding these divergent customer needs, you can tailor your program to better meet them. You may even lower costs by avoiding discounts that may not drive response.
  3. Define your segments
    Understanding your customers’ motivations also allows you to segment your customer base. “Customer segmentation lets you target people with specific messages and offer products that resonate with them. You can also use soft rewards — rather than discounts — that align with their purchase patterns,” says Chris Robertson, Manager in Deloitte’s Consumer Business practice.
  4. Test, test and retest
    Some of the retailing world’s best loyalty programs took years of testing to achieve their stellar results. To make your program more profitable, experiment with some of the following strategies:
    • Make it compelling to spend. Don’t just tell your customers how many points they’ve earned; entice them by explaining what their points can buy.
    • Encourage specific types of buying behaviour by running special promotions, encouraging redemption of high-margin products or awarding higher points for buying bundled services or private-label products.
    • Partner with other vendors or retailers to help fund the costs of the program.
    • Sell extra points to customers who want to top up their existing points to access a reward more quickly.
    • Forget about mass advertising. Target your marketing at specific customer segments.
    • Monitor the points liability on your balance sheets to keep it within a specified range. If the liability is too high, encourage redemption with special promotions. If it’s too low, offer more aspirational rewards that encourage customers to save their points rather than redeeming right away.
  5. Analyze, refine and add value
    Over time, analyze the data you collect to ensure the program meets your customers’ evolving needs. Changing markets and shifting consumer tastes may make a once-vibrant program stagnant. By tweaking your program’s reward structure, conducting better financial modelling or closing process gaps, you may be able to revive a struggling loyalty program rather than cancelling it outright.

    If you’re a retailer planning to launch a new program, you’re in a great position to design a world-class loyalty program from the outset. You can base your design on best practices — such as using customer segmentation to focus on your most profitable customers, leveraging purchasing efficiencies, encouraging redemption of higher-margin items, taking tax implications into account and managing liabilities more effectively. And you’ll be well on your way to designing a program that delivers value to both you and your customers.