October 18, 2015

Loyalty Programs

A quiz question for you:

Question: On average, where do loyalty programs pay off the most?
  1. Among the most loyal customers (i.e. those with 60%+ annual repurchase rates).
  2. Among average customers (i.e. those with 40% - 60% annual repurchase rates).
  3. Among marginal customers (i.e those with 0% - 40% annual repurchase rates), because the loyalty program pushes the customer from inactive to loyal status.
The answer?

Across all of the loyalty work I've done, over twenty years, it is obvious that loyalty programs work when customers are already very loyal.

Here's the problem. Loyalty programs have very few levers - points leading to discounts, or discounts, or promotions, or freebies, or service enhancements, or combinations of the above. Those tactics must generate profit, in order for a loyalty program to succeed. Just as important, those tactics must increase sales significantly, or what is the point of a loyalty program outside of data capture?

Now, if a loyalty program increases customer-level demand by 10% (it's often between 5% and 10%, measured incrementally), then we have two situations.
  1. A customer with a 30% annual repurchase rate and 1.5 purchases per year nets out at 0.45 purchases per year. The loyalty program increases annual purchases per year from 0.45 to 0.45*1.1 = 0.495 purchases per year. That doesn't change anything.
  2. A customer with a 70% annual repurchase rate and 6.0 purchases per year nets out at 4.20 purchases per year. The loyalty program increases annual purchases per year from 4.20 to 4.20*1.1 = 4.62 purchases per year.
In a low retention environment, the loyalty program is accountable for 0.045 incremental purchases per customer per year.

In a high retention environment, the loyalty program is accountable for 0.42 incremental purchases per customer per year.

The answer above is (1). If your annual repurchase rate (across all twelve-month buyers) is below 60%, your loyalty program initiatives are not likely to move the needle much.