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Businesses aren’t getting the ROI they should be from loyalty programs. Why?
In our most recent episode of Conversations with CommerceNext, Scott Silverman spoke with Abhishek Dalmia, Managing Director and Partner at Boston Consulting Group, to discuss how loyalty programs can evolve to maximize profit instead of becoming a margin drain.
Businesses Are Doing Loyalty Programs Wrong
In these times when every consumer is a potential new online customer, the realm of customer acquisition is experiencing significant disruption. With the cost of acquisition rising, retailers can not abandon their retention programs. They should double down on retention, yet many retailers and brands are simply doing loyalty wrong. Retailers are attempting to increase brand loyalty and retention by offering membership programs that provide discounts after a certain spend target is met, which, unfortunately, sets themselves up to lose margin .
Don’t Focus on Loyalty as a Discount Program
Dalmia describes loyalty programs with an ‘earn and burn’ model as a rigid framework that ultimately translates into a discount program. Looking at a broad portfolio of retailers, Dalmia found that the top 10% of customers drove 50-60% of revenue. Loyalty programs actually decrease the margin dollars that are being generated by those top customers, creating a margin drain. This is especially true for businesses with low frequency customers, such as apparel where loyal customers are in the mid-range of the value chain. There is potential to shift mid-range customers up the chain but brands need to drive change across the entire customer landscape to move customers up the lifecycle.
Why Have Loyalty Programs Evolved This Way?
Loyalty programs evolved into earn and burn programs because brands and retailers focus too much on the traditional metrics of traffic conversion and frequency instead of adopting a consumer-centric approach. A lack of consumer insight leads to a gap in understanding—many brands and retailers don’t realize they need to foster a more direct relationship with the consumer. Dalmia recommends understanding customers beyond their transactions. It’s critical to take a holistic view of customers that incorporates transactions, behavioral and contextual knowledge. Only with this knowledge should retailers engage customers to build loyalty that can include earn and burn programs.
How to Build a Consumer-Centric Loyalty Program
- Understand the importance of the transactional, behavioral and contextual knowledge of the customer
- With an integrated view of knowing and understanding the customer, begin engaging with them
- Move existing loyalty programs to a more profitable one with personalized loyalty rewards
- Utilize marketing technology, such as a CDP (customer data platform), to unify customer data from various touch-points
Dalmia believes businesses have a huge opportunity to define what a consumer-centric model looks like by using their own customer data. It’s important to think about consumer centricity from an organizational standpoint and not solely marketing. A customer-centric loyalty program will keep customers coming back and maximize profits for retailers and brands in the long run.