Profit from informed decisions

07 May 2014

Ensuring a successful approach to loyalty involves continually understanding and evaluating the right areas to invest and being able to accurately assess the results and commercial impact related to the investments being made.

Whilst focusing time and effort on direct programme costs can increase the return on investment, the impact of indirect costs needs to be understood in order to evaluate the changes in revenue and profits. In this way both the opportunities and risks are fully considered, to maximise the returns.

Understanding the costs of loyalty

There are three categories which are likely to demand the largest amount of time and focus, given they often account for the most significant financial investment, and need the greatest ongoing management.

  • Technology requires high levels of investment as providing a robust loyalty platform and required user and administration interfaces with the ability to collect and store data for analytics needs significant investment of both time and finance
  • Marketing and communications  costs  remain high, especially when a programme is being launched or is undergoing major change. Critically this area will need ongoing investment as it positively drives customer engagement and response
  • Benefit/reward provision  can be costly; supporting a Customer Value Proposition (CVP) can be in the form of free/discounted products which will have to be shown as deferred revenue in the programme accounts. Also in this category would be consideration for money-can’t-buy rewards i.e. items or experiences of high perceived value but very low actual cost which ‘creates’ value for customers.

Impact of direct costs

Whilst the following direct costs account for a much lesser proportion of the overall loyalty investment, the investment in these areas can punch above their weight in terms of the returns if implemented properly.

  • Operations  – this would include the softer aspects of programme management such as member servicing where small practical considerations can make a big difference           
  • Deriving insights from data  – the frequent request is for an explorative modelling method i.e. run the data and provide some insights that can be acted upon – is an extremely labour intensive way of using expensive analysis resource when compared to a confirmative approach which starts with strategies that are then proven or disproven with data

Costa Coffee – use RFM modelling to understand their customers, utilising the data from their loyalty programme offers. This allows them to understand and define key customer segments based on more than just transactions. The recency, frequency and monetary value of a Costa Coffee customer is analysed allowing them to identify their VIP customers that can be targeted in a different ‘exclusive’ way to engender a longer term brand relationship.

  • Management time  – needs careful planning to decide what activities to resource internally versus where to work with external experts. Knowing what the in-house team are and need to be good at, as opposed to expecting them to have the knowledge of specialists, allows for the right investments to be made along with the correct client – agency partnering strategy.

Quantifying the commercial returns

Equally important, is to determine and substantiate the commercial returns and benefits from loyalty and identify where there are opportunities to garner even greater potential future gains. The key areas where the measurable programme gains are most likely to directly drive revenue are increased purchase frequency – getting an already known and profitable customer to make just one more incremental transaction and cross and upsell opportunities – generating sales and revenues outside of shifting share or demand generation of existing products and services.

Factor in the indirect benefits for the business

When evaluating the more indirect benefits, the following need to be considered:

  • Advocacy and referral – This starts with understanding, managing and then exceeding customer expectations as a way of achieving customer satisfaction, which is a benefit in itself but has also been proven to increase advocacy.                   
  • Brand equity – These customers are looking for a deeper brand relationship. A programme that is valued by customers can have a positive impact on the key measures of brand awareness and preference. The more engaged the customer base, the more significant the intangible asset of ‘goodwill’ and efforts should be made to measure and assess the related increase in brand equity.
  • Net book value – Similarly the programme itself can have asset value and this will increase with the number of members and their level of engagement. 
  • Communications effectiveness – The intelligent, data-driven marketing communications opportunity provided by a successful loyalty programme should be regarded as a significant benefit to the business. The ability to derive more relevant, tailored and targeted communications, combined with a considered and strategic incentivisation platform results in a cost-effective marketing strategy minimising wastage.  

Club CarlsonSM – the loyalty programme of the Carlson Rezidor Hotel Group last year conducted an audit to review the effectiveness of their communications. Following this research, a highly dynamic email statement template was developed to show targeted content at a member level. The shift, with more relevant, personalised and measurable communications within the channel allowed them to increase engagement rates by a third and drive incremental revenue, with an ROI measurement of 4:1 in their first e-statement alone.

Profiting from informed decisions on loyalty

Developing and maintaining a commercially successful loyalty programme should not be left to chance. An informed decision is made when investing in loyalty, critically presenting the business case and commercial model for the overall return and impact for the business over a number of years. With many factors continuing to change the landscape for both brands and consumers alike, it is imperative that any business strives for a 360 degree view of their loyalty investment, to actively measure its commercial impact in driving a more positive customer experience and insights used to continually refine the overall strategy.