Retail Loyalty Program Best Practices 1

Agenda Current State of Loyalty Programs in Retail How to Design a Best-Practices Program How to Implement a Best-Practices Program How to Sustain a Best-Practices Program

Loyalty Programs: an Attractive Option for Retail Retail Industry Characteristics How Loyalty Programs Can Add Value Commoditized product

• Increase values to customers • Decrease price competition

Service can be a differentiating factor

• Strengthen the brand • Increase share of wallet

Minimal customer information

• Gather the data needed to perform targeted marketing and better localize assortments • Build lasting customer relationships and LTV

Low switching costs

• Increase switching costs • Decrease marketing costs

Adoption Level is Accelerating Percentage of Retailers with Loyalty Programs

Total

45%

55%

Years with Loyalty Program in Place Specialty

41%

41%

59% No

Fast Moving Consumer Goods Department Store/ Mass Merchandise 0%

Yes

56%

44% 21% 17%

33%

20%

67%

40%

60%

10%

Three Years

Four Years

80% 100% One Year Two Years

Source: AMR Research, 2/2006

10%

Five or more Years

Loyalty Program Challenges: Parity Deadlock Even though many consumers rank loyalty programs as an important factor in influencing where they shop, by itself they are losing their effectiveness.

% of Members Influenced

C u rre n t L o y a lty P ro g ra m s ' A b ility to In flu e n c e C u s to m e rs ' B e h a v io r " A L o t" 30 % 25 % 20 % 15 % 10 % 5% 0% G roc ery S tores

D epartm ent S tores

S pec ialty R e tailers

D is c ou nt R et aile rs

P harm a c ies

Loyalty Program Challenges: Performing Below Expectations Top 5 reasons for retailers’ dissatisfaction with their Loyalty Programs:

Loyalty Program Challenges: Inadequate Systems Most existing solutions not allow retailers to offer a targeted, highly-valued loyalty program due to: • High maintenance costs • Minimal flexibility • Limited functionality • Poor cross-channel and cross-product integration • Minimal analytical capabilities • Manual partner management

The Result - Loyalty Program Failure Customer: single, never married, no children

System: static, not personalized, not relevant, not compelling

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The Secret to a High ROI Loyalty Program: Target Marketing Targeted Marketing : • •

Drives Frequency, Recency, Monetary Value (RFM) Improves profitability: • Up-selling • Cross-selling • Moving distressed inventory

•

Provides competitive advantage: • Few existing programs have the flexibility to adapt to customer segments’ distinctive behavior • Of those few retailers who do targeted marketing most do so only to the highest value members even though research shows that marketing is more effective and changing mid- and low-value members’ behavior

Agenda Current State of Loyalty Programs in Retail How to Design a Best-Practices Program How to Implement a Best-Practices Program How to Sustain a Best-Practices Program

“Successful programs deliver a clear value proposition to target customers without trying to be all things to all customers.” -McKinsey

Loyalty Program Design Imperatives Decide which: • • •

Exact behaviors to encourage Groups to target Incentives to offer to each of these groups in order to change their actions

Ask your customers: 1. 2.

What type of benefits do they desire the most? How would they like to receive communications?

Ask yourself: 1. 2. 3.

How is your program unique? Are there true switching costs if a member wants to leave your program? What is your strategy for using your loyalty program to lock-in your customers and create continuous competitive advantage for your company?

Create Holistic Customer Profiles A best-practices program should enable the retailer to truly understand and segment its customer base. • Contact information (e.g., name, address, marketing channel preferences)

Profile of Four Shopper Types

• Demographics (e.g., marital status, household members, ages)

• Service history (e.g., calls and emails to customer service, in-store interactions) • Past transactions (such as past purchases and redemptions) • Status (e.g., tier, customer value score)

Profitability

• Shopping preferences (e.g., customerstated preferred items/categories/stores)

High

Product Enthusiasts

Satisfied Shoppers

Deal Junkies

Frugal Families

Low Low

Loyalty

High

Source: Forrester

Plan to Use Profiles to Perform Targeted Marketing Targeted marketing is an important component of retail loyalty programs. Some of the key benefits retailers will realize from their loyalty program, such as increased sales and profits as a result of more effective up-selling and cross-selling, are achieved via targeted marketing. Retail leaders: • Are aggressive with targeted marketing • Target promotions to each customer segment’s needs and desires • Use a cost-effective approach including “mass personalization” via sophisticated analytics and then targeted e-mail / direct mail

Formulate a Benefits and Rewards Strategy Designed to change members’ behavior by providing an interlocking series of benefits and rewards. •

Use Discounts to recruit customers into the Loyalty Program

•

create other means of locking the customers in once they are part of the program to ensure long-term loyalty

•

The benefits that each retailer decides to offer will depend upon a variety of factors, such as the retailer’s cost of goods sold, customers’ needs and desires, and cost-benefit ratio of different incentives

“Price is only one in a series of the levers that can be used to retain customers.” -Fair Isaac

Agenda Current State of Loyalty Programs in Retail How to Design a Best-Practices Program How to Implement a Best-Practices Program How to Sustain a Best-Practices Program

Manage the Entire Loyalty Lifecycle

Process Members’ Transactions and Accruals

Respond to Customer Questions about Promotions Create and Execute Targeted Marketing Campaigns

Measure Promotion’s Results and Effectiveness

Loyalty Marketing Lifecycle

Manage Flexible Loyalty Program Rules

Track Comprehensive Member Profiles

Identify Members for Targeted Promotions Create Loyalty Promotions

Implement Offers Based on Segments Provide benefits that appeal to each targeted group’s unique needs and desires

• • • •

Members benefit by only receiving promotions for items about which they truly care Switching costs are created because the accuracy of the promotions improves over time An additional benefit is that targeted promotions make it more difficult for other retailers to price match Implement tactics that foster a sense of community or club status your customer don’t want to be excluded from

Focus on the Key Success Drivers Manage Rewards Program • • •

Include multiple interaction channels as part of your loyalty program Provide customers visibility to points, statements, and transactions Manage a single 360° view of the customer

Drive Customer Behavior • •

Rollout rapid fire promotions that create value and drive customer behavior Segment customers and rollout campaigns using personalized messaging

Empower Customers • • •

Allow customer to self-enroll in programs and promotions Provide redemptions of points capability over a web site Give customers incentives to keep their profile and preferences up to date

Enable Partners • • •

Allow partners to enroll member and submit transactions Enable partners to participate in the design and execution of promotions and campaigns Provide Partners with the ability to service your customers with the up to date information

Agenda Current State of Loyalty Programs How to Design a Best-Practices Program How to Implement a Best-Practices Program How to Sustain a Best-Practices Program

Adapt - Evolve - Lead Continuously Evolve Loyalty Programs to Maintain Competitive Advantage • Watch trends closely • Adapt to consumer tastes, spending behavior, etc. • Market conditions and Competitors’ tactics

• Adjust promotions and member communications • Tune targeted promotions and offer messaging • Engage member interactions

• Innovate new program benefits • Members feel special for belonging in your Loyalty Program • Increase switching costs

Capabilities to look for: • Ability to analyze customer data • Recruit and enroll members via multiple channels • Create and modify promotions by Marketing and Merchandising • Multi-channel targeted campaign communications • Member services – agent based and self service • Flexible Accruals and Redemptions rules • Analysis of customer segmentation and promotion effectiveness

Loyalty Marketing Activities

Sustain A Best Practice Program by Choosing the Best Solution at the Start

Identify Targeted Members

Create Promotion

Create Marketing Campaign & Offers

Executive Marketing Campaign

Enroll in Promotion

Process Accrual Transaction

Analyze Effectiveness

Long-term Benefits of a Successful Loyalty Program • • • • • •

Decreased price competition Increased customer retention Decreased marketing costs Greater share of wallet Improved inventory management and turnover New revenue streams

Loyalty Programs Benefits Benchmark Metrics Percentage of Improvements Measured 82% 75%

61% 57%

25% Higher Lifetime Value to Customer

More Frequent Shopping Visits

Higher Rate Of Conversion on Promo Campaigns

Larger Market Basket

Better Demand Intelligence

Source: AMR Research, 2006