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Nailing Loyalty: 62% of Retailers Boosting Loyalty Budgets, But Do They Have the Right Tools?

Almost half of U.S. retailers have identified structured loyalty programs as a priority in 2015, and 62 percent are increasing their loyalty budgets. True, loyalty is a remarkable tool for engagement, but if it is not crafted and installed with meticulous planning, it can become a money pit.


 

Retailers are investing more money in loyalty program strategies, but are they buying hammers when they need nails?

A survey of 500 U.S. retailers reveals that 46 percent identify structured loyalty programs as a priority in 2015, making it their second-highest concern after customer engagement (with 74 percent), according to a recent report by Boston Retail Partners. Not surprising, then, that 62 percent of those retailers said they are increasing their budgets to enhance loyalty initiatives in 2015.

“Loyalty programs are one of retailer’s best tools to ‘know the customer, reach the customer, and deliver this experience,’ ” the report states.

True, but in order for that tool to be operated properly, it has to be crafted and installed with meticulous planning and collaboration, company wide. A hammer may drive a nail, but retailers first need to establish they have the right nails for the job. This means at the early planning stages that everyone on the management team agrees with the blueprint, or risk getting stuck with a money pit.

We all know the practical benefits of a good foundation. When it applies to loyalty, these benefits extend from practical to profitable. Our research shows that when retailers can collect insights from their loyalty-based data to refine pricing, promotions, assortment and marketing to customer preferences, we consistently see a 1 percent to 4 percent increase in sales and a 4 percent to 7 percent increase in profits. For a $2 billion retailer, this can equate to $80 million in additional annual sales and $30 million in added profits.

Retailers are evidently recognizing this value. According to other findings in Boston Retail Partner’s benchmark survey, 100 percent of the retailers surveyed said they plan to use analytics to better understand shopping behaviors within the next two years.

Avoiding breakdowns

So how to get the right tools into the right hands? The first step is identifying the common areas where communication breakdowns among organizational managers are most likely to occur and upend a strategy. Some of these areas can be disarmingly basic, but if overlooked and not retooled, can doom a loyalty initiative before it starts. Following are some of the more common mind fields:

Squaring away the goal: Yes, the general objective of a loyalty program is to increase sales and profits through better customer understanding (analytics), but what are the benchmarks and opportunities? Do sales among a specific demographic show enough upside potential that the program should be geared to appeal more to that group, for example? Or is the program seen as a way to gain greater brand recognition?

When drawing up these goals, managers should be sensitive to the competing agendas of different organizational leaders; they may be conditioned to protect their departmental goals first.

Knowing who you’re building for: One of the great benefits of technology is it is enabling retailers to more accurately understand their customers more immediately. The online lingerie and swimwear merchant Adore Me, for example, tested its marketing images and found that when it switched to brunette models from blonde models, sales rose 340 percent, according to a story in COLLOQUY. Plus-sized models also resulted in increased website traffic. The takeaway is that we need to test, test and test our preconceptions.

If the data exists, retailers should analyze it for behavioral patterns that reveal the most promising or upwardly spending market segments, as well as the most consistent and predictable. By overlaying these sets of data, retailers may be able to detect demographic similarities from which they can extract a cleaner customer profile.

Choosing the yardstick: The loyalty program’s performance criteria should be established well in advance and it should support the program’s reason for existence. Internal testing can be useful for proving out the criteria. Before Walgreens introduced its Steps with Balance Rewards program, for example, it made the strategic choice to launch it among its employees first, to both familiarize them with the program as well as to foster support and test the outcome. The drugstore chain also established a governance structure to ensure collaboration among key stakeholders.

Photo credit: Walgreens

Photo credit: Walgreens

Among the metrics to consider: the breakage rate, the average time to the next spending activity and, among my personal favorites, the lifetime value of a customer. Simply put, that would be the expected sales generated by individual customers multiplied by the average number of years they are projected to shop with the company.

Designing a finish: Once all the critical back-end work is finalized, it is time design how it will work. This process can get hairy, since personal preferences tend to come into play. For this reason, it is good practice to have regularly updated statements or missions that make clear the company’s brand promise and best customer, and then stick to that.

When Kohl’s re-launched its Yes2You Rewards program, for example, it recognized how important value was and is to its shoppers. So the retailer kicked up the earn rate to 5 percent, higher than a lot of national credit cards at the time. It also made the program currency neutral, meaning members could pay however they want, including with cash. Kohl’s has the benefit of operating its own charge platform, so it was able to tap into a rich database of shopper behavior as it tested variations of the program. The result: It gained 10 million enrollments in the pilot phase.

Lastly, if the organizational leaders find they simply cannot follow the same guidebook to building their loyalty program, then they should bring in an outsider. An objective third party won’t be mired in the internal politics of an organization and therefore won’t be afraid to ask hard questions.

Yes, it may add to the overall loyalty investment, but there’s no point in rebuilding or expanding a program if the organization intends to cut corners.

This article originally appeared on Forbes.com, where Bryan serves as a retail contributor. You can view the original story here.

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