Customer loyalty & marketers rewards programs


Loyalty programs have a simple logic: to provide customers an incentive to spend more. And in keeping with that logic, retailers, service providers, telecom services, financial services and many other companies, have been doling out loyalty cards with associated rewards. Their aim is to retain what they hope will be high-spending customers.

But here’s the twist: it would seem that shoppers don’t see much value in such programs. Studies have shown that only about 20% of the members in a loyalty programs drive a substantially large percentage of the profits. They are the loyal customers who tend to spend more and are actively involved in the loyalty programs by constantly accumulation and redeeming points.

Up to 50% points remain unredeemed because memberships lapse. Almost 50%-60% of programs members tend to spend less and less on the company’s products. Almost 40%-50% are the low spenders. Having earned the points, they are unable or unwilling to use their points. They are what programs managers call ‘value destroyers’ of a loyalty Programs. These are all customers that, for various reasons, have taken their custom elsewhere.

Loyalty programs are a double-edged sword. On the one hand business gurus tell us that a loyal customer is an investment. Reward her with points and she will keep coming back to spend more. But retailers that have a huge bank of un-redeemed points often consider it a liability and not investments. The immediate reaction tends to be to bring down the value of the points to reduce the liability.

Here’s how it works in India: Most loyalty programs are based on the model followed by the credit card industry, where 1%-2% rewards points is the norm. But the thing is, the economics of the credit card business does not allow anything more.

Besides, people make many more purchases on their credit cards than they are likely to make at any single retail outlet. In a year, an average family spends between Rs. 50,000 to Rs. 1.5 lacs through credit cards. Even a 1% reward on that work out to between Rs. 500 to Rs. 1,500 that’s large enough to give a higher notional value to the 1% reward point.

The irony here is that, a few years ago, a leading MNC bank reported up to 65% unredeemed points. Yet, unfortunately the credit card model has become the benchmark for everyone else, irrelevance notwithstanding.

Now consider this. If a shopper gets only 2% of the purchase value as reward, she would have to buy things worth Rs. 25,000 to collect a mere 500 points. Given an industry norm of 1 point equals Re. 1, it works out to Rs. 500, Recently, there were reports of a major retailer shaving off 30 paise from that “one rupee�. A drop to 70 paise means a 30% drop that is, Rs. 350. So as a loyal member, I spend Rs. 25,000 and at the end I get a mere Rs. 350 gift. Is that really winning over loyalty? Probably that’s why the Indian consumer is so apathetic towards such programs and why we have loyalty programs either closing down or forever restructuring themselves.

But it need not be like that. Smart programs managers globally have created sophisticated techniques to predict which ‘loyal’ consumers are going to drop out. They then proactively assign residual value to the truly loyal members. Instead of killing the lapsed points and their value, they reassign value somewhere else. What this means is, creating a tiered loyalty structure where the top 20% members get higher points.

The reasons for doing this are fairly strong. Top-end members spend proportionately much greater than the lower tier members, even though at the beginning of the programs the spending may have been similar.

A large retailer reported that out of a total of 1.5 lakh members, the skew was clearly noticeable with only 15,000-20,000 spending greater than Rs. 25,000 or more, as against the national average of Rs. 8,000 It therefore makes sense to move part of the rewards to the better and more profitable members by carefully restructuring the potentially dead points.

Furthermore, it is now a well established fact, proven by many surveys, that on an average a frequent shopper is a member of at least three such programs with different retailers. A rationally structured loyalty programs could be a way to get an increased “share of his wallet�.

Data has also shown that loyalty members tend to be more educated, involved and more discerning customers. The higher they go up in the loyalty ‘pyramid’ such profiles get even stronger.

Many large retailers in the US have actually given up to and sometime beyond 8%-10% of bill as rewards to their best customers. A good loyalty program is one that lets members see value per point beyond the commercial par value that is 1 point equals 1 unit currency. Many loyalty programs have, with smartly carved rewards structure given up to 50% more value per point (read as 1 point equals Re. 1.50) This makes loyal customer feel good about the program.

It is a matter of assigning notional values that have far reaching implications. Redemption improves sales. But unredeemed points hit bottom-line. Unredeemed points also do not belong to anyone after validity expires.

This surely calls for program restructuring to provide a greater value to potential winning customers.