Four Myths About Retail Loyalty Programs

(Direct) Most retail loyalty programs are alike, and many are failing in their basic mission. Consumers and retailers are feeling disillusioned, but the programs themselves are not the problem.

On the contrary, the obstacle is the conventional wisdom followed by many retailers. Even when they make money, few programs are differentiated based on solid customer insights.

Here are four myths that get in the way of creative thinking:

Myth #1: Build a loyalty program and your customers will become more loyal. Nonsense. Retailers have too often focused more on the administration, infrastructure, design and benefits of their programs instead of first figuring out the underlying drivers of customer behavior. As a result, they ended up creating programs that look alike when they should have emphasized distinction. And they never quite grasp what makes customers go to them instead of going to a competitor. It is far better to understand loyalty across all customers, products and channels. Only then can a firm understand where its program fits in, and what strategic role it needs to play in the business.

To find out how your firm shapes up, ask yourself these questions:

Do you truly know what your customers value and are willing to pay for?

When customers come across your membership card in their wallet, is there something special they’ll remember about you?

Will you be able to predict customer behavior and take actions that will make them think, “Wow, this company really knows what I need and what I want”?

Myth #2: Price has become the last lever for retaining retail customers. Not true. But this programmatic “me-tooism” leads retailers to feel they’re forced to compete on the lowest common denominator: price. And it’s indeed a strong mover. Wal-Mart, the most prominent example, beats most competitors on price without needing a loyalty program. The solution? Retailers should use the insights available from their loyalty programs to shift the terms of the battle.

Again, ask yourself:

Are you using analysis of available data to better grasp what role price really does play, and how it differs among varying customer segments? Can your loyalty program move customers from low-margin to high-margin purchases? As we see it, the best defense against price competition and margin erosion is the customer understanding available through loyalty programs (and the ability to act on it).

Myth #3: Loyalty programs are self-contained initiatives. Many retailers continue to approach their programs as distinct efforts, each balancing its own costs and revenue. They believe if the effort is able to generate incremental revenue it should be left alone, or managed as a “successful” business.

However, only certain consumers will play by the rules. How can you affect the loyalty of those who aren’t members? With good analysis, you will find high-value and high-potential customers outside your membership. That’s why it’s critical to integrate the program and other business initiatives. And once again, ask yourself: Do your customers get a holistic shopping experience across all touch points?

Is your store and channel strategy integrated with data from the loyalty program? How about your customer service?

Do all these touches bolster the loyalty messages that most affect each segment?

There is enormous untapped value in breaking out of a siloed approach. When done well, you can affect behavior across all segments, whether customers are loyalty program members or not. And you can shape your merchandising and messaging so that loyalty builders are promoted to high-value customers and transaction builders offered to low-value customers. Moreover, you can design your store so new customers are drawn to products that will most to them. Myth #4: Technology is a silver bullet for loyalty program improvements. Don’t believe it. The automation used by firms like Amazon.com can enhance the customer experience. But the key to Amazon’s success is not in the technology per se, but in the company’s ability to apply it. You may think your technology gives you an advantage against competitors. But are you generating enough insights from your data to create and deliver benefits others can’t?

Loyalty cards create data, but many firms fail to segment customers beyond recency and frequency. The answer? Attitudinal analysis that will lead to deeper understanding of consumer motivation.

Here are the questions:

Are you capable of segmenting by behavioral and attitudinal attributes?

How well can you tie such segments to tailored benefits and offers? Do your planned investments move you closer to this goal?

If you are like most retailers, you’re looking to improve customer loyalty and retention, and likely are thinking of creating a new loyalty program or struggling to get deeper insight out of an existing one. Above all, you want to know customers better.

If you are really advanced, you’re trying to move from mass marketing to a more personalized, multichannel experience. The first step toward this is the collection and robust analysis of customer data.

But you need more than transaction data. The loyalty program must become a building block in a comprehensive effort to capture and leverage information at the customer-segment level. That will require investment, but it’ll be worth it.

And just wait. The next generation of programs will offer tiered benefits based on deep understanding of customer segments.

Using advanced analytics, retailers can get a handle on customer buying behavior and predict future purchases. Moreover, by means of similarity and consistency analyses, it will become possible to tweak benefits and promotions and optimize the appeal of the store space to as many consumers as possible.

Analytics has evolved to a stage where customer microsegments can be identified and acted upon to optimize market spending. Retailers can now ask: What’s the value of each customer that we cater to today or in the future?

Well-run loyalty programs will produce a mountain of data that can be mined for patterns in purchasing behavior, frequency, and so on.

They also will allow for greater personalization. Next-generation loyalty programs are beginning to take that cue to use data for more than just personalizing loyal shoppers’ experiences. They are making loyalty data actionable both downstream (customization) and upstream (core marketing strategies), across to store design, branding and merchandising.

But keep in mind that this requires a companywide effort. And it must be broadly understood by everyone from management to sales clerks, and implemented at every touch point.

In a nutshell, then, achieving all this depends on two key competencies:

Advanced analytics that will enable retailers to understand specific loyalty drivers for each marketable customer segment, measure impact on margins and lifetime value, and refine tactics by predicting customer behavior.

Integration capabilities to convert insight generated by analytics into segment-specific offers and campaigns on the one hand, and merchandising, store layout, discounting, channel strategies and customer service on the other.

Doing this will allow retailers to go beyond the conventional wisdom and begin harnessing the untapped potential of loyalty programs.

Jane Johnson and Web Fletcher are with Fair Isaac Corp.’s precision marketing group. Johnson is a retail vice president in Minneapolis; Fletcher a marketing strategy coordinator in Boston.