Home » Blog » This is the cost of loyalty programmes: the cost of increasing profit!
Real cost of customer loyalty programmes

This is the cost of loyalty programmes: the cost of increasing profit!

Last Updated on

In the New Report: Leveraging the Value of Emotional Connection for Retailers published by Motista, customers that have an emotional relationship with a brand increase their lifetime value up to 306% and are 71% more likely to recommend a brand. It is important for brands to know the real cost of loyalty programmes.

According to Annexcloud’s report (Customer Retention Analysis: The Indispensable Metrics You Need To Know), existing customers provide 65% of a company’s revenue, and only 35% will come from potential new customers. 

These statistics demonstrate just how important it is to cultivate customer loyalty. Earning and keeping customer loyalty is all about understanding and evaluating the areas in which to invest in the customer relationship. In 2019, this process is more complicated than ever. Here’s a breakdown of the associated costs:

Cost of loyalty programmes – the 3 main areas

  1. High and low tech

Loyalty platforms, user interfaces and the ability to collate, store and analyse customer data are all vital in delivering personalised marketing programmes, CRM programmes and retaining customer loyalty. There is a whole universe of solutions available and it is crucial that both time and financial investment are in place to ensure the successful launch of a customer loyalty programme

2. Marketing and communications

It’s impossible to over-emphasise the importance of strategic and effective communication when it comes to customer loyalty.  This is even more vital when a brand is launching a new loyalty programme or the programme is going through a transition phase.  In a world where customer engagement is instant and far-reaching, businesses need to make proactive and ongoing investment in loyalty marketing and communications in order to maximise customer retention, drive positive customer engagement and loyalty. 

3. Benefits and rewards

You get ‘nothing for nothing’ in this world and this is particularly true when it comes to customer loyalty.  Today’s savvy customer will actively seek out the best loyalty / reward programme before committing to a brand.  For this reason, investment in the loyalty programme’s customer value proposition (CVP) is of paramount importance.  This can take the form of free or discounted product (which your accounts will show as deferred revenue) or non-financial rewards.  The latter is a tricky area which can include an experience which, although low in cost, offers a great perceived value to the customer – for example, priority booking or free VIP membership.

Source: Knowledge City

Additional direct costs of loyalty programmes

The following costs and benefits are a little less straight-forward as they are tricky to quantify.  Although these are relatively low cost, they make a big splash when it comes to customer loyalty. 

Operations

This area speaks to the ‘soft’ aspects of the programme management – and the least quantifiable.  These include member services which, although small, form an important part of the customer experience, for example, practical considerations such as great customer service. 

Data driven insights

Crunching data is a big part of analysing and improving the cost of loyalty programme.  As such, brands need an explorative modelling method with which to analyse data in order to gain insights which are actionable.   

Coffee Chain, Costa, uses RFM (Recency, Frequency, Monetary Value) in order to understand its customers.  This model harnesses data from its loyalty programme and analyses key customer segments – not just transactions.  This allows Costa to then target different customers in different ways in order to forge a more personal and, longer term relationship. 

Management time

Needless to say, management time is a precious commodity.  Bearing this in mind, it’s sometimes a sensible idea to invest in external resources in order to add specialist skill and knowledge without monopolising management time.  This can include freelancers and specialist agencies – and investment strategies should be put into place to ensure that the right resource is acquired – at the right price. 

Customer loyalty programs and its real value
source: tapmango

Optimising customer loyalty programmes to increase profit

Quantifying commercial returns – and their correlation to loyalty – is incredibly important in identifying opportunities for further gains in profit.  The key areas here are: 

  • Increasing purchase frequency – Driving an existing and lucrative customer to make one more purchase.
  • Opportunities for incremental transactions, upsells and cross-sells – creating sales from existing customers, rather than spending on demand generation of your brand’s current products and services. 

Having locked down the direct costs  of customer loyalty – and the ways in which your brand benefits from them – it’s time to look  at some of the sneaky indirect benefits: 

The 4 indirect benefits of a customer loyalty programme

  1. Customer satisfaction and referral

Put simply, when a customer is delighted with your brand and service, they’re likely to shout about it.  When you work to achieve customer satisfaction, you automatically breed customer advocacy. 

2. All brands are not created equally

These customers that 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.  

3. Net book value

This is where the actual programme itself develops an asset value which grows with the number of members and their level of engagement with the programme. 

4. Effective communication

The intelligent, data-driven marketing communications opportunity provided by a successful loyalty programme should be regarded as a significant benefit to the business.  Building rich portraits of each customer with data helps all marketing become tailored and relevant which can help deliver a streamlined and waste-free marketing strategy.  

This was demonstrated by the Radisson Hotel Group who undertook research to analyse the effectiveness of its communication.  The research resulted in a dynamic email statement template in which content was targeted toward members. This increase in personalisation increased the group’s engagement rates by a third, increased revenue and upped its ROI measurement to 4:1 in the first e-statement.

Nobody said it was easy

Creating and maintaining a great loyalty programme is no easy task.  It takes time, effort and investment in order to design and implement the perfect strategy. With the right commercial model for a loyalty programme, the business can enjoy an increase in profit and customer retention for years to come.  

A number of factors must be taken into account at the planning stage, including the ever changing consumer landscape (and that of brands).  Brands should, at all times, have access to a 360 degree view of their loyalty investment – how else can you measure its commercial impact and then use the results to drive improvement and strategy refinement?

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.