By: Andy Ruff, VP Loyalty Rewards, Givex
If you already have a rewards program – or are thinking of launching one – ask yourself one key question: “how can I use customer data profitably?”. Points programs are not magic bullets for sales growth. It puts you on the right path to be sure, but the “point” is to capture and use customer-specific data to grow sales.
While points programs can be a powerful tool, they do come with associated costs—both in terms of system setup with your service provider and the value of the rewards you offer. That’s why it’s important to design your program efficiently, ensuring that reward costs are well-managed and contribute to a strong return on investment (ROI). Figure 1 shows a typical breakdown of the points costs associated with maintaining a rewards program:
Step 1: Managing the Points Cost
A rewards operator should consider this cost as the cost of acquiring customer data, not unlike advertising or marketing costs. Before we go into all the strategies of how to turn this data into profits, it is worth noting that even this cost can be minimized by the strategic use of points before we even put it to work! It may seem counterintuitive, but issuing more points via bonus points can not only increase your customer engagement but actually reduce the overall cost.
As your customers become engaged in redeeming points, they will have a desire to earn more, either by spending more to earn more, or by purchasing items with Bonus Points; and those bonus points can be issued profitably. The two most common ways are by using promotional allowances and reducing shrink:
Figure 2 below shows how issuing bonus points reduces the overall points cost (or increases gross profits depending on how you account for it):
Operators also issue points to reduce shrink without markdowns, for example: putting points on short shelf-life items, end of day hot food service, post-holiday closeouts or produce that is just past its prime, to name a few. All of these methods continually drive down costs, making your program even more profitable!
Step 2: Using Customer Data Profitably
The following are a few, but the most important, areas to address to increase sales and have a positive ROI. How much of an ROI? That is completely dependent on how you utilize the strategies below from the data you gather; the points strategies outlined above give you the tools to put this customer data to work at the lowest cost:
1. Retain Existing Customers
Retention – that is, the percentage of customers who continue to shop from one year to the next – is perhaps the most important sales growth metric there is. Why? Because if you retain more customers in the next sales period, you will have more customers, assuming your influx of new customers remains the same, and more customers to retain into the next period, and so on as it grows similar to compound interest. Fact: a company with a ~70% customer retention rate will have lost 1.5 to 2 times as many customers as a company with a ~80% retention rate. An effective customer marketing program provides a practical and compelling reason for continuing to shop with the retailer, year after year.
2. Acquire New Customers
A rewards program should attract new customers to the business; how effectively will depend on how exciting and how valuable the rewards seem to be to the target audience. Additionally, the retention of new customers – which is notoriously low – can be raised by providing compelling reasons to continue shopping once they enroll in the program. Lastly, using existing customer demographics (especially the higher spending customers) can be used to recruit new customers who live near your current best customers.
- Reactivate Lost Shoppers
The success rate in reengaging ‘lost’ customers can be three to four times as high as it is when prospecting for new customers. You have advantages with lost customers that you don’t have with prospects: their past purchase history, where and how to reach them, and their preferred communication channel. Reacquiring a lost customer is all profit with little cost – lost customer campaigns can offset nearly all your costs alone!
- Upward Migration
Using “spending segments” is actually 2 promotion targets: 1) target lower spending customers to spend more with incentives and 2) For customers who are spending less than before, to return to their previous spending levels. Moving customers up from one spend level to the next greatly increases their profitability in several ways: it lowers their proportion of markdown items (and increases gross profit), increases trip frequency to your store, and increases efficiency metrics such as sales per labor hour.
- Retail Media Networks
The wave of marketing dollars for Retail Media is here, but to take advantage of these funds, one must have a customer-specific marketing platform of some kind. To learn more about these programs, contact your AWG representative.
- Best Customer Marketing
Do not forget your best customers – those customers making up the top 20% of all shoppers. They provide around 80% of your sales and a higher proportion of your profits. In today’s competitive atmosphere, you must identify them and make them feel special, they are too costly to lose and require 50-100 new customers to replace one lost one!
- Adjust Pricing Levels
How profitable is a shopper who comes in, buys all the ad items, and leaves? Not very. You already have an existing “rewards” program in your ad and TPR’s – and the worst shoppers get the best rewards! Points pricing allows you to shift these rewards to your better customers – because they are the ones earning the most points. Treat your regular shoppers to great deals while locking out the ad shopper with points “specials”.
- Respond to Competitive Challenges
A good reward program’s ability to tie purchases to individual customers allows quick and accurate identification of customers who defect when new competition opens nearby. They can then be enticed back with customer-specific special offers or even direct contact. Utilize the power of knowing who your customers are. Also, if a competitor comes out with an ad that catches you by surprise, you can quickly and effectively have a better deal for just your better customers so they won’t be lured away – your best customers will love it!
Conclusion
A well-designed points program is far more than just a customer perk. It’s a strategic asset that, when executed efficiently, can drive sales growth and profitability. By viewing your rewards program as an investment in customer data, rather than a cost, retailers can unlock powerful insights. Whether it’s retaining loyalty shoppers, reactivating lost ones, attracting new customers or responding to competitive pressures, your rewards program can be the engine behind smart data drive marketing. The key is to make every point count!
With today’s technology, it is a fairly simple process to identify a competitive need, create a target list of customers, create targeted offers, and send them marketing communications. If you would like to know more, please contact your AWG representative
