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Retailers Find That Loyalty Programs Make Dollars and Sense

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Loyalty. It’s in short supply these days, especially at retail. Where consumers could once be relied upon to express their blind devotion to a store, brand or tier through multiple purchases a season, these days, fidelity is almost unheard of. Cross shopping and price shopping have conspired to lure once devoted fans away. That’s one reason why stores are re-examining their loyalty programs in the hopes of perking up sales with, well, perks.

The other reason may even be more important these days, and that’s data. Getting to know who customers are, being able to track their behavior and tailoring pitches to them is at the heart of most retailers’ marketing strategies today and these programs help them do just that.

According to “The Great Loyalty Reset” poll by loyalty marketing solutions company 500Friends, which queried 200 program managers and 1,000 consumers around the globe, 80 percent of consumers belong to up to five loyalty programs. And 86 percent of shoppers buy more once they join.

The goals, from a marketer’s standpoint, vary. Some use it to attract new consumers (44 percent of North American respondents), while others are hoping to increase shoppers’ frequencies (31 percent) or basket size (52 percent).

“The obvious result is retained, higher value customers. But loyalty programs can also impact brand satisfaction, enhance the customer experience, and provide a mechanism to connect the customer across all brand channels (online and offline),” said Michela Baxter, senior director of loyalty at HelloWorld, a digital marketing solutions company.

At Macy’s, the retailer’s new program is designed to move shoppers up the pyramid from occasional customers to core consumers. Currently, 9 percent of shoppers at Macy’s make up 46 percent of the company’s sales, with an average spend of $2,010 a year. In an effort to attract more people like this, it is now focused on incentivizing behavior. Starting in the third quarter, the program will shift from one focused on rewards to a tiered approach that’s loyalty based, benefitting its best customers the most.

Read more about how marketers are using loyalty programs: Progress Report: Mobile Loyalty Programs Boost Members, Sales

To date, Macy’s original program, which launched in 2005, has garnered it 14 million credit card account users. Similarly, Sears reports its Shop Your Way program has amassed tens of millions of users. The retailer continues to enhance the program, which now rewards shoppers not only on how much they spend but on the frequency of those purchases. The adaptation has resulted in a 50 percent increase in the number of VIP members. Shop Your Way has also resulted in an increase in the number of trips, order volumes and cross-category purchases. Sears credits the use of data analytics and personalization for helping it leverage the program.

Value proposition

But before retailers can garner big benefits like this, they have to figure out how to entice people to sign up and then fulfill their expectations in order to keep them around. If a program falls short on that last point, the downside is substantial. Sixty-three percent of those who have exited a program report bailing on the brand altogether or shopping there less frequently.

The keep them around, the key is to offer things consumers value. “The program must provide both intangible and tangible value to the customer,” Baxter said. “The intangible value is incredibly important because it can be a differentiator and reduce the reliance on profit-hitting discounts and rewards that create transactional interactions.”

A great example, according to Baxter, is Starbucks’ program. She says the free java that comes after a minimum number of purchases is nice but it’s the ability to skip the line that really gets caffeine-addicted followers’ hearts racing. This perk doesn’t cost Starbucks anything but makes consumers happy.

Those companies that fail to tap into exactly what their fans crave will be faced with a revolving door of consumers joining and then abandoning their programs. While 27 percent of survey respondents in the U.S. say they join based on the value of the rewards, an almost equal number (23 percent) ultimately leave them once they deem the promised perks to be insufficient.

Members will also leave if they feel it’s too much work or the rewards are irrelevant.

“Many marketers still view loyalty programs as a way for customers to show loyalty to the brand. These brands haven’t caught up with the shifting customer mindset that loyalty programs should show how the brand is loyal to the customer,” Baxter said. “Figure out what delights your customers most and design a program that delivers customer value around that.”

Data download

Beyond the initial payoff in dollars and cents, loyalty programs also yield a benefit that these days is almost better than gold.

“Loyalty programs are seen as data collection mechanisms that give brands the tool to identify once anonymous customers and provide customers an equitable value exchange for giving brands their personal information and using their purchase data,” Baxter said.

Sixty percent of retail marketers in North America reported using data to create personalized messaging/offers. Half use it for predictive analytics, while 43 percent say its valuable for segmentation.

Arguably the most successful loyalty program out there is Amazon Prime. As a member, shoppers receive free, fast shipping along with a host of additional benefits like streaming the company’s original television content, book and music downloads and early access to new programs like the Amazon Fresh Pickup grocery delivery service and Prime Wardrobe, its new try-before-you-buy apparel concept.

By all measure, the program is working. The most recent estimates say at least half of U.S. households are said to have an Amazon Prime membership. And not only are Prime members more inclined to shop Amazon to justify the $99 fee, the influx of data the e-commerce giant receives based on each click and purchase positions it to develop even more programs and products that are carefully crafted to be a success. Just look at Amazon’s move into apparel, the private-label brands are designed based on the colors, styles and sizes shoppers have told the company it likes best.

Read more about Amazon’s fashion aspirations: Private Label, Amazon’s Secret Fashion Weapon

Though most other retailers aren’t as advanced with their loyalty programs, there is a growing awareness of the potential payoff where data is concerned.

Nordstrom recently opened its loyalty program up to all shoppers, not just those that are store cardholders, a development that will allow it to capture more consumer data. Co-President and Director Erik B. Nordstrom described the decision as “a big step in the right direction.” He added: “We have a lot of opportunity going forward to continue to leverage customer information better.”

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