Loyalty programs work but there’s plenty of room to improve, according to new research.

The effectiveness of loyalty programs in Australia is improving according to the latest research, but there is still a long way to go before they reach their potential.

Adam Posner, CEO of Directivity, a loyalty and retention marketing consultancy, says that over the past couple of years there has been a big improvement in activity and engagement with loyalty programs.

The research study For Love or Money 2015 commissioned by Directivity and retention marketing agency Citrus published in early September reveals:
  • Activity in programs is improving, with 59 per cent of loyalty members engaging at least once with all their loyalty programs in the past 12 months (up from 45 per cent in 2013).
  • Defection from programs is declining, with 22 per cent of members defecting from one of their programs in the past 12 months (down from 26 per cent two years ago).
  • Finally, 48 per cent of consumers believe programs offer better benefits (up from 41 per cent two years ago).

Posner says the better results have been driven by an improved performance by the major loyalty program owners, such as airlines, banks, supermarkets and department stores. “All the big, big programs are realising how valuable those memberships are and so are putting a lot more effort into engaging with members,” he says.

The successful programs are focusing on three elements:
  • Simple – Loyalty programs providers are making their programs simpler to understand, to join, to earn and to redeem, so members no longer have to “jump through hoops” to earn points and redeem rewards.
  • Personal – Rather than sending out “spray and pray” communications, loyalty program providers are using the data they have about members to target personal and relevant offers specifically to their needs. Hence members are engaging more.
  • Valuable – They are also offering better value, both in terms of the amount of rewards which can be claimed for a set number of points but also in the type of rewards they offer, such as experiences and exclusive offers for members.

Karen Webster, CEO of Market Platform Dynamics, acknowledges the improvement in the Australian experience, but says loyalty programs globally still need to improve.

She says a lot of programs have incentives to sign customers up – 10 per cent off the first purchase or a $5 coupon – but don’t offer enough to drive ongoing engagement. “You’re signing up because you want that incentive, but you’re not really after a relationship with that retailer and I think that’s really the flaw of a lot of these programs”, says Webster.

“In an increasingly complicated, cluttered marketplace, the consumer’s attention span is reduced, so a lot more has to go into creating that repetition and engagement than there used to be.”

US data suggests that consumers are joining fewer loyalty programs and engaging less with those they do join, and Webster says this is because creating a “one size fits all” loyalty program no longer works.

She says the next evolution of loyalty programs will have to address how to provide an experience that brings the most dedicated, loyal and profitable consumers to a merchant’s doorstep. US luxury retailer Neiman Marcus, for instance, derives 40 per cent of its sales from the valuable customers it rewards via its In Circle loyalty program.

It provides them with relevant offers such as early access to sales and merchandise. “If you’re spending that kind of money at a retailer like Neiman Marcus those are the things you value – it’s not whether you’re getting it on sale, it’s whether you’re getting one of the three jackets by Channel that shipped to that store because that’s important to you,” says Webster.

Many loyalty programs have low barriers to entry and for consumers switching costs are very low. “I see loyalty as really prime for disruption,” says Webster.

“I see loyalty being subsumed by players who have a very good sense of data and how to use it – card networks and commerce players like Google, Amazon and Visa and MasterCard,” she says.

“You really know if a consumer is loyal to the brand because you can begin to connect the dots between offer presented, members of a loyalty program and purchases that they’ve made. Payment is the ultimate proof point of whether loyalty programs work.”

Directivity’s Adam Posner also sees a greater role for payments infrastructure to make loyalty programs more seamless at the point of sale. Instead of requiring consumers to hand over a loyalty card or link via a phone, the schemes will be connected to the payment method, be it via a card or a phone.

This will ultimately drive huge growth in loyalty transactions, he says.

In late October, Woolworths ditched its six-year partnership with Qantas, which had offered shoppers frequent flyer points. They replaced it with a scheme offering its nine million members “Woolworths Dollars” which they can redeem in the store. Woolworths said its research revealed the majority of supermarket shoppers believed it took too long to earn enough points to redeem rewards in points-based schemes.

The company is still in talks with Qantas about including the airline in the scheme in some way.

This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
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