More than 90 percent of companies currently employ some form of customer engagement or loyalty program. In the United States alone, loyalty program memberships grew at a rate of 26.7 percent from 2012 to 2014. Estimates put the number of loyalty memberships at 3.3 billion, and the number is rising.
Investments in loyalty cost businesses more than many leaders realize. Companies spend billions each year on non-cash loyalty incentives. Additional costs are also hidden in the “loyalty” line item within programs that simmer in the background, consuming investments at a steady pace. Once activated, they are difficult and time-consuming to shut down, so they rarely are.
Given the high cost, is the business case for loyalty investments sound? Members of loyalty programs typically generate between 12 and 18 percent incremental revenue growth per year over non-members. But loyalty investments are not generating all the value they could.
Accenture Strategy’s latest Global Consumer Pulse Research confirms that for growing numbers of U.S. consumers, loyalty investments are missing the mark.
• Seventy-one percent claim loyalty programs do not engender loyalty.
• Fifty-four percent switched their business from one brand or provider to another in the last year.
• Seventy-eight percent say they now retract their loyalty quicker today compared to three years ago.
• Sixteen percent demonstrate a negative or nonexistent reaction to loyalty efforts. And that number is rising, particularly among the critical younger cohort.
The research suggests that as loyalty investments have grown, our understanding of how customers behave and how they view loyalty has not kept pace.
Leaders should rethink how, why, and how much they’re investing in loyalty. Here are five key ways to maximize the value of loyalty programs:
1. Justify every investment with an eye on margin growth. To maximize loyalty value, start by eliminating programs that do the opposite. Identify every investment made in the name of loyalty (including rewards and capability investments) based on their ability to drive margin gains. Then apply zero-based budgeting to isolate and shut down initiatives that are margin-dilutive. Once less valuable programs are cut, companies can use their freed-up capital to rebuild their remaining loyalty programs to engage customers and monetize experiences.
2. Double down on new customer acquisition through retention. Rather than investing in initiatives aimed at directly increasing the wallet share of loyal customers, companies can benefit from placing greater investment emphasis on leveraging the goodwill and word of mouth generated by their loyal customer base as a source of “warm” acquisitions.
3. Learn the loyalty language of Millennials. This segment now numbers 1.8 billion globally and is expected to have a lifetime value of $10 trillion. Unfortunately, Millennials aren’t enamored with most current loyalty programs. It is critical that companies understand Millennials’ impressions of loyalty and then tailor language and experiences to their values and behavior.
4. Recognize that actions speak louder than words. More than half of the most loyal customers actively recommend brands to others; 14 percent express their loyalty by publicly endorsing or defending the company via social media. These tangible actions demonstrate customers’ affinity more than a self-reporting measure of “satisfaction” ever could.
5. View loyalty as a team sport. Loyalty leaders invest in “listening architectures” to capture, analyze, and act on customer feedback across internal silos in near real time. It also makes sense to work with partner organizations to create lower-cost acquisition channels and share the advertising and operating expenses associated with loyalty programs.
The old loyalty rules no longer apply. Without course corrections (some major, some minor), investments in loyalty are likely to be wasted in the years ahead, diluting margins, draining profitability, driving less-than-expected growth, and decreasing customer value along the way.
Business leaders can adjust to the new reality with a strategy that focuses on maximizing value. Those that make the necessary changes will not only achieve a new form of competitive advantage but free up capital that can drive additional growth.
Robert Wollan is senior managing director of advanced customer strategy at Accenture Strategy.