Despite the statistic that the loyalty management market is projected to grow from $1.68 billion in 2017 to $4.59 billion by 2021, you can bet that the age-old battle of the C-Levels will still remain. You know, the situation where the Marketing Chief has an idea for a loyalty program or takes some *ahem* inspiration from one they like, but the CFO just won’t sanction it. And then mayhem ensues.
For me, the bottleneck of this conflict always comes down to 1 key question:
Can a rewards program increase
revenue and profit?
A lot of marketers don’t feel that CFOs see the full program value, especially long term and that they instead look to cost-based arguments and failure tales citing the likes of this liability story that we saw with Coke recently. But CFOs aren’t the enemy; they’re there to achieve the same goal as any marketer, they simply view the model from a different angle. I find that the ensuing breakdown is most often down to a lack of communication or a failure to speak in the right terms.
So here’s how we tackle the question at IC Group!
Now, first up, I’ve got to admit that I love this question, as it gets asked so much by our prospective clients. I find that once they get it, it really helps them to drive the program process on.
I always start by getting grounded on understanding and building the underlying financial model that drives a program’s success. Once you understand the financial model, decision-making becomes much easier for all parties involved. Can a loyalty program increase revenue and profit? This can often get confused, in my opinion.
The short answer
Yes, effective loyalty programs will impact the lifetime value of loyalty members as well as non-members and ultimately result in increases in both revenue and profit, assuming you design a cost effective loyalty program.
And you don’t have to just take my word for it either! Cap Gemini showed that ‘fully engaged’ customers deliver a 23% premium over the average customer in share of wallet, profitability and revenue, and the Loyalty Effect found that building loyalty with 5% more customers would lead to an increased average profit per customer of between 25% and 100%.
These are numbers your CFO just can’t deny – evidence that having a program, across industries, is far better than not when it comes to driving customer revenue.
A product of your surroundings
But, as a caveat, reviewing potential revenue really depends on your product too, and it’s an absolute must that you keep this in mind, as it’s part of the financial modeling.
If your offering has no real or set frequency of purchase then, yes, you can have an increase in purchases through a program. That’s unquestionable. But what if you have a product that has a set frequency of purchase, where, say, you only buy the product once a month because there’s a very specific timeframe of use? You will get retention but, naturally, you won’t likely see an increase in revenue.
How can I really impact revenue and profit?
So now we’ve established the ‘yes’ (the easy bit), it’s time to find the details that will help your CFO by delving into the real meat – how you can drive revenue through a rewards program?
At IC, we have a simple theory based on 3 member types.
- Loyalists | they love you & your product, they’ll tell people about your offering and not wait for a sale to purchase
- Switchers | they jump back and forth on products, typically based on offers and sales
- Detractors | they only buy your product when it’s deeply discounted
Loyal, yes, but perhaps not the type you’re looking for?
Loyalists will always increase revenue, they’re cheap to acquire and will spend, but they only account for circa 20% of your target pool. Switchers, on the other hand, take up about 60%, and we count these folks as the most important spot – if there’s one thing I want you to take from this, it’s that you must aim to convert Switchers. They cost more to acquire & keep than Loyalists, but there’s no need for an exhaustive budget – we’ve seen that relatively inexpensive campaigns can get results. If you can move 10% of Switchers to be Loyalists, you’ll be achieving a very healthy margin & increasing that measurable revenue. Detractors, however, aren’t a group we typically tend to advise engaging. They’re expensive to convert and even getting them to become a Switcher can be an exhaustive process – they’re not worth the effort.
At IC Group, we always model the 3 members types out when planning a program to ensure success, and keep this method as a program staple for as long as we deliver. We help to identify the opportunities and the pitfalls correctly, enabling efficient, considered program spend that delivers measurable revenue. Rewards programs don’t need to be black holes; with even just a little bit of guidance, they can deliver.
In short…
So, yes, a rewards program can certainly increase revenue and profit. But, like most things in life, it has to be done right. If you line up those Loyalists and switch the Switchers correctly, you’ll be hitting that program sweet spot!
Kelly Crerar
I’m the VP of Sales at IC Group and loyalty program strategist.
I’d love to get your take on this article. To talk more, you can email me at kelly@icgroupinc.com