Loyalty Programs

LOYALTY PROGRAM What is a loyalty program? Loyalty programs are often part and parcel of a comprehensive customer relations hip strategy. "As a customer's relationship with the company lengthens, profits rise. And not just by a little. Companies can boost profits by almost 100 percent by retaining just 5 percent more of their customers" F.P. Reichheld Loyalty programs have been used in commerce for many years, originating in Germa ny where price based competition was disallowed by governmental restrictions in certain industries. In the 1950s, S&H Green Stamps rewarded grocery store and ga s station customers with stamps redeemable for appliances and other merchandise. The modern day loyalty program was launched in 1981 by American Airlines, and w as quickly duplicated by other airlines and other hospitality industries includi ng hotels, car rental companies, and credit card organizations. Retail loyalty programs evolved when progressive retailers recognized that witho ut a "customer identification tool," they were unable to recognize individual cu stomers and reward them for desired behavior. This was in obvious contrast to ba nking and telecommunications industries, among others, that have a customer data base as part of their regular service offering. Both businesses and consumers have recognized the value of loyalty programs. Onl y 12% - 15% of customers are loyal to a single retailer, according to the Center for Retail Management at Northwestern University. But that small cadre of shopp ers generate between 55% - 70% of company sales. Some food retailers find that a s much as 65% - 95% of their sales go to members of loyalty programs (53% of foo d retailers offer loyalty programs with 3/4 of program customers using their loy alty cards at least weekly and 88% at least once a month). In general, loyalty programs are often developed with good intentions but unclea r objectives. While retail loyalty programs have many purposes, the greatest val ue that is created for retailers is the ability to identify individual customers and to measure and understand their individual behaviors. This consumer behavio r data far outweighs the "currency" value of providing consumers the opportunity to build a reward opportunity by shopping at one particular retail banner. This opportunity is often misunderstood by retailers and consumers alike. The basic benefits of using a loyalty program to obtain customer information are summarized below: - Shift - Acquire new customers - Lift - Increase the spending of existing customers - Retention - Improve the natural churn rate of customers - Profit mix - Shift spending to higher margin products These loyalty program benefits form the basis for all loyalty program initiative s. Fundamentals of Loyalty Marketing For loyalty programs, communications used to focus on tangible benefits - what w e call the "ER" words. That is to say, "Our program is..." 'bigger,' 'better,' ' faster,' 'easier.' These words have ceased to have meaning. Everything works now . These are the table stakes. As such, the market has changed in that consumers are demanding more. Rewards have evolved in the marketplace from being a nice li ttle extra for one's loyalty to being perceived as an entitlement (partly the re sult of the commoditzation of loyalty programs). Concurrently, consumers have sh ifted, to some extent, away from a desire for possessions to a desire for experi ences - partly due to changing demographics. Overall, consumers are looking for the meaningful (which includes value and relevance). The rising tide of expectations necessitates that loyalty marketers develop trul y innovative loyalty programs, utilizing loyalty marketing best practices. In re ading through this page, and this website for that matter, keep in the back of y

our mind the question of how your program can tap into not only changing lifesty les, but changing attitudes. The answer is not just in the rewards catalog, but in understanding the fundamentals of loyalty marketing. Many confuse "loyalty" with "rewards." This is a fundamental mistake of many mar keters. Loyalty denotes advocacy and commitment not points. Industry wise average in loyalty

Basic objectives for loyalty programs Retain best, most profitable customers Make good customers better Acquire customers with potential to become best customers Reconnect lapsed users with the brand Revitalize the brand's relationship with its core franchise Building a Winning Loyalty Program Strategy Regardless of how you develop your loyalty program - based on hard benefits (e.g . a currency) or soft benefits (e.g. access, special privileges, exclusive partn er benefits and offers) - make sure there is alignment between your customer and the loyalty program i.e. the program supports the customer experience and not t he other way around. There truly is a sequence you need to go through in developing a loyalty program . Too many program designers take short cuts and jump to platform selection or p rogram execution and don't do the basics: Program Objectives Program Positioning Program Strategies Financial Analysis Value Proposition Currency Strategy Business Analysis Data Analysis Platform Selection Segmentation & Test Plan Measurement Plan Exit Strategy Four phases 2. Program development 3. Collect data and test 4. Leverage knowledge 5. Customer Management Program development Start with the Facts - Conduct an organizational SWOT - Conduct a competitive SWOT - What is the competitive activity? - What are the core objectives of the program? - What do we want the marketing database to do? - What will be the key success factors

- How will this program fit with the brand vision? - How will this program fit with the company culture? - Are there any employee issues that must be addressed? - Are there any technology issues that must be addressed? - Why might this project not work? - What is our current sales channel strategy and how will this program affect/en hance it? - What human resource needs will be created by this project? - What financial resources are available to execute this project? - Who will be involved in this project? - Describe the core, highest margin customer? - How will success be measured and over what time frame? - What are the best practices in the field? - What is the number one complaint from our customer feedback system and can thi s be addressed with the planned loyalty program? Create your Loyalty Program Strategy - What are the objectives of this program? - What are the target groups for the program? - Will the needs of this group also satisfy the needs of our top customers? - What customer needs will it satisfy? (tangible benefits, intangible benefits; rate the benefits, cost, feasibility and competence;financial value, relevance f or the consumer, attainability) - How to identify benefits (brainstorming, small study to measure general feedba ck to the benefits, large scale study to identify the main value drivers) - How will it increase your differentiation from the competition? - How will customers be rewarded? - How will the data be captured? - How will the data be analyzed? - How will the data be actioned? - Who will own the customer relationship? Define the Program - How will the program be structured? - Will there be a "currency" of the program? - How will customers enroll? - How will customers earn rewards? - How will we communicate with customers? - Who will serve the members: outsource, 1-800, web site, etc. - What will be our problem resolution strategy? - How will customers redeem benefits? - What performance standards must the program live up to? - What will be our contact strategy for our program members? - How do you build evangelists? - Recognize that like a store, loyalty programs have a lifecycle, benefits need to be modified periodically (what benefits can we roll out over time to keep the momentum going?) - Cost recovery: entrance fee, annual membership fee, co branded credit card, me rchandise sales Identify Key Performance Metrics for the Loyalty Program - Financial - Human resource - Customer acceptance - Transactional penetration - Supplier participation - What is the break even point or payoff Build Business Case for Implementation - Investment required

- Estimated payback - Break-even point - Go/No Go decision Develop Action Plan for Implementation - How can employees benefit from this implementation (employee/union involvement ) - Training - Employee participation/enthusiasm - Monitoring - Potential for incentives? - Potential to include as part of employee evaluation? Research - Develop a research plan to identify key program elements - Test, test, re-test to ensure customer acceptance and support Technology Assessment - Limitations - Effect on transaction time at retail - Where will the data be stored? - How will the data be accessed? - Effect on channel partners - What types of statistical analysis will be required? - Will the data be delayed (for how long) or will it be real time at POS? - Will the data be delayed (for how long) or will it be real time at head office ? - Building an actionable database(s) - Integration with web site Partners - Does partnering make sense - What partners are right for YOUR customers - What agreements must be put in place to execute partnerships - Control/data ownership issues - Consumer privacy protection Retail - Communication at retail - Employee scripting - Reinforce key messages - Integration with other channels Advertising - Incorporation into all media streams - Working with agency to develop marketing "look and feel" Direct to Consumer Communication - Web site - Direct Mail - Statements - Newsletter Privacy - Development of a privacy policy - Communication of a privacy policy Web site - Communication

- Special incentives for the channel - Ensure data gathering and usage of program seamless for customers Launch - Test market launch plan - Full launch plan - Media Plan - In-store execution - Direct Mail acquisition - Special incentives Post Launch Plan - 3, 6, 12 month contact strategy for consumers - Program enhancements Exit Strategy - Identify specific criteria that would result in the wind-down of the program - Identify process for wind-down of program including partnership agreements, co nsumer commitments Data Management Plan - Ownership and maintenance - Refresh plan - Privacy Strategic Review Plan - Identify specific targets and review process to evaluate success - Identify key stakeholders to include in the review process Collect data and test - Analyze results - Basic reporting structure - Store level reporting - Marketing initiative reporting - Offer tests Leverage knowledge - Decile analysis - Integrate data across the organization - RFM analysis Customer Management - Develop customer management plan - Differential offers by profitability - Churn reports - Supplier program development Loyalty Program Value Propositions One common mistake Marketers make is in currency selection. Too many decide the value proposition prior to customer research. Ask the question as to whether the currency fits the frequency and the size of the transaction. And does the curre ncy fit with the brand i.e. cash is a pure discount? In general, many retail loyalty programs are converging into a blend of each par ticular value proposition. That is, many programs offer points, rebates, discoun ts or a combination of the program offerings. Rebate Programs/Cash Back Although similar to discount programs, which are immediate rebate programs allow participants to accrue financial benefits from purchases that are saved up and redeemed after a set threshold or time period. These benefits can be tracked ove r time but often involved a rebate of a percentage of total purchases over a mon th or quarter. The rebate is often in the form of a gift certificates to drive c

ustomers back to the store. Rebate can be in the form of a dollar value or a per centage value. Pros - Relatively simple to communicate and understand, depending on the offer struct ure - Although discount based, it avoids the "discount on every purchase" mentality - Rebates in the form of gift certificates can often drive customers back to the store - Does not require much administration - Cheaper to administer than a points based scheme (although difference can be m arginal dependent on size of rebate/cash back - Can allow tiered offers for highest value customers Cons - Does not provide instant gratification - Rewards profitable and unprofitable customers alike - Can be expensive depending on the rebate thresholds - Disguised discount program affects margins - Can alienate infrequent shoppers - Easily emulated by competition Rebate/Cash back programs have become increasingly popular because while avoidin g immediate discounts, consumers often feel they are accruing value. Although th e program can be expensive, the rebate dollars often drive customer back to the store. Discount Programs As is implied by the name, discount programs are programs that offer a specified percentage off (or a dollar amount for large purchases) of the retail purchase price. This can be product specific or offered on the total basket of purchases. The distinction from rebate programs is rather than accrue the benefits, discou nt programs typically apply instant benefits to participants at the point of sal e. Pros - Simple to consumers - Instant gratification - Deeper discounts can be used tactically - Usually easy to administer Cons - Discount implies that regular prices are too high - Difficult to exit the program - Can be easily duplicated in the marketplace - Can alienate infrequent shoppers - Discounts affect margins Discount programs are typically the easiest to administer loyalty program offeri ng. However, discounting products for members is expensive and it is difficult t o exit such a program once it is launched. An example of a successful discount p rogram is Canada's oldest, best known, best loved reward program - Canadian Tire Money - often suggested as a replacement for the nation's weak currency. Points Programs To avoid the negative connotations of discounting, many loyalty programs us a po ints "currency" to allow participants to keep track of their earned benefits. Ty pically, consumers earn additional points by buying goods and services from the issuing retailer and can include bonus products, bonus thresholds and partner op portunities

Pros - The basic premise is simple for consumers to understand - Can be difficult to match because earning and reward thresholds can be easily adjusted - therefore can offer greater competitive advantage - Can allow more targeted, flexible and imaginative promotions e.g. points for s pecial purchases - Avoids price discounting - Can use points promotions on brands that do not allow discounting - Can use to reward employees - Currency can be resold to vendors to help support the program - Enable the collection of customer data to put in place targeted promotions and cross-selling opportunities - Breakage (The difference between points issued and points redeemed) Cons - The proliferation of points programs is confusing for consumers - The "halo effect" of programs where thousands of points are required to earn a benefit devalues all points programs - Depending on the community, loyalty program fatigue can be an issue - Requires investment in redemption opportunities - More complex to put together and manage an attractive customer proposition - r equires management of the currency including customer service - Need to put a contingency on the balance sheet for outstanding points - More expensive than cash back Experiential Awards For loyalty programs, the communications used to focus on tangible benefits e.g. , our program is: "bigger," "better," "faster," "easier." These words have cease d to have meaning. Everything works now. These are the table stakes. Consumers a re demanding more. Consumer have shifted from where we were leading up to the In ternet boom; away from a desire for possessions to a desire for experiences or s ervices that enhance their experiences. Going beyond points, discounts and cash back, many loyalty programs are incorporating experiential aspects into their pr ogram - an idea we have been huge proponents of since the early 1990s. The experiential takes many forms but the common thread is that programs, whethe r this has been developed internally or through partnering with 3rd party compan ies, deliver to its members unique lifestyle driven opportunities. As programs become somewhat commoditized, incorporating "experiential awards" whether purchased or redeemed by the member - take on a renewed sense of opportu nity to: Enhance differentiation from other programs Reinforce brand value Support the customer experience with the brand Strengthen member relationships Increase engagement with members Increase spend Program Measurement The following elements are all tied to customer advocacy, which is tied to custo mer loyalty - all of which affects your brand: Simplicity = Make my life simple, don't confuse me with too much information Benevolence = Understand my issue and take my side in getting a resolution Trust = Doing what's right, honoring promises, and protecting customer's privacy Transparency = Rates and fees are crystal clear, and comparisons are available Exit Strategies All good things come to an end. While exit strategies should be planned for in t he initial program construction, let's face it, some programs aren't designed as they should be. As such, if your program isn't achieving the financial returns envisioned, you may want to plan your exit strategy.

The number one goal in any planning exercise should be to "do no harm." The last thing you want is a bunch of angry customers out there bad mouthing your brand - not to mention the fact that a loyalty program with hard benefits or rewards i s really a financial obligation to the program members. As such, four considerat ions to build into your loyalty program from the start so you can use them to en d your program in a considered fashion: 1. Sunset Clause: This can take a number of forms, but the bottom line rema ins the same - the program can end in a timely fashion, should you need it to. T he first form is a definite end date written into the rules of your program. Whi le you don't want to emphasize the end date in your communications, this end dat e can always be extended until the time you decide that the program needs to com e to an end. Another common Sunset Clause, which also happens to help with finan cial liability, is to establish an expiration period for points earned. Like the first form of Sunset Clause, this too can be extended. 2. Timing: From the time you announce your program's termination, allow mem bers sufficient time to redeem outstanding points - especially considering that some members may have made a significant commitment to your program. Give them t he respect and sensitivity they deserve. 3. Communication: Everything comes down to communication. This will have a significant impact on how your customers and program members will perceive you g oing forward. A favorite positioning of ours for program termination is: "the pr omotion." When communicating the loyalty program's demise, don't refer to it as a "loyalty program" but as a "promotion." By definition "promotions" have an end . "Programs" on the other hand have a long life. So, set the tone with your comm unication. Be clear and precise with information as to the program's future, how to redeem outstanding points, and the timeframe involved. Use all communication channels available to carry this message. Cite program rules and emphasize your intention to continue to recognize and reward good members in the future. Perha ps allude to future programs/promotions. Don't apologize or offer excuses. Conce ntrate on the facts. 4. Be Generous: This is your opportunity to turn a negative into a positive . Consider topping up member accounts to the next redemption level. You want mem bers to continue to have good will toward your organization. Consider a small ge sture of appreciation e.g. an additional discount or coupon. Now is not the time to be cheap. You are messing with member "bank accounts" (many program members consider their point balances like cash), so don't leave them feeling gipped. Future of Loyalty Programs As loyalty programs become ubiquitous, we believe some interesting dynamics will evolve in the loyalty marketplace: 1. Companies will continue to look for ways to differentiate their loyalty programs, while balancing program revenue and costs to achieve favorable economi cs. 2. Newer loyalty programs will be more segmented e.g. targeting life stages , lifestyles and interests 3. Existing loyalty programs will become more tiered i.e. concentrating res ources on high potential and high value customers. 4. Loyalty programs will begin to take a more holistic view of customers focusing on broadening customer relationships (i.e. "relationship rewards") - of fering awards and recognition for broadened existing relationships - resulting i n a strengthened hold on their customers. This takes on increased importance for program administrators as the customer's sense of entitlement rises. 5. Instant point redemption at merchant partners. Making it easier to redee m your points, program sponsors will begin to develop merchant relationships whe reby loyalty program members will be able to convert their loyalty points on-sit e at the merchant partner for discounts, merchandise and/or services. 6. Coalition Programs. As compelling value propositions become harder to c ome by, the importance of coaliton programs increase.