How Much Loyalty Costs Retailers

Retailers know the ideal results of consumer loyalty programs — reduced defections, increased spending per customer, lower cost to serve, increased purchases of higher margin products and more customer referrals — and many of them understand the best practices in implementing them — empower the consumer, treat customers as individuals, incentivize (instead of obfuscating), be flexible regarding redemption deadlines and openly equate points with currency.

What a lot of retail businesses don’t have a handle on, though, is how much they should be spending to build and maintain their loyalty and rewards programs.

According to the 2015 COLLOQUY Loyalty Census, consumers in the United States hold 3.3 billion memberships in customer loyalty programs, which is a 26 percent increase from 2013. Given that consumers are continuing to show interest in loyalty programs, companies are continuing to spend on them — to the tune of $2 billion in the U.S. last year.

Is that too much? Not enough? Just right? The answer obviously depends on each individual business’ situation. But there are some general guidelines that retailers can follow to assess their loyalty spend relative to its value.

BREAKING DOWN THE NUMBERS

For a retailer that is building a loyalty program from scratch, CostOwl assesses the general requirements and their average costs:

Gift cards are typically priced at around $0.50 to $1.00 per unit (and, of course, that price lowers the more that are purchased); gift card software costs approximately $300 to $400 per location if processing is done on the POS, or $50 to $75 per location if the cards are processed on credit card terminals. Transaction fees are usually around $.10 to $.75 per activation of a rewards account, while monthly program maintenance fees are roughly $20 to $40 per month with a one- to three-year contract.

As for a formula that a retailer can use to weigh these expenses against results, Patrick Lewis of the National Association of Convenience Stores (NACS) actually cracked the code years ago (as seen in the image).

Using conservative industry averages, Lewis calculated the following reward projections:

   Member participation: 40 percent

   Rewards percent back to customers: 1.5 percent

   Rewards redeemed: 85 percent

   Monthly hidden costs: $370

   Monthly support costs: $325

   Program investment: 0.5 percent of to­tal sales, or $2,063.20/month

Lewis’ “secret formula” produced an improvement in overall average customer loyalty of 4.3 percent, with a calculated ROI of 335.09 percent.

That’s probably what you’d call a best-case scenario … which — while a nice thing to have if they can get it — is not always the reality for retailers.

WHEN IT’S NOT WORKING

There are some statistics that make the case that a loyalty program might not be worth the investment.

According to a Capgemini Consulting report from earlier this year, as much as 89 percent of consumers’ opinions on loyalty shared on social media is negative — a lot of which stems from retailers not following the aforementioned best practices related to relevance, flexibility and value. Even for a retailer who’s doing loyalty right, those who aren’t can hurt its chances of success through the power of popular opinion.

There is also scientific data more soluble than public perception that indicates a limited range of loyalty programs in general. Writing for Fast Company, Don Peppers argues that there are two key characteristics that make a loyalty program a worthwhile investment for a retailer: (1) when just a few high-value customers represent a vast majority of its business and (2) when there is limited product differentiation.

If a retail business model doesn’t meet those two standards, it’s Peppers’ opinion that a loyalty program isn’t worth it.

On the other hand, as technology continues to advance, so too does the ability for retailers of any size to utilize it to implement intelligent, robust and specifically targeted customer loyalty programs.

That Capgemini Consulting report notes that while 79 percent of loyalty programs use a mobile channel, only 24 percent allow redemption through a mobile device. Seems like a clear miss.

Using a recommendation put forth by Capgemini — that loyalty programs ought to be viewed “within the larger context of a marketing strategy that is focused on driving customer engagement” — as a jumping-off point, the question for retailers becomes less about how much money to spend on loyalty than about where, within that category, they should spend it.

WHERE SHOULD THE MONEY GO?

For thoughts on that matter, PYMNTS checked back in with Steve Rowen, managing partner at Retail Systems Research (RSR).

“Retailers are definitely realizing that ‘engagement’ is the key to differentiation in the modern world,” says Rowen, “…and that means engaging with consumers as intimately as they’ll allow.”

While some retailers are “treading lightly” when it comes to applying new technology to loyalty programs, Rowen has observed that “others are clearly acting more boldly, trying to get in front of the consumer via in-store sensing devices and — in particular — online targeting.”

“It’s not for us to decide which of these works best,” he goes on to say, “as the market will no doubt sort that out.”

Rowen’s advice to retailers channeling their resources into specific loyalty programs is to “be as experimental as [they] dare but to understand that many consumers have lines that just can’t be crossed. That means setting up a team with input from members from multiple different departments (marketing, store, online AND merchandising), [as well as] trying some new ideas on small groups of consumers.”

If retailers have an app, Rowen remarks that’s “all the better” … provided that the business doesn’t “get too precious with new ideas,” as none should be afraid to cut a pilot program quickly if it’s not working.

“There’s going to be a lot of room for nontraditional methods,” he concludes, “and I’m very excited to see where retailers take loyalty and engagement concepts in the next 12 months.”