Does Growing Your Loyalty Program Reward the 'Right' Customers?
By Michael McCall Director of The School of Hospitality Business, Michigan State University. | April 2013
Co-authored by Clay M. Voorhees, Ph.D., Assistant Professor of Marketing, Michigan State University
As consumers, we face offers to enroll in loyalty programs on an almost daily basis. And with good reason, loyalty programs are often the most visible sign of a firms' commitment to customer relationship management. A significant driver for offering these programs is routed in the idea of customer lifetime value (CLTV). Customer lifetime value is essentially a numerical estimate of the value of a customer over the lifetime of the relationship. For most firms that have adopted a customer-centric approach, CLTV can offer a blueprint for allocating resources and target marketing efforts.
After first identifying the actual cost of acquiring that customer, the intent is to then look at the return on that investment for as long as that customer is retained. Firms from almost all industries are interested in identifying, valuing and retaining their customer base as the costs to acquire new customers can become prohibitive. Firms need to be concerned with issues of short term profitability as well as long term revenue generation from their customer base. CLTV therefore is a monetary measure of customer cash flow past, present and future.
Loyalty programs have become an increasingly popular method for retaining and enhancing the long term value of the customer base. Indeed, many firms offer reward programs as strategic tools in an attempt to offer customer specific engagement programs. In addition to increasing retention, these programs are often intended to increase spending frequency and generate positive word of mouth for the firm. Program enrollment offers come from a wide array of industries both inside and outside of hospitality and have shown no signs of slowing down. One study recently reported an increase in loyalty program membership of 2.8 billion customers in the United States and an overall 20% increase since 2007. Indeed, it has been argued that the average individual may belong to as many as 17 different reward programs ranging from everything from hotels and restaurants to appliance stores, pet supply stores and grocery stores.
As marketing managers are increasingly being asked to meet certain monthly enrollment targets, it seemed appropriate to take a deeper dive into the implications of this practice. Specifically, we examine the proposition that enrolling more customers may enhance revenue in the short term but may have other longer term consequences. We see three critical areas of concern. First, as enrollment increases, a firms' ability to service an ever increasing number of customers can become unwieldy. Second, the very nature of the program is often to reward your better customers thereby creating a sense of status and value. Third, when enrollment becomes unrestricted, a firm may not be identifying and enrolling customers with a profitable and favorable CLTV. Finally, we offer a number of suggestions that may aid managers in optimizing the return on new program enrollees.
In prior work, we have suggested that the key drivers of a successful reward program can be found in 3 buckets: The structure of the program; the structure of the rewards offered; and the degree to which the customer fits with the program. A key take away from that discussion was that it is important for program managers to think carefully about how they might best differentiate their program from that of their competition. We argued that a critical feature of a successfully differentiated program rested in the need to properly segment your customers both within and across program tiers. An underlying theme for all reward programs is the categorization of customers into groups. Rooted in the notion of market segmentation, the basic assumption is that there are relatively homogenous groups of people who are stable in their consumptive usage, firm level commitment, and can be reached by manipulating various aspects of the marketing mix.