The Science of Loyalty

Study breaks down false premises of reward programs

MILFORD, Ohio -- There's never been an easy answer to developing a successful loyalty rewards program for customers, and a recent study by COLLOQUY, a Milford, Ohio-based loyalty marketing and consulting firm, may explain why that is.

Having engaged in numerous loyalty consulting assignments over the years and having heard extensive debate about the proper value proposition in our public educational workshops, the team at COLLOQUY realized that tactical and operational hurdles often prevented best strategies from evolving, the study states.

Some of the false premises and stumbling blocks to successful loyalty programs noted in the study include:

Customers lie: What customers say and what they do are often at odds. Whenever consumers are surveyed as to what value proposition they prefer, they invariably list cash and discounts as Nos. 1 and 2, respectively. But in a real-life loyalty program, they more often than not choose accrual, rewards and special treatments as the real influencers of their behavior. You can't afford it: You can design the perfect value proposition on paperbut just try to implement it. No sooner do you try than operations begins lamenting the hidden cost of delivering soft benefits and the training required, while a vein in your CFO's head starts throbbing over the issue of point liability. The result, in most cases, is the compromising of your strategic vision. It's too hard: Frankly, many marketers don't have the specialized expertise, time or the willingness to exercise the gray matter required to design a truly differentiated loyalty value proposition. Why spend time thinking about all of those hard and soft benefits when it's so much easier just to run another promotion?

Now, COLLOQUY reveals the results of a research project for a $4 billion national retailer that tested five distinct value propositions in test and control markets designed to be statistically parallel. More than 75 stores participated in two consecutive six-month tests where more than 60,000 customers from the retailer's credit-card file were auto-enrolled in one of five loyalty program scenarios. Those scenarios included:

The reward cell offered loyalty program members the ability to accrue points they could redeem for in-kind merchandiseproducts already sold by the retailer. The rate of accrual was set at 2% to 4%. The service cell offered members discounts on selected items at up to 50% off along with other soft benefits, including special checkout lanes and preferred parking. The combination cell offered both the points accrual model of the reward test and the special privileges (but without discounts) of the service test. The rebate cell offered members a 2% to 4% rebate on all identified purchases that they could take as cash back or a balance reduction on their private-label credit-card account. The awareness cell was a communication-only strategy that used incremental, targeted and personalized direct mail to reinforce existing services offered by the retailer to the private-label cardholders.

At the conclusion of the test period, the results overwhelmingly favored the blended value proposition in combination cell No. 3, according to the report. This was not surprising to the paper's author, Terri Gaughan, consulting program manager for COLLOQUY, who noted, What our theoretical evidence told us would win out, actually did. The combination test market, with both hard and soft benefits, generated the most positive revenue lift over the control group, followed by the rebate and reward groups. The combination cell also had an improvement in the rate of customer attrition even though it carried higher execution costs.

The white paper, titled ValueTalk: The Great Value Proposition Debate, also explores applying a proprietary customer-value-score methodology to determine the overall value of members in each test cell, methods of establishing control groups to quantifiably identify incremental lift and the attrition benefit of loyalty programs and an analysis of the financial implications of each of the test scenarios.

To read the complete white paper, click here (free registration required).