1. Cream of The Crop Part III
How Effective is Your Loyalty Program?
May | 2009

2. Cream of The Crop Part III I How Effective is Your Loyalty Program?
The third in a series around features of successful loyalty programs that have
helped certain companies stand out from the rest, with program offerings that
are recognized as best-in-class.
Keeping Costs Under Control
While this article was to focus on control groups and measurement methods as
was mentioned previously, there is a more pressing urgency that needs to be
addressed. This is around the concept of keeping loyalty program costs under
control.
The most appreciated loyalty programs from a customer perspective are those
that are perceived as generous. Customers desire to be recognized for the value
they add to a company, and thus, want their loyalty programs to award them
generously.
In certain sectors and their respective loyalty programs, there are minimums that
customers expect back as a payout – traditionally 1-2% in supermarkets, 3-5% in
telecoms, 10%+ in retail (particularly clothing and restaurants). Paying out less is
simply not acceptable for two reasons – one, when your competitors are being
generous to their customer base and thus your program is not best-in-class, and
two, when your customer base is wary of your tactics and can calculate your
stinginess.
So what to do when you can’t convince your Finance Department or executive
ranks to be generous? Revise your business model and offerings. Here’s an
example of how to make the customer think they are getting 2% back, but in
reality, it affects your company’s bottom line by .4%:
Begin with a 2% payout rate. Traditionally, successful loyalty programs have
participation rates of 75%, and redemption rates of around 60%. This right away
brings the payout to .9% (2%*.75%*.60% = .9%). If you don’t have Execs on
board yet, there’s more.
Bring in a partner that offers an attractive redemption alternative from
customers to not only improve the overall strength of your program, but to
reduce the overall costs. Here’s how a blended offering would work at a grocery
store if they brought on board a restaurant chain as a partner.
Points Earned Payout Estimated Redemption
Per 1 USD Spent Ratio Reward for 500 points Ratios
10 USD Voucher for Use
1 2% in Grocery Store 50%
10 USD Voucher for Use
at Restaurant Partner 50%

3. With the above rules in place, two additional topics come into play – one, the
discount to be obtained from the partner, and two, the cannibalization effect:
1.) Traditionally, such partners are willing to give a 50% discount on the reward
in question – our loyalty program engagements dictate this (this depends
somewhat on the negotiating power of the grocery store). The above mentioned
10 USD restaurant voucher in essence costs the grocery store only 5 USD, but still
makes the customer feel they are getting 2% back.
2.) Cannibalization in this case refers to the concept of whether the 10USD
voucher in question is cannibalizing from a normal purchase the customer would
have made regardless, and thus, is technically lost revenue. In most cases, the
reward does cause significant cannibalization – the customer is a regular shopper
and would have given you the 10 USD in question at their next visit but now
won’t. Thus, this entire amount can be considered foregone revenue (in some
sectors like airlines and banking, this cannibalization occurs to a much lesser
degree, especially if the reward is not pure cash but rather lest often used
benefits and services).
Taking the .9% ratio and considering half of the restaurant partner redemptions
are subsidized, the payout is whittled down to a .67% ratio. There are ways to
bring this down even further by modifying internal benefits to ultimately help
you achieve a payout ratio of .45%, but the rewards should always be kept
relatively attractive – in this case, the internal voucher is a necessity.
Thus, the original 2% payout ratio is stabilized in this case at .67%, one third of
the original figure. Added back in would be .1-.2% traditionally to cover launch
and ongoing marketing costs around the program. Other one-time costs around
systems may also apply.
Most important here is that the customer perception around the generosity of
the program is maintained, and management is hopefully persuaded to go
forward with a launch. Next month, as promised, we’ll talk about to measure the
overall success of the program, how the perception in fact turns into benefits
that can quantifiably me measured.

4. About Forte Consultancy Group
Forte Consultancy Group delivers fact-based solutions, balancing short and long term
impact as well as benefits for stakeholders. Forte Consultancy Group provides a variety
of service offerings for numerous sectors, approached in three general phases -
intelligence, design, and implementation.
For more information, please contact
info@forteconsultancy.com
Forte Consultancy Group | Istanbul Office
www.forteconsultancy.com