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Loyalty programs are back in a big way. US consumers have created an eye-popping 3.3 billion accounts across different rewards programs. Nearly 2/3rds of American households are members of at least one paid loyalty program, with almost half of US homes having Amazon Prime subscriptions.

90% of companies already have some sort of loyalty program (free or paid) in place. An average US consumer is a member of approximately 15 different loyalty programs; unfortunately, they engage with less than half of those.

So loyalty programs are abundant and achieving signups, but they may not be driving much loyalty. A well-executed program, though, can prove an untapped gold mine of revenue and data. With customer acquisition and retention costs increasing, this is the time for every organization with a loyalty program to ensure it is paying the dividends it has the potential to pay.

Low risk, high reward

So why are these programs so popular? They foster deep connections, resulting in better customer service and more relevant offerings. And while consumer demand has driven the proliferation of these programs, they provide even bigger benefits to the businesses running them: companies with loyalty programs can see 2.5x the revenue growth of competitors without a reward program, and deliver as much as 400% higher returns to shareholders.  

Emotionally connected customers are likely to remain patrons significantly longer; recommend the brand with greater frequency, and have an LTV that increases by up to 300%. A good loyalty program can generate new streams of revenue, reduce marketing spend, and increase innovation—benefits that nearly any company could stand to take advantage of.

Loyalty programs result in higher average transactions and increased likelihood of repurchase. Nearly 7 in 10 consumers say that loyalty programs have an impact on where they shop, while half are willing to spend more in order to reach a higher tier in a loyalty program. 75% of consumers are more likely to make additional purchases after receiving loyalty rewards, with an equal number reporting that these initiatives solidify their relationship with a brand.

Perhaps the most compelling reason to launch (or relaunch) a loyalty program is the goldmine of data it can provide. Apart from the zero-party data captured during signup, 1/3rd of US adults are willing to provide even more personal information to companies with loyalty programs. Combine this with the fact that these programs attract better qualified and more committed customers, and the ROI is obvious.

Living up to the potential

Of course, only well-executed programs realize these rewards. Customers love loyalty programs, but they have expectations to match. In paid programs, customers expect at least a 150% return on their subscription fee in the form of discounts, services, or free products. So while transactional benefits like free shipping are great, members are expecting much, much more than just waived fees or expedited processing. Successful loyalty programs are finding innovative ways to drive engagement, using everything from curated content and real-world experiences to gamification.

So what separates the successful players from the unsuccessful ones? Good programs are designed with long-term goals, not short-term sales, in mind. Half of all paid memberships are canceled before the first renewal period; programs that successfully nurture subscribers past this point do so by proactively, and repeatedly, showing the "hard value" they provide. By consistently delivering (or even over-delivering) on what they've promised, these brands improve retention numbers, brand loyalty, and LTV.

Paid loyalty programs

The paid loyalty program model includes both programs with a one-time membership fee and ones based on a recurring subscription. Aside from the revenue stream these programs provide, they help solidify relationships with high-value customers and decrease the likelihood of brand switching. With the data captured through these programs, marketing teams can create more personalized, more engaging, and more valuable content, driving increases in purchase frequency and basket size.

Of course, not all programs succeed. When paid programs aren't showing strong returns, some businesses have tried reducing the associated benefits or offerings, a move that typically results in even less consumer interest and even fewer returns. More successfully, other companies have taken the opportunity to reinvent and reinvest in their programs, using them to provide more expensive products and services as well as new engagement opportunities.

Success stories: Lululemon and CVS

Turning loyalty into lemonade

Lululemon's loyalty program, though only a few years old, is already showing great success. For about $150 a year, members get access to exclusive apparel, fitness classes and discounts, along with online workshops and health coaching. By creating a mix of digital and in-person benefits, the brand is maintaining the relevance of its brick-and-mortar spaces while fostering an active online user community.  

The program's success among subscribers is due in part to the deeply customized, local experience the membership provides. This brand loyalty results in higher incremental purchases among their existing base, while customer perks like guest passes for classes actually help lower marketing spend by increasing word-of-mouth advertising. All of this fosters a brand stickiness that enables Lululemon to add services and move beyond retail apparel to become a lifestyle brand.

Offering care, packaged

For $5 per month, the CVS CarePass gives members 20% off CVS-branded products, as well as free shipping and access to a 24/7 pharmacy hotline. The program is seeing significant growth, with an 18% uptick in enrollment in 2020 alone. Perhaps most important for the brand is that 20% of those new enrollees were millennials, customers with a long potential customer lifetime ahead.  

CarePass members have an average increased spend of up to 20%, and their typical basket size is at least one item larger compared to non-members. So it's no surprise that CVS is investing more resources into the program, rolling out same-day prescription delivery for subscribers. And by providing members with monthly coupons, CVS is shortening their average purchase cycle while bringing more foot traffic into the stores.

Both CVS and Lululemon exist in hyper-competitive markets with relatively limited opportunities to differentiate their products from their rivals. This is perhaps one of the best use cases for loyalty programs; when consumers have lots of similar options, the lure of rewards points or extra discounts can make the difference.

Free loyalty programs

Free loyalty programs make up the vast majority of initiatives on the market, and increase the likelihood of higher spending by 30%. Like their paid counterparts, the success of these programs comes from the perceived value the customer derives and, perhaps more importantly, the speed with which that value is delivered.

Whether through rewards points or access to higher tiers of membership, loyalty programs drive big revenue by finding ways to engage with a business's lower spenders. These customers can be motivated into purchases by the chance of earning rewards, transforming an occasional shopper into a "frequent flier."  

The chance to quickly earn rewards also sharply increases spending. Programs that give on-the spot rewards see customers spend as much as 2/3rds more compared to non-members. And when consumers are given the ability to "split" points (spend some while also banking others for rewards in higher tiers) they have a significantly higher LTV than those in programs without tiered rewards.

Success stories: Sephora and The North Face

Beauty on the inside

Sephora's Beauty Insider program rewards members at every price point. The tiered membership program motivates higher spending through access to deeper discounts, exclusive events and early access, but provides all members with perks regardless of purchase history. Apart from their tiered program, Sephora has heavily invested in creating a vibrant digital community that allows fellow beauty fanatics to connect and share inspirational looks and product recommendations.

The personalized, frequent engagement opportunities provided by the program drive website traffic even when people are not looking to buy, solidifying brand loyalty and adding cross-sell opportunities. And with programs like the Rewards Bazaar, which releases new rewards as an "event" two times a week, Sephora keeps excitement high. The Beauty Insider loyalty program has become an essential part of the brand's business strategy; members account for a whopping 80% of Sephora's annual sales. 

Breaking new ground

The best loyalty programs manage to drive user behavior beyond the app, program, or retail experience alone. The North Face takes the standard benefits of loyalty programs (early access, discounts, member-exclusive products) and combines them with gamification to encourage real-world activity (using recyclable bags) or social media behavior (checking in at national parks and monuments). Points are earned and issued on a set schedule and expire after a year, creating easy opportunities for additional engagement outside of the standard birthday greeting or sign-up anniversary discount.  

The road ahead

Creating the kind of specific, personalized experiences that drive effective loyalty programs requires a robust understanding of customers' habits and interests. Brands that have the data and analytical tools to form that understanding have a huge advantage over brands that rely on guesswork to design their offerings.

The good news is that advancements in AI and predictive analytics are substantially lowering the barriers to implementing data-driven rewards. As insights into customer behavior become more nuanced, brands will be better positioned to differentiate themselves with unique offerings and evaluate their ROI on an ongoing basis. Retailers with a presence in multiple market categories can offer data-driven personalized cross-selling recommendations and strategically spend to migrate-up high-value customers. Customers know they can derive a lot of value from loyalty programs, which means businesses can derive even more.

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