Loyalty Programs and Data Analytics

For many price-conscious shoppers – the email inbox has become a sort of personalized coupon book. From pharmacy chains to big box stores, retailers of all types encourage repeat customers with email offers, very often tied to loyalty programs. But these programs cost those retailers money, and some even elect not to offer one at all.

So why are some stores going to great lengths to enroll customers and give them rewards, while others deem it unnecessary? What’s the future of such programs in the era of advanced data analytics? The answers are all about customer retention and segmentation, though they may vary, depending on the retailer’s size and type.

The customer retention component is more or less self-explanatory – someone has shopped with you before and you want them to come back. This has been the impetus behind such programs for a long time. But the newer trend is about finding more opportunities to compete better by blending internal transaction data with external, syndicated demographic data.

A loyalty program can help connect these two datasets. If, for instance, a customer uses cash instead of a credit card, their program membership can make it easier to properly match the transaction with the appropriate demographic data. The program becomes a way of filling in some of the data gaps. As the gaps get filled in, retailers begin to create more detailed customer profiles that capture everything from income to interests to value consciousness, giving them another, more powerful lever for marketing, retention and cross-selling.

Outside of a few notable exceptions, most major retailers do have a program of some kind. The second tier of retailers below them are now mostly moving toward adopting programs as well. The challenges they’re all tackling are the same; that the emergence of online shopping has made it more difficult to retain loyal customers. Customer retention and engagement need greater personalization; which means there are data gaps to fill in.

The challenge smaller retailers run into is cost. For some, the marketing dollars that go into promoting the programs, not to mention the deals themselves, can eat too far into margins. Retail chains, such as pharmacies — well known for popular loyalty programs — have the volume and margins to sustain their programs and realize the other benefits. But smaller, specialty retailers that don’t have that luxury may now be trying to wean their customers off of some of the rewards that were initially offered in an effort to generate buzz and drum up early business.

Some retailers, large and small, are trying to address the cost issue by experimenting with soft benefits. Soft benefits have become popular in the air travel industry, where airlines compete using offers that don’t actually cost them anything, such as free luggage, priority boarding or exclusive airport lounges. In the B2B tech industry, software vendors do this by offering priority customer service, and by making the purchasing process faster and easier for repeat customers making large purchases.

For retailers, these sorts of benefits can include things like in-store pickup, expedited shipping, priority customer service, or even virtual reality “lounges” for trying out products – anything that feels like a benefit but doesn’t cost as much as an actual discount. This represents a middle ground approach – the rewards eat into margins a little less, while still providing a level of value to the customer and still generating data.

Those early adopters of the soft-benefits approach might have more modest expectations about the program’s ability to generate repeat customers, but are still testing and learning about how customers will react. Whatever they learn may be the most valuable reward.

 Vinay Mony is Principal Decision Scientist, Ugam

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