Anyone trying to launch a loyalty program today knows that from the very start you must climb from a financial hole to reach a profitable horizon. A typical marketing plan is filled with shorter-term commitments â€” media buys, CRM efforts, search/web advertising â€” while a loyalty program represents a much longer-term undertaking.
A business case for a loyalty program generally looks like this: The financial model begins with a big first-year investment in capital costs and marketing. Then, as customer attrition slows and customers consolidate more of their spending with you, the model shows dramatic profit increases in years three, four and five. Retention of high-value, high-priority customers over time is what makes the financial model behind a loyalty program so strong. It’s focused on your best customers, and it’s sustainable.
But that return on investment takes time to establish. And in today’s business environment, companies are cautious about taking on a business investment with lengthy ROI time.
Pay it forward
The period between when an investment is made and when results start to justify that investment â€” the time to payback â€” has become a liability that puts an otherwise strong loyalty business case in jeopardy. How can one build a business case for a loyalty program that the capital investment committee can accept and the finance department can endorse?
The key is to shorten the break-even time horizon and get that program into the black more quickly. Here are three ways to minimize the time to payback and maximize a loyalty program’s business case:
1. Share the cost. Many of the efforts made for a loyalty program launch have ancillary benefits. Quantifying those benefits and lobbying to share the investment in those efforts with other groups can spread costs and leverage economies of scale.
I recently worked with a CPG company to build a business case for a program. Their approach was to put codes on all packages â€” similar to the codes that My Coke Rewards places on Coke packaging. The original cost projections made the initiative not feasible. But the additional benefits of an on-pack code to other parts of the company, such as aiding product recalls and quality-control efforts, were strong enough to reduce the cost burden of the model on the CPG’s marketing department.
2. Find (and quantify) early payoffs. Loyalty programs can benefit from establishing a few early "quick wins" â€” proving value and getting results at the beginning of a program’s life. This can be as easy as illustrating the value of new customer data through more-successful direct marketing. But there are other ways to demonstrate return on investment early in the program.
For example, some organizations seek email addresses to use in their overall CRM efforts, and capturing those email addresses through loyalty program enrolment can create a spike in that email database. Assigning a value to that email address can help shrink the time to pay-out.
3. Use new technologies to enrol and engage. Such industry sectors as quick-service and casual restaurants are aggressively launching loyalty initiatives. This interest is being driven in part by their ability to rely on new technologies to shrink the time to payback.
Starbucks, for instance, has created a program that takes much of the upfront cost of loyalty program enrolment away by leveraging their existing pre-loaded card platform for enrolment. Starbucks customers enroll in My Starbucks Rewards by registering their loadable card online. Once a customer reaches Gold status, Starbucks can justify the expense of issuing a new member card. There are trade-offs to such an approach; for example, enrolment rates will be considerably slower than launching with a new card and pushing enrolment at the point of sale. But using the approach to shorten the time to payback can make that initial foray into loyalty much more palatable for an organization.
These types of tactical design options offer new opportunities to shorten the time to payback and build a business case that puts a program in the black in less than two years. Loyalty looks like a smarter investment when the break-even time horizon is in plain sight.
About the Author Dan Ribolzi:
Dan Ribolzi is a consultant at LoyaltyOne and advises on best practices on all areas of loyalty marketing, including: program design, evaluation and growth strategies. Drawing on his expertise in customer-centric marketing, he helps retailers develop and implement loyalty solutions that meet clients' business objectives while creating value for their customers.