Six Critical Factors in Designing a Successful Loyalty Program

2010 Customer Insight Group, Inc. All rights reserved.

November 30, 2010

Many Loyalty Programs Fail to Deliver Positive ROI

Where do they go wrong?
Fail to develop loyalty opportunity. Quality of data is not properly addressed. Lack clearly defined and measurable objectives. Little or no attention is paid to employee skill sets and abilities; not ongoing training about the program and the benefits to the organization. Customers dont understand how to earn rewards. Data is not leveraged to communicate to customers. Program was launched and went into auto drive.

What do the winners do right?

Change behavior rather than just reinforce it. Each year program results are analyzed to optimize customer enrollment, retention, redemption and ROI. Build in time for testing and learning. Over-invest in coordination with users and across functions. Link technology implementation priorities to business objectives. Advocacy by senior management. Segment and tailor the program and offers. Demonstrate innovation and regular re-invention. Develop robust multi-channel communications to engage, keep and grow profitable customer relationships. Understand customers and how segments differ from one another.

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty programs are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Successful Loyalty Programs are Strategic

Is the value message simple to understand? How can you deliver and reinforce engagement over time?
 POS technology  Frontline training  Social media,  Fulfillment  Marketing support

What is the primary business objective goal for customer impact?

EXECUTE SKILLFULLY AND PERSISTENTLY TO SUSTAIN IMPACT

SET REALISTIC AND TARGETED PROGRAM OBJECTIVES

 Frequency  Average sale  Lime time value

Successful Loyalty Program LEVERAGE DISTINCTIVE ASSETS

Are potential benefits compelling enough to achieve required customer impact?

What distinctive assets can be leveraged?

 Assortment  Receipts  Community  Affinity programs

MAKE RIGOROUS DESIGN TRADEOFFS TO ACHIEVE OBJECTIVES

Do customers know what it takes to earn rewards? Benefit mix (combination of hard and soft benefits). Strategies to move customers up in tiers/spend?

How will these assets reshape economics and expected returns?

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty programs are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

Program Elements
Which Customers are Targeted How and When Customers Are Enrolled Qualification & Re-qualification Criteria Value and Structure of Rewards How Program is Communicated

Design Trade-offs
Breadth of appeal and participation Level of participation over time Types of customers participating Degree of offer-tailoring Types and degrees of impact Depth and consistency of data capture Level of frontline involvement Culture to drive sales or margin System capabilities Cost of program Long- and short-term measurement Exit flexibility/cost

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty programs are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Objectives Must Drive Program Strategy

High
 Provide direct, targeted messages and offers across customer base  Target all segments, with limited ability to target and tailor between segments
Expand marketing channel with direct capabilities  Collect customer data to make better decisions across the business  Target all segments, significant ability to target & tailor between and within segments Collect data to be us used as a core business asset Build strong relationships with growth segments  Develop strong relationships with most valuable segment(s)  Target growth segments only, significant ability to target and tailor between and within segments

Breadth of Customer Information

BUSINESS OBJECTIVES

No explicit strategy

 Continue to pursue defined initiatives

Low

Low

Depth of Customer Information

High

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty program are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Identify How Program Design Delivers Value

Expand marketing channel with direct capabilities Collect data to use as core business asset Build strong relationships with growth segments

KEY AREAS OF BENEFIT CUSTOMER SEGMENTS

BROAD AND SHALLOW

Growth segments Maintain segments

BROAD AND DEEP

Growth segments Maintain segments

NARROW AND DEEP

Growth segments Maintain segments

Limited data for all customers

Distrib.

Robust data for all customers

Merch. Planning Marketing Buying Store Ops. Distrib.

Deeper data for select segments

Merch. Planning Buying

FUNCTIONS

Marketing Only

Marketing Store Ops.

POTENTIAL TYPES OF IMPACT

Improved efficiency of markdown spend through direct targeting and understanding of promo response

Robust customer insights drive business decisions Strategic decision support. Strategic choice evaluation (e.g., impact of merch. changes on core customer segments behavior) Increased customer loyalty Targeted levers

Limited customer insights to drive core function business decisions. Increased customer loyalty. Enhanced customer perceptions. Targeted levers (e.g., conversion, frequency, UPT, and markdown)

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty program are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Leverage Best Practices of Industry Leaders

Industry Leaders

Strategy

EMBRACE TOP SPENDERS

Small Dominant spending group Exclusive aspirational offers

Target Priority Segments

Several important segments with differentiated needs Tailored value proposition (pricing, service levels) based on behavioral insights

ENGAGE MASS MARKET

Provide every day extra value Strong core brand alignment Build ongoing connection point to encourage purchases, differentiate offers

DELIVER SUPERIOR EXPERIENCE

Multiple touch points, channels Able to indentify high value individuals and deliver superior experience across touch points

BUILD PLATFORM FOR RELATIONSHIP EXTENSION Customer embedded in business decision-making Mass market acceptance/confi dence as a gateway to broader array of relevant products & services

Hallmarks

2010 Customer Insight Group, Inc. All rights reserved.

Leverage Best Practices of Industry Leaders

Strategies Examples Hallmarks
Embrace Top Spenders Small dominant spending group Exclusive aspirational offers Target Priority Segments Several important segments with differentiated needs

Tailored value proposition (e.g., pricing, service levels) based on behavioral insights to better meet needs

Engage Mass Market

Provide every day extra value Strong core brand alignment Build ongoing connection point to encourage purchases, differentiate offers

Deliver Superior Experience

Multiple touch points, channels Able to identify high value/high priority individuals and deliver superior experience across touch points

Build Platform for Relationship Extension

Customer embedded in business decision-making Mass market acceptance/confidence as a gateway to broader array of relevant products & services

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty program are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Align Loyalty Program with CRM

Program Type Execution Elements

INSTANT STORE DISCOUNT

POINTS BASED REWARDS

SEGMENT SPECIFIC

Broad and Shallow

Markdown dollars distributed through card. Swipe Sweepstakes element to encourage consistent use of card. Mass consumer data insights to build tailored merchandising, pricing, and promotional mix.

Broad and Deep Points program for rewards Swipe Sweepstakes element to encourage consistent use of card. Mass consumer data insights to build tailored merchandising, pricing and promotional mix at store and customer level detail.
High participation. High free rider hurdle. Aspirational purchases provide gains in UPTs, store trips and conversion. High exit costs.

Narrow and Deep

Program targeted to select group of customers Brand distinctions leveraged against group for distinctive positioning and brand strength. Purchase response to tailored messages drives follow-up communications and determination of need for additional customer data detail. Select participation. Greatest customer upside. Enhanced loyalty to drive per cap and margin. Strongest gains in conversion and UPTs. Minimal exit costs.

Economic Considerations

Highest participation. Low customer upside. Minimal incremental impact on UPTs, store trips, conversions

2010 Customer Insight Group, Inc. All rights reserved.

Six Critical Factors in Designing a Successful Loyalty Program

1 2 3 4 5 6
Successful loyalty program are strategic Trade-offs are required to realize financial goals Objectives must drive program strategy Identity how program design delivers value Leverage best practices of industry leaders Align Loyalty Program with CRM

2010 Customer Insight Group, Inc. All rights reserved.

Sallie Burnett, President Customer Insight Group, Inc. Email: sallie@customerinsightgroup.com Phone: 303.422.9758

Customer relationships Engage. Keep. Grow.

Customer Insight Group, Inc. leads the way in the evolution of how companies engage their customers, positively motivate them and earn their long-term loyalty. Our extensive client is testimony to our depth of knowledge and ability to apply strategic insight and solutions to a wide variety of business objectives. Our client experience includes: Ashro, A&P, The Bon Ton, Crate & Barrel, Dicks Sporting Goods, Edwin Watts Golf, GE Consumer Finance, The Great Indoors, G.H. Bass, Golf Galaxy, Helzberg Diamonds, HSBC, Kohls, La-z-boy, MCI, Payless ShoeSource, Pier 1 Imports, Petco, Proflowers.com, Regis University, Ruby Tuesday, S&K Menswear, Sierra Trading Post, Spencer Gifts Tommy Hilfiger, Ulta, as well as various other leading companies.

2010 Customer Insight Group, Inc. All rights reserved.