Marketers Love Loyalty Programs. Few Do Them Right

Consumers have lots of cards in their wallets, but many go unused

Author: Andria Cheng

May 30, 2017

From Kohl’s and Ulta to Starbucks and Panera, retailers and other marketers are investing heavily in loyalty programs, which they see as a key part of their growth strategy to hook today’s increasingly fickle and disloyal consumers to spend within their brand universe.

And for a good reason: Loyalty drives traffic and sales.

Take Ulta Beauty. On Thursday the beauty supplies retailer reported another industry-envied double digit comparable sales gain of 14.3%. One of the key contributors to that growth? “The strength of our loyalty program,” said CEO Mary Dillon in the earnings call. Ulta added 1.1 million net new loyalty members in the quarter to reach 24.5 million active members. Loyalty customers who shop both online and in its physical stores contributed to a 71% jump in Q1 online sales, the highest growth rate in three years, she said.

Loyalty programs are “a major revenue driver” for brands,” said Sean Claessen, EVP of strategy & innovation at brand loyalty agency Bond Brand Loyalty, in an interview. “They clearly see the benefit.”

Indeed, more than four-fifths of consumers said such programs make them more likely to continue doing business with brands while two-thirds of them said they modify spending to maximize loyalty benefits and nearly three quarters said they would recommend brands with good loyalty programs, according to a recent Bond Brand Loyalty study, in partnership with Visa. (The annual study, in its seventh year, covered more than 400 loyalty programs across retail, CPG and other industries and surveyed this year over 28,000 North American consumers who participate in at least one program, most of them in the US.)

However, the study also suggested that many marketers may not have gotten their loyalty programs right. While the number of loyalty memberships each American consumer belongs to has risen each year to over 14 from under 11 in 2014, the number of programs consumers remain active in has declined to under 7 from about 8 in 2014.

While brands continue to increase their investment in these programs, the study also suggested many may not spend money in the right place. Less than half (46%)  of members said they are satisfied with their programs. And only 22% of loyalty members perceive their experience with the brand as better than that of non-member customers. With personalization being a big industry buzzword, only a quarter of loyalty members said they are happy with the level of personalization experience, the study found.

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“Nobody has cracked the code on personalization,” Claessen said. His firm works with clients from Gap and Under Armour to Ford and Johnson & Johnson, parent of such brands as Neutrogena and Tylenol.

However, the promise of the loyalty program is too tempting for brands to ignore. “We are seeing an increase in the activity from CPG and OEM (manufacturers) to create direct relationship with consumers,” Claessen said, adding the company’s clients now also include more traditionally wholesale brands.

Interestingly, as consumer spending shifts toward experiences rather than physical goods, so too do loyalty programs seem to have more success with experiential rewards: discounts and cashback rewards yield below-average customer satisfaction, while personalization and other experiential features make consumers happier.

Indeed, a Nielsen study published in December showed that non-monetary benefits that provide lifestyle benefits or offer exclusive access are valued by consumers around the world, with the percentage of millennials who value higher-priority service such as first-class seating or VIP customer service more than double that of Baby Boomers.

Marketers are trying to respond to that demand. Ulta offered members a free birthday gift of a sample of a new Lancôme mascara, providing access to the product before it became available in stores.

Panera Bread said it gives its members some of their favorite menu items as rewards. Panera said its 25 million loyalty membership is the largest in the restaurant industry.

Walgreens, meanwhile, allows its members to win points not just through purchases, but also for engaging in activities such as walking and managing their weight. Starbucks, which has more than 13 million rewards members in the US, also gives personalized offers and product suggestions. The company said recently that personalization will be a key part of its investment going forward.