March 14, 2017
What are you doing to measure the indirect benefits of your customer loyalty program?
You know you need a loyalty program to run a successful credit card program. But margin pressures mean program performance is constantly under scrutiny. To make sure your loyalty program truly meets all the needs of your financial institution, it’s vital that you measure its direct benefits as well as its indirect ones.
Research shows that the majority of consumers won’t consider applying for a credit card unless it comes with rewards. Meanwhile, the competitive landscape demands that rewards be a part of a successful card portfolio – 60 percent of all payment cards have a rewards component, and 80 percent of all credit card spending goes on cards with rewards, according to Colloquy.
But the different ways of measuring effectiveness of the loyalty programs is an ongoing topic of discussion.
I divide the cost side of a loyalty program into two parts: administrative costs and redemption costs. Administrative costs include paying the party that’s supporting your program to get you into the game. You need a robust scoring platform and communications channel, and you typically pay based on a monthly fee per account.
The second cost component – the redemption cost – includes the price of all awards provided to the consumer in exchange for the loyalty currency (points, cash back, etc.). This can run as much as 80 to 90 percent of your overall customer reward program cost.
I’ll provide a typical example. A big issuer might offer 30,000 points if a consumer charges $3,000 over the course of 90 days after signing up and a card. In theory, 90 days is enough time to habituate use of the new card. After 90 days, the consumer has accumulated his or her signing bonus, plus the points associated with money spent on the card – enough to get the plane ticket, hotel room or whatever redemption offer motivated the consumer to sign up.
In the end, the more points consumers accumulate, the more likely they are to redeem them. At the same time, the more mature the loyalty program, the more people tend to redeem points, thus increasing the cost of the program.
While the cost side of a loyalty program is easily computed, the benefits side gets trickier because different parts of an organization have different criteria for measuring value. The social media director may look at the number of “likes” after a promotion and consider social media feedback a crucial ingredient for a brand recognition. The CFO, on the other hand, may only take direct benefits – tangible benefits that can be mathematically computed as a direct effect of the program – into account.
Direct benefits are measurable and include factors such as the incremental spend and number of transactions one gets on a card with rewards. Because consumers want to accumulate points, they purchase bigger ticket items on their cards. Bigger tickets result in higher interchange income and, in many instances, result in revolving credit balances which produce interest revenue and other fees. The issuer can also promote spending with retailers where interchange rates are higher and boost card-related revenue in that way.
Indirect, soft benefits are anything and everything that is hard to quantify. Although they may be hard to evaluate, indirect benefits are essential to building a successful brand and consumer loyalty. Many successful, national brands are starting to put increasing emphasis on indirect benefits, recognizing the impact on brand recognition and revenue over time, especially among millennials.
Here’s an example of an indirect benefit of points, drawn from a real customer interaction in which Mladen Vladic, FIS Loyalty Services General Manager, assisted. A bank’s customer was upset because of an incorrect APR assessed on a car loan. When looking up the customer’s record to solve the problem, the bank’s branch manager also noticed that this customer had a credit card with the bank. The manager then offered a goodwill gesture of 5,000 loyalty points, which further sweetened the deal for the customer and ended the transaction on an even more positive note.
Let’s weigh 5,000 points against a $50 gift card as the goodwill gesture. Which is better? I’d argue that points are better. Not only does it accomplish the main purpose – calming the customer and increasing retention – but the company also reaps the benefit of float. If that wasn’t enough, banks also benefit by breakage – unredeemed points that never get redeemed by cardholders.
Meanwhile, the financial institution improves the stickiness of the customer because, if consumers are pleased with your program, they are more likely to buy more products from you, especially if you use points to incentivize additional purchases such as car loans.
Companies must measure indirect benefits of loyalty programs. Do your cardholders have a better opinion of your company? Do they buy a higher percentage of the products from you? Will they buy their next product from you? Will they finance their next big purchase through your financial institution? Every yes to questions like these increases the value of your program.
In order to make sure your loyalty program stays successful, you’ll need proper balance and alignment between direct and indirect benefits, thus allowing each benefit to be weighed properly against another. If you’re unsure how to weigh your benefits, contact your loyalty program partner and ask for assistance.
Payments Leader from FIS provides insights on credit, loyalty, fraud and emerging payments strategies through blog posts from our industry experienced authors.
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