CFOs Should Want to Lead the Charge for Enhanced Loyalty

A well-run loyalty program provides the data to make informed decisions, the flexibility to adapt to ROI targets, and perhaps most important, the customer behavioral insight necessary to accurately calculate Customer Lifetime Value.

Much has been written about the conflict between CFOs and the loyalty team.

If conflict exists, it is because the loyalty team is not reporting program results clearly and accurately, the program is designed poorly, or because the CFO is not aligned with the enterprise becoming customer centric.

If your business is out-of-step on any of these three problems, you need to fix them or growth will languish.

CFOs should be the primary proponent of an optimized loyalty program because they drive desirable customer behavior changes that can be achieved at a cost that is a fraction of the incremental margin earned.

NET PROMOTER SCORE, LIFETIME VALUE, AND MAXIMIZING ENTERPRISE VALUE

Most organizations have now embraced Net Promotor Score (NPS) to measure short-term, long-term, and segment satisfaction. While NPS is a simple measure, measuring it accurately – and measuring it accurately by customer segment – can be a challenge.

However, knowing who your promoters are, and how this group is growing (hopefully) directly reflects on Customer Lifetime Value (CLV). CLV is important because the Net Present Value (NPV) of the total Customer Lifetime Value is effectively the enterprise value. 

Even lifting NPS by 1% can drive significant incremental revenue.

Therefore, every person in the organization from the CEO to CFO to front-line team members should recognize the importance of building loyalty based on delivering a consistently good customer experience and good perceived value.

Please notice that I did not say ‘great’ experience or ‘great’ value. Consistently good performance builds trust and entrenches habits that typically keep customers from shopping around.

Tractor Supply Company (TSC) in the United States is a classic example. TSC was founded in 1939, went public in 1959 and is rarely on the radar screen for industry observers. However, their NPS score last year was 40; only eclipsed by Costco in traditional retail.

Why is Tractor Supply Company so special? In spite of economic cycles or leadership changes, they really know their customers. Importantly, the majority of their front-line employees have similar profiles to their customers which leads to empathy that goes both ways.

The granularity with which NPS is measured is where NPS gets really powerful. When you can differentiate the NPS score by different customer segments, you can understand who in each segment requires more attention or where operational problems exist.

With NPS by segment, you have strong insight into what can reduce the number of detractors, convert passives into promotors, and understand why promoters are in that category in order to find more customers like them. And, your segmentation can allow more personalized engagement with each group to increase conversion.

A little testing and learning with each segment will start to reveal the levers at your disposal to drive profitable incremental revenue.

CUSTOMERS CARE ABOUT ‘SOME’ POINTS THEY COLLECT

Most brands think their points or miles are great. Maybe 20%-25% of the brand’s customers would agree. The frequency of these customers ensures they earn enough value per year to make it worth their while participating in the loyalty value exchange. Research indicates the minimum threshold in value at about $25 per year.

All the effort and focus on top customers is great (for them) and reduces churn.

What few companies seem to consider is what they can do for the other 75% of less-frequent customers. How can we get them engaged enough that they will reveal insightful data about themselves so we can earn more share of wallet. After all, those customers are spending with other brands.

If you segment well, you will find another 10%-20% of mid-tail customers that could shift share-of-wallet with the right incentives. But the remaining 50%-60% simply do not need what you offer enough to spend more with you – and they won’t engage unless you offer them something useful to them based on their spending profile.

Once this is realized, you have a choice: 1) do little to nothing with that large number of people, or 2) allow them to earn a loyalty currency they really want to collect in exchange for more insights (i.e. data) about their lifestyle preferences and the ability to communicate with them.

In that massive amount of incremental data will be gold nuggets of insight that can help you increase the probability they will buy from you the next time they need what you sell.

The way to get them engaged is to offer other popular loyalty currencies – the points or miles that these mid-tail and longer-tail customers really want.

You can do this in two ways: 1) issue the other points/miles directly when customers shop with you, or 2) force the customer to earn your points (and therefore be registered in your loyalty program), but then allow them to exchange out into a few or dozens of other loyalty currencies.

In many markets and especially those subject to payments reform, the value of points on offer from bank credit cards, once a customer’s richest source of rewards, are rapidly declining. This decline is changing the shape of the loyalty industry globally but nowhere is it more pronounced now than in Australia today says Simon Rowles of Beyonde:

“Banks in Australia have advanced their view of loyalty from product-centric to customer-centric and are actively considering the transfer of their own points to programs that are more valued by customers … [and] global customer experience innovators such as Currency Alliance provide real opportunities to deliver what’s next in customer experience.”     

This perceived freedom to earn value where it is most meaningful appeals to nearly every customer. In reality, less than 10% of these customers will actually follow through and complete exchanges out of your currency. Therefore, the cash that needs to be paid out to a partner brand tends to be small.

And, if you are entirely rational and you’ve accounted for the cost of your own currency as deferred revenue, you should be perfectly happy to allow customers to exchange out. With modern technology and commercial agreements, you can set the exchange rate such that you make customers happy while reducing program liability – all at a cost below the estimated liability if the customer redeemed their points with you.

Of course, you should design your program and rewards catalog in such a way that the customer gets the best value when redeeming within your program (to de-incentivize exchange), but giving customers this choice has wide appeal and leads to much better data on a much broader base of customers.

And guess what? Your most frequent customers also shop with other brands. In that scenario, they may prefer to earn your loyalty currency from those other brands. This is fertile ground on which you can build a wide, open network of collaborating brands that give customers more freedom in exchange for insights about customer behavior across complementary spending categories.

A customer centric company, led by the CFO should be very happy to participate in this type of value exchange which means they will give the marketing teams the tools and latitude to drive engagement with a much broader audience.

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