Card Loyalty: The Pursuit of the Best Rewards Blend

  Retail card marketers continually struggle to create reliable value propositions to change customer behavior when there is little data on the blend of recognition and rewards benefits that are most effective. This conundrum has been apparent for more than 20 years, and faced with a lack of quantifiable data, popular wisdom has dictated that a loyalty program should contain some mix of reward and recognition benefits with an overlay of customer dialogue.
  The results of a recent research project for a national retailer suggest that a blended approach of hard (reward) and soft (recognition) benefits is the optimal way to improve retail card revenue and to reduce customer attrition.
  In the research, a large retailer with more than 400 U.S. stores and annual sales of more than $4 billion evaluated five value propositions in test and control markets designed to be statistically parallel. The audience consisted of consumers and small-business owner/operators who already were visible in the retailer's transactional database because of their propensity to use the merchant's private-label credit card.
  The business objectives called for a lift in average spend per customer of more than 20% and an improvement in the rate of customer attrition by 10%. Given the higher-value characteristics of the target audience, achieving these objectives would result in a substantial financial benefit and return on investment for the retailer.
  More than 75 stores participated in two consecutive six-month tests in which more than 60,000 customers from the retailer's credit card file were auto-enrolled in one of five loyalty program scenarios, or cells:
  The Reward cell offered loyalty-program members the ability to accrue points they could redeem for products already sold by the retailer. The rate of accrual was set at 2% to 4% of the sale.
  The Service cell offered members discounts on select items at up to 50% off, along with other soft benefits that included special checkout lanes and preferred parking.
  The Combination cell offered a blended value proposition that combined the points-accrual model of the reward test with the special privileges of the service test.
  The Rebate cell offered members 2% to 4% rebates on all purchases that they could receive as cash back or as balance reductions on their private-label credit card account.
  The Awareness cell was a communication-only strategy that used incremental, targeted and personalized direct mail to reinforce existing services offered by the retailer to the private-label cardholders.
  At the conclusion of the test period the Combination cell showed the best performance, while the Reward and Rebate cells also generated positive revenue lift. Though the Rebate cell came close to stated lift objectives, the Combination cell flirted with achieving or slightly surpassing the established metrics for revenue change. The Combination cell outperformed the Rebate cell by more than 3.5% of revenue lift.
  For attrition measures-defined as no transactions in the preceding 12 months-only the Reward and Combination cells generated a positive result versus control. While both cells surpassed the pre-established metric for average spend and attrition, the Combination cell did so with overwhelming superiority. The Rewards cell surpassed the metric by 100% and the Combination cell by almost 200%.
  Rebate Failure
  The Rebate test failed to generate a positive attrition benefit. Both the Awareness and Service cells failed to register a positive result versus control for either lift or retention. Attrition underperformed the Combination cell by 120% or more for these three cells and revenue lift for Awareness and Service cells underperformed the combination by 140% or more.
  The Combination cell value proposition not only generated the greatest revenue lift, but it came very close to achieving very ambitious objectives. This same proposition blew away the attrition objective. Although this value proposition carried higher execution costs, it was the clear winner in the value-proposition debate. On a per-member basis the cost was almost 1% higher in the Combination cell versus the Rebate cell.
  The Reward scenario, a "hard benefits-only" strategy, also experienced increased revenue lift and provided an attrition benefit, but not at levels sufficient to meet financial objectives. It missed the revenue goal by 7% and added costs of almost 2% per member compared with the Rebate cell. The added cost of running and maintaining the points program and merchandise-redemption options required either greater efficiency of scale, stronger lift or greater time for the attrition benefits to produce additional return on investment.
  The Rebate-cell results confirmed the belief that rebates are an effective tool for motivating a short-term jump in spend. But they are ineffective at sustaining sufficient interest and loyalty to stop churn.
  The analysis did not concentrate solely on the primary metrics associated with loyalty-program objectives. Additional evaluations examined the overall value of the members in each test cell.
  This evaluation is based on a proprietary customer-value score methodology. It used a composite of recency, frequency and monetary-spend measures, as well as the principle of transaction velocity (a way of looking at the risk of attrition) to derive value scores for each cell and indexed them to a benchmark of the Service cell.
  The result? Members in the Combination value-proposition test returned value scores a full 10 percentage points higher than benchmark market members. Hence, the Combination cell-with its blend of hard and soft benefits-not only produced improved retention and increased yield, but it also delivered the highest overall average customer value to the retail organization.
  Loyalty programs with hard-only or soft-only benefits can be successful. Likewise, many programs featuring a combination of hard and soft benefits have failed miserably. But in a study of nearly 2,000 loyalty programs in the Colloquy archives (1990-2004), 38% of all new loyalty initiatives failed.
  'Talking Back'
  Of those programs pulled from the market, 77% had weak or no soft benefits, 75% had no demonstrated dialogue tactics with their best customers, and 82% did not appear to use the customer information they collected to advance their program, refine their measures or improve the value proposition for their members.
  This is not pure coincidence. Rather, it is the art and science of loyalty marketing talking back to the audience that created it.
  Just like most customer bases, this case study is unique. Taken alone, it may not settle the great value-proposition debate. But it does shed powerful light on the subject. Certainly, it invites more study, greater experimentation and rigorous research. The entire loyalty industry would benefit.
  Terri Gaughan is a consultant for Colloquy, a provider of loyalty-marketing publishing, consulting, research and educational services. Gaughan can be reached at terri.gaughancolloquy.com.
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