Loyalty programs -- those heralded marketing ploys pushed by 60% of all companies -- are not delivering for many of them.
That’s the conclusion of Leveraging Loyalty Programs Using Competitor-Based targeting, a study conducted by Brett Hollenbeck and Wayne Taylor and reported by the authors in Harvard Business Review on Thursday.
One mistake that many firms make is targeting loyalty promotions at their highest-spending customers.
What’s wrong with that?
“These are customers who would have spent their money regardless, rather than customers for whom discounts would actually convince them to spend more,” the authors write.
Retailers might be better off targeting based on location. This can aid them in poaching customers from local competitors or preventing defections by shoppers who are vulnerable the minute they pass a rival store.
The authors analyzed two years of purchase data from more than 10,000 individual customers, totaling 2.4 million purchases.
Prior to the COVID-19 pandemic, they also examined spending patterns such as “how often customers visited a store, how much they spent, and what items they purchased, both before and after joining the company’s loyalty program.”
What did they find?
“First, we found that for a large group of customers, signing up for the loyalty program had no noticeable impact on their behavior: They started collecting discounts (which they were no doubt happy about), but both the frequency of their visits and the quantity of their spending remained unchanged,” Hollenbeck and Taylor write.
The exceptions were consolidators, or customers who began buying more products from the retailer and upgraders who began buying more expensive versions of the same products they had been purchasing from the firm.
They also found firms might have to rethink some metrics.
Case in point: One retailer targeted customers with the highest historical spending levels. A single email increased their sign-up rate by 6.1%.
However, “this actually performed slightly worse than random targeting when it came to identifying customers for whom the loyalty program would actually increase profitability, and it was a lot less effective than a targeting strategy that incorporated customer vulnerability based on location data."
“Ultimately, it’s all about rethinking how you approach targeting,” Hollenbeck and Taylor write. “Instead of focusing on customers who are already high spenders, marketers should leverage automated tools to identify and intentionally focus promotions on the customers whose loyalty will be most valuable, and whose conversions will yield the greatest return.”
Hollenbeck is an assistant professor of marketing at the UCLA Anderson School of Management, and Taylor is an assistant professor of marketing at the Cox School of Business at Southern Methodist University.