Launching and sustaining a rewards program requires investment, focus and above all, patience. Once in market, the only way the program is optimized is if the sponsor utilizes marketing and other resources to call attention to the program and remind current members and prospects of the benefits of being a “loyal” patron of their business.
Today’s environment has all program sponsors, financial institutions and retailers alike, evaluating each line item of expense in their business looking for ways to generate savings that go straight to the bottom line. Certainly rewards program reserves and administrative expenses are not immune to such scrutiny and can be an easy target for financial analysts. After all, it really is just returning a portion of precious margin to customers…or is it?
Financial analysts have a tendency to underestimate the value that an organization garners from a rewards program. Financial institution sponsors will look at per card performance for rewards and non rewards customers, compare interchange revenues, net out the rewards reserve rate, and call it a day. Retailers, on the other hand, sometimes limit their evaluations to average sales per ticket, net out in-store discounts provided to rewards members and look no further. In each case, the broader benefit of the rewards program is underestimated, potentially…grossly underestimated.
There are several additional elements of rewards program value to consider. Perhaps the most under recognized with the greatest potential impact is customer attrition. The length of a rewards customer relationship as compared to a non-rewards customer can be eye opening to skeptics of the value of rewards programs to its sponsor. Not only should the revenue over time of the relationship be considered but also the cost of replacing that customer in the event that they do attrite. In addition, the number of products car- Originally Appeared in the January 2009 Edition of Loyalty Management Magazine ried by the customer, or the number of incremental visits is also important to include.
Another example, but perhaps the hardest to quantify, is the marketing value of various forms of communications that the rewards program supports. Each statement, e-mail and web visit supported by the rewards program would have to be replaced by another, less permissive, and often more costly, form of communication that equally impacts member awareness of the program and the sponsor’s value and brand.
This is not to say that opportunities do not exist to reduce rewards program costs. There are several strategies such as segmenting programs to target top tier customers with the most compelling value. There is also the potential for adjusting redemption options or raising redemption costs. Adding a nominal membership fee is also an option to consider. The impact of any of these changes however, needs to be closely monitored to quantify their impact on customer revenues.
At the end of the day, the value of a rewards program and of the customers participating in it should be carefully evaluated before employing any cost cutting measures. Those evaluating rewards program costs should look to the items mentioned above and consider others that may be unique to their organization. One potential challenge in all of this is the availability of behavioral data to support such an analysis. Those embarking on a new program construct should carefully consider the data points that will be necessary to support continued program analysis such that the program’s performance can continually be measured.
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