Does the investment you make in enrolling your customers in loyalty programs result in quantifiable benefits for your firm? That’s the question that Mike McCall, Ph.D., and his co-author Clay Voorhees Ph.D., are attempting to answer in their current research project for the Cornell Center for Hospitality Research (CHR). Mike will provide more detail on his findings so far in our upcoming Cornell CHR/SAS webcast later this month, but I had a chance to catch up with him in advance of the webcast.
“Few firms have attempted to identify whether loyalty programs provide lift, or are just another cost center,” Mike told me. “The real question for us to answer with this research is if there is a way to measure that lift,” he explained. And before you can identify in which camp your loyalty program belongs, you need to understand why people join loyalty programs. Mike thinks that most people join loyalty programs to feel special. “If a firm is enrolling everyone that comes through the door they may not be creating the kind of program that encourages loyalty through feeling special,” he told me. In fact, a firm may be bringing in people who are looking for discounts or deals and not necessarily looking to be one of your firm’s regular customers.
“Not everyone who joins a loyalty program necessarily contributes to your bottom line,” Mike elaborated. Mike looked at two groups of people when conducting his analysis: those that joined the program and those that didn’t. “It was those people who were made to feel special by the program that tended to contribute positively to the ROI of program,” he said. When I asked how customers were made to feel special, Mike explained that they were those customers were promoted within the program within the first year.
Mike encourages firms to look carefully at the customers they are enrolling in their loyalty program, and think about the various characteristics they would want from a loyalty program member. “For example; are they going to be repeat customers, are they going to spread positive word-of-mouth, are they going to the kind of customers that you will want to promote to a higher level in the program?” Mike explained. Mike notes that those customers that you are likely to promote are those that directly contribute to the lift gained from loyalty programs. “Those are the customers that you need to focus on enrolling,” he said.
So far, there has not been a lot of analysis of the impact of loyalty programs. Generally, Mike thinks that there is a lift that can be gained from loyalty programs. How you should maximize, or optimize that lift is another story. “To get started, you need to collect the right data on your customers,” Mike explains. Then, it is all down to analytics. Mike finds that many firms implement loyalty programs because every other firm has one. By using analytics to understand what drives loyalty and profitability from all of your customers, you can then identify a strategy for your loyalty program that is aimed at maximizing loyalty and profitability. “That’s how you should be measuring your loyalty program, not just by how many customers have been enrolled,” Mike said.
You may remember Mike from our conversation last February on whether loyalty programs actually drive customer loyalty. Mike will present the results of his latest research,”How Big is Too Big? Decomposing the Effects of Reward Program Enrollment on Profitability” in the upcoming SAS and Center for Hospitality Research joint webcast later this month.