Post on 09-Apr-2018
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What Do We Want from Our Customers?Loyalty, Rewards and Value:
Michael McCall
Research Fellow, Center for Hospitality Research
David Ogden
Principal Analytic Consultant
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The Origins of Loyalty Programs
S&H Green Stamps
Strengths
What did they not
provide
American Airlines
AAdvantage (1981) Strengths
What did they not
provide
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Fast Forward: Loyalty Programs 2009
Widely Available in Virtually All Industry Segments
Expected By Consumers
Lack of Empirical Evidence Demonstrating Positive
Effects
Some Evidence of Negative Effects
Lack of Strategic Focus and Measurable Outcomes
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You know, I have this customer reward program. It is
kind of expensive but, I feel like I have to have aprogram because everyone else has one. Honestly,
I dont know what if anything it actually does for me.
--- A Millennium Group Hotel Manager (2009)
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StructureofLoyaltyProgramProgramTiers
Numberof
Tiers
TierTransitions
StructureofRewardsRewardType
RewardMagnitude
RewardFrequency
Reward
Framing
CustomerFactorsCustomerProgramFit
RoleoftheCustomer
+
+
LoyaltyProgramEffectivenessIncreased
Purchase
Frequency
DecreasedCustomerPrice
Sensitivity
CustomerAdvocacy
ExtendedRelationshipLengths
IncreasedShare
of
Wallet
DevelopmentofConsumer
CommunityandConnectedness
IncreasedFirmPerformance
Conceptual Model of Loyalty Program Effectiveness
*McCall and Voorhees (2010), Cornell Hospitality Quarterly
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Research Overview
Data Collected from Loyalty Program Members inTwo Industries Sit Down Restaurants (N = 151) Air Travel (N = 334)
Measured
Perceptions of Brand Equity Cumulative Satisfaction Loyalty Program Quality Share of Wallet
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Key Results
Significant Main Effects on SOW
Brand Equity
Customer Satisfaction
Quality of Loyalty Program
Significant, Positive Interaction Effects Brand Equity x Quality of Loyalty Program
Customer Satisfaction x Quality of Loyalty Program
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Key Findings
As perceptions of the quality of loyaltyprogram improves, the positive effects of
brand equity and satisfaction increase
Further justification for the need to not onlyhave a loyalty program, but to ensure it isviewed as quality by your customer base.
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Research Overview
Data Provided by Firms in the Lodging Industry 8 Years of Transactional Data 100,000 Loyalty Program Members 1.2 Million Transactions
Measured Spending (Room, Food and Beverage, and Other Services) Basic Demographics
Upgrades and Downgrades Other Actions to the Account
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Key Results
Loyalty Program Members are well-represented as8 independent segments
One highly valued segment emerged
Two additional segments appear to increasespending based on the program
Five segments did not show substantial increase isspending following enrollment
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Key Findings
For of the loyalty program members, the enrollingin the program did not result in increased spending. This suggests a need to probe what benefits are missing
from the program itself
Highly valuable segment accounted for the majorityof the spending, but were grouped with other
lesser consumers in the top tier of the program. These results suggest a need for an ultra-premium
category that is reserved for a very small minority
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Future Research
Optimization of Program Structure and Rewards Develop tradeoffs between high consumer value
rewards and low cost rewards
Instill rewards that drive engagement to foster trueloyalty
Assessing the Benefits of Loyalty Programs Determine the effects of programs on consumerspending Assess moderating effects of competitive intensity,
promotional efforts, and program structure
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General Recommendations
Dont create price sensitivity among customers.
Think carefully about tier program management: Rewards
are easy to give hard to take away.
Think carefully about what the customer values.
Reward customer engagement.
We have more data than ever before on customers:
Separate true effects from artifacts.
Bridge the gap between academics and practice.
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Loyalty Programsvalue orientation
Loyaltyprogramsaretypicallydesignedto: increasespendingfrequency&monetaryvalue
increasecustomerretention
maintaincompetitivepositioning
acquireadditionalcustomerdata
CustomerLifetimeValue(CLV): measureofcashflowfromacustomer,past&future
basisformeasuringtrueeconomicvalue
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CLV 101: margin + retention = value
med
CLV
Margin $
Retentio
nLikeliho
od
Low High
High
learn-from &
acquire more
low
CLV
med
CLV
high
CLVimprove
improve
(eliminate as a last resort)
TheessenceofCLV gethighermargins,loooongintothefuture.
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CLVwere talkin big dollars here
Well-designed loyalty program reduced customer churn.How valuable is it to reduce churn? Consider
with a monthly margin of $30,
a monthly churn probability of 5%,
(and a discount rate of 10% for present-value calculations)
customer future value = $491decrease monthly churn probability to 4%...
customer future value = $600
For 10M customers, that is worth over $1 billionnet present value of incremental future cash flow!
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$
CLV the basic concept
CLV is a sum of returns, over the life of a customer.
Sum margins (profits) from a given customer, from the time you acquire thatcustomer until they are no longer your customer.
Time
$ $ $ $
$
$$ $ $Month
lyProfit
Acquisition
Churn
sum margins
over the life
of the
customer,
including the
cost of
acquisitionExample: -100 + 75 + 80 + + 63 = CLV
$ $
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$ $$Time
$ $ $ $
$
$$ $ $MonthlyProfit
UNKNOWNFUTURE
Customer
Profitability
Predictive
Modeling&
Forecasting
Whatisthevalueofeachcustomertoday?
Whatis
the
expected
amount
of
future
money?
WhatcanIdotoincreasefuturemoney?
Intelligenceto
Improve/
Optimize
CLVhow hard can it be?
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CLV step by step
mathematics,
econometrics,financial acumen
customer lifecycles,
retention modeling,margin projections
value creation,
relationship mgmt,improving & optimizing
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CLV visualize the math
$ $$ $ $ $$$ $ $ $ $
$ $$ $ $ $$$ $ $ $ $
$ $$ $ $ $$$ $ $ $ $
Margin projection,
adjusted forcumulativeretention
probability,
discountedto net
presentvalue,
and summed.
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Customer Value Mathmore than one choice
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CLV okaynow what?
Afterbuilding
aretention
model
Developingcustomerlevelmarginprojections
Andselectingtherightformulatoputitalltogether
Nowwhat?
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CLVleverage the mechanics
RetentionPropensity
FutureMargins
CustomerDemographicsCustomerExperienceCustomerBehaviorCustomerLoyalty/Tenure
MarketingTreatments
up/crosssell,retention,acquisition
RevenueAccountAdjustmentsBadDebtCost
to
Acquire
CosttoMaintain/ServeHistoric
Value
Future
Value
CLVpricing
costcontrols
customersegmentation
channelstrategy
processimprovements
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BusinessValue
OptimizationData / Text Mining
ForecastingReporting / OLAP
Data ManagementData Access
Predictive Modeling
Data Information Knowledge Intelligence
Statistical Analysis
SAS Analyticsvalue evolution
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Final Thought
We are not talking about best practices, we are talking about NEXT
PRACTICES!
Jim Davis, Sr. Vice President and Chief Marketing Officer, SAS
(Premier Business Leadership Series, Las Vegas, NV, October 28, 2009)
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