Loyalty Webcast

8/8/2019 Loyalty Webcast

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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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Loyalty Webcast

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