oyalty: It’s Killing Your Business; There are plenty of reasons why loyalty programs fail – they’re easy to copy, they’re more expensive than they need to be, they focus on the wrong people
April 9, 2014 Leave a comment
Loyalty: It’s Killing Your Business
March 20, 2014
If you’re like me, your wallet or purse is bulging with loyalty cards and your inbox is flooded with loyalty offers. We’re not alone. The average US household belongs to an astonishing 23 loyalty programs. And the numbers are increasing. Most of us could use a loyalty program to keep track of all of our loyalty programs!
So, with all that emphasis on loyalty, you’d think that these programs would be a cash cow for companies. And you’d be wrong. I was pretty shocked to learn that loyalty programs are actually destroying value for many companies. You should read the complete piece (Making loyalty pay: Six lessons from the innovators) but the McKinsey research showed that those companies that spend more on loyalty, or have more visible loyalty programs, than their peers grow at about the same rate – or slightly slower – than those that do not.
In addition, companies surveyed that had higher loyalty spend also had EBITDA margins that were about 10 percent lower than companies in the same sectors that spent less on loyalty. You can see some of the data here in this slideshare:
Those are pretty stunning numbers, especially given that US companies spend $50 billion a year on loyalty programs alone. But the picture doesn’t have to be negative. Businesses that get loyalty right can see those programs generate as much as 20 percent of a company’s profits.
There are plenty of reasons why loyalty programs fail – they’re easy to copy, they’re more expensive than they need to be, they focus on the wrong people. Those that succeed, however, are clear about their objectives – something that happens all too rarely – and have a crystal clear view of which customers are really valuable and, therefore, which ones to focus their efforts on. Successful loyalty programs understand both the profit customers generate and the influence they have more broadly on sales. The real payoff from loyalty programs comes from locking in those customers who drive profitability.
So, is your loyalty program paying off or just paying out?
Learn more about loyalty and other topics on the McKinsey on Marketing & Sales site. Keep up with our latest insights by signing up for our newsletter or following us on Twitter@McK_MktgSales. And please follow me on Twitter @davidedelman.
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