Loyalty Programs should Get Customers
Then, Keep and Grow them.
In September 2024, Myer, an iconic Australian department store retailer (think Selfridges, Macy's), announced their financial results, including data on the performance of their long-running Myer One loyalty program. The results made us pause.
Myer's loyalty program, Myer One, had an outstanding year: Tag rates were up to 77.2%, 4.4 million members were active, and 706,000 new members were added. For Myer, the company, it wasn't a good year. Gross Profit was down 2.5%, total sales were down 2.9%, and stores were closed.
Myer's not alone. There’s a raft of struggling retailers whose financials and results are going backwards but who have a high performing loyalty program.
Big W, a discount retailer, saw loyalty program scan rates increase to a peak of 58% in Q4, with a 90% fall in operating profit. Dan Murphys, a liquor retailer, reported that its loyalty program members were responsible for 90% of sales and spent 80% more than non-members, while its share price fell 6.8% on weaker-than-expected sales. Super Retail reported 11.5 million program members were responsible for 77% of group sales, with EBIT down 9% on a 2% sales increase (they opened 28 new stores). Jeweller Michael Hill grew it’s loyalty program membership by a factor of 4 to 2.5 million with members delivering 80% of sales and 80% higher average transaction value while Michael Hill the company’s EBIT plunged 76%. New Zealand based retail group The Warehouse Group has been expanding its loyalty program across brands and announced 1.9 million members, while Warehouse Group the company posted a loss and it’s share price is the lowest it’s ever been.
How can this happen?
Two factors combine to help explain this: self-selection (and other biases) and the Ehrenberg Bass Marketing Laws, which describe how brands grow.
Customers already likely to purchase your brand join your loyalty program, in higher proportions and bring their higher value with them. Less committed and/or lower-value customers do not participate at the same rate, "Why bother?”: self-selection. Engaged customers join the program earlier and stay longer, so the density of engaged members is highest in the period following the program launch.
Over time, as more light buyers are enticed to enrol in the program, the density of valuable customers decreases; the membership ‘regresses to the mean' of customer value.
At the same time, brands grow relative to the market by selling to the larger population of light-buying, unengaged customers. As brand growth reverses, these customers stop buying first, increasing the density of engaged, valuable members in the loyalty program again. Having fewer buyers reduces company performance while increasing the relative value of the best customers who remain loyal to the brand and active in the loyalty program.
Program performance looks better, company performance not so much.
The recent economic environment for retailers has been challenging, and many are reporting flat or falling sales as regulators battle inflation. As Warren Buffet said, “Only when the tide goes out do you learn who has been swimming naked.” Ellipsis holds some loyalty principles that are non-negotiable for all tides.
- Measure program performance correctly. Rigorous attribution of incremental return for program cost is crucial to good investment decision-making. Don't accept false measures like 'members spend more than non-members" as evidence that all is well; they could drive you broke.
- Make sure your program also delivers some value to light, uncommitted and buyers experimenting with your brand, not just high-value advocates. This requires disciplined expense allocation and focusing on secondary rewards, such as points, that allow targeted cost control. Make it easy for customers to get into the habit of buying from you because rewards make your brand mentally alluring when deciding.
- Use the program as a new customer acquisition tool, supporting initiatives to sell to new and light buyers. It worked for Tesco and Boots, who increased their market share by 2% and 4% within a few months with program launch promotions. The rewards should become part of the brand’s mental proposition for customers.
If this discussion has caused you any concerns, help is available; get in touch with us at Ellipsis.
We are Ellipsis, The Loyalty Experts. We help find, understand, measure, manage and grow customer value. We’re here to help, please get in touch…