Business Journal

Making Loyalty Programs Work

Companies must first fully engage customers and activate their participants

Telltale markers are everywhere: the sliver of plastic clipped to a key chain, the colorful card positioned deep inside a purse, the frequent email reminders about a "special" deal available only to members of a maybe not-so-exclusive club. These are just a few of the loyalty and rewards program vehicles that companies use to tether themselves to their customers.

Loyalty programs are effective at activating only a relatively small percentage of a company's customer base.

For decades, companies at the forefront of consumer marketing have developed loyalty and rewards programs in an attempt to grow their business by retaining their most valuable customers. And companies continue to spend massive amounts of money to create and market these programs and keep key participants. But has their investment been worth it?

For the most part, the answer is no. According to Gallup's analysis, loyalty programs are effective at activating only a relatively small percentage of a company's customer base. Gallup researchers define activated participants as those who say they are "much more likely" to shop or use the given brand because of their membership with the brand's loyalty or rewards program and who also say they are "much less likely" or "a little less likely" to use other brands because of their membership with the program.

"Across all industries, companies spend two billion dollars each year on loyalty programs. That's a significant amount," says Jordan Katz, a managing consultant at Gallup. "What isn't significant, though, is the positive effect most companies receive through these programs. Most of these programs leave a lot of money on the table."

In addition, the analysis reveals extreme differences in participants' satisfaction with these programs and their perceived quality. These differences are even more pronounced when considering the participants' engagement levels. In the end, loyalty program participants who are both activated and fully engaged spend more money than other participants.

To begin its research, Gallup asked survey respondents whether they currently participate in any loyalty programs for nine types of retailers. Participation varied by category, from more than half of respondents to 1 in 10. (See graphic "Who Participates in Loyalty Programs?")

Who Participates in Loyalty Programs?

Gallup researchers then focused on four categories -- grocery stores, credit cards, airlines, and department stores -- to better understand the behaviors associated with using loyalty and rewards programs. Between frequent-flier mileage, cash-back or points programs, and "plus" cards, many businesses in these categories offer similar programs. So Gallup took an in-depth look at respondents who said they participate in these initiatives. At least one-quarter of survey respondents indicated that they participate in programs with a grocer (57%), credit card company (47%), airline (33%), or department store (27%).

Gallup researchers didn't look only at respondents' participation with just any retailer in these categories. They probed further, asking respondents to name which grocery store, credit card provider, airline, or department store they used most often in the past 12 months. Of course, some respondents didn't use one specific vendor in an area in the past year. But Gallup wanted to know more about the behaviors of those who did.

Getting participants "activated"

Relatively small percentages of shoppers who enroll in loyalty or rewards programs with their preferred brand in each category are considered activated participants in these programs. For example, nearly 9 in 10 respondents mentioned the name of a specific grocery store where they shopped most often in the last year. Of that group of shoppers, one-half said they participate in that store's loyalty or rewards program. Among those respondents, 28% are activated participants in their primary grocery store's loyalty program. That is 14% of those who have a primary grocer.

The other three categories have similar percentages of activated loyalty program participants:

  • About one-half of respondents (49%) said they flew on a primary airline in the past year; of that group, about half (52%) participate in a loyalty program with the airline. But just one-third of those participants are activated with the airline's loyalty program -- or 17% of those with a primary airline.
  • Eighty percent of respondents said they have a primary department store where they shopped during the past 12 months, but only 30% of that group participates in that store's loyalty or rewards program. About one in four (23%) of those participants are activated with their primary store's program -- or 7% of shoppers who have a primary department store.
  • About three-quarters of respondents (74%) said they have a primary credit card, and 66% said they participate in a loyalty program with that provider. Less than half (42%) are activated participants in the card provider's loyalty program -- or 28% of consumers with a primary credit card provider.

"The credit card industry probably feels great that three-quarters of people have a card they prefer over others," Katz says. "But less than half of those people are activated participants with their primary card's loyalty program. That means a company may pay millions of dollars to try to lure customers into such programs, but that investment doesn't change the behaviors of a large percentage of them. It offers no perceivable impact above that of a regular customer."

The main driver of activation is engagement.

Gallup asked respondents to rate their level of satisfaction with the rewards program in which they participate for their primary grocery store, credit card provider, airline, or department store. The analysis shows significant differences in how activated and inactivated participants view their satisfaction with and perceive the quality of their primary loyalty program.

Activated participants are more than twice as likely as inactivated participants to be extremely satisfied in a primary grocery store, department store, or credit card provider reward program. And activated airline rewards program participants are three times as likely as inactivated participants to be extremely satisfied with their primary program.

Respondents also rated whether their primary loyalty program in each category was much worse, a little worse, about the same, a little better, or much better than other programs in the respective categories. Again, Gallup found dramatic differences between activated and inactivated program participants when measuring consumers' perceived quality of their primary program compared to all others. Across all four categories, activated participants are more than three times as likely as inactivated users to say their primary loyalty program is much better than those offered by competitors. So it is critical for organizations to activate their loyalty program participants.

Engaging customers maximizes loyalty programs

The chasm between activated and inactivated loyalty program participants poses a challenge to organizations, and the solution has important implications on a brand's bottom line. How can these businesses convert inactivated participants to activated ones? The answer is straightforward: engage them.

For decades, Gallup has researched customer engagement -- that is, how emotionally attached and attitudinally loyal to companies, brands, products, and services consumers are. This engagement is the type of loyalty that rewards programs try to cultivate -- the kind of emotional connection and consumer dedication that is invaluable to companies in any industry. (See graphic "How Engaged Are Your Customers?")

How Engaged Are Your Customers?The analysis found that fully engaged customers of primary loyalty programs in the four categories are about twice as likely as customers at any other engagement level to be activated program participants. "The main driver of activation is engagement," Katz says. "The best way to create high-performing customers is to focus on the elements of customer engagement, track its impact on activation and performance over time, and take direct action to increase both."

Activated participants in primary loyalty and rewards programs aren't necessarily fully engaged with the companies that offer those programs. But when they are, the power of customer engagement is evident. Participants who are activated and fully engaged are exponentially more likely to be satisfied with their primary loyalty program. These activated, fully engaged consumers are also more likely than inactivated and activated participants to rate their primary program as much better than the competition.

Specifically, among department store loyalty program participants, nearly 8 in 10 activated and fully engaged participants are extremely satisfied with their primary program. And nearly one-half of activated, fully engaged participants perceive their primary program's quality as much better than the programs offered by the competition. Satisfaction nearly doubles when activated participants in credit card loyalty programs are also fully engaged with their primary card loyalty program. One-half of these activated, fully engaged participants perceive their program's quality as much better than that of the competition. Gallup found similar results when comparing activated, fully engaged participants to inactivated and activated participants in airline and grocery store loyalty programs.

"We looked deeper into the data and found that activating participants is not an end game in itself. There is a way to create more value, and it comes from fully engaging these activated customers by building an emotional connection with your program, brand, or product," Katz says. "If you're not doing that -- if you're not measuring, tracking, and acting to create a strong relationship between your customers and your company's program, brand, or product -- your program is falling short."

Improving wallet share by engaging customers

The marketing message surrounding these loyalty programs might be rooted in rewarding customers or offering exclusive perks for frequent shoppers. But companies wouldn't engage in these initiatives without the potential for a significant payout. Gallup found that program participants who are both activated and fully engaged contribute a larger share of wallet to retailers in three of the four categories.

If you're not fully engaging and activating your customers, you're leaving millions of dollars on the table.

The effect of moving participants from inactivated to activated and fully engaged on wallet share can mean millions of dollars. "A difference of six to ten percent of wallet share across the credit card industry, for example, can be enormous," Katz says.

"Let's look at American Express, for example. Worldwide card spending with American Express was $187.9 billion in the first quarter of 2011 alone," he says. "Customers spent about $3,400 on average. A twelve percentage point premium between activated and fully engaged participants and inactivated participants, then, could mean a lot of money to a credit card provider like American Express.

"When we compare the difference between participants who are activated and fully engaged versus inactivated participants, there is at least an eleven percentage point premium in wallet share," Katz says. "Is it fair to extrapolate that entire premium out across the customer base? No, because it's unlikely that a company will fully engage and activate its entire group of program participants. But shifting even a small percentage of participants from inactivated to activated and fully engaged represents an enormous impact on overall spending."

Perhaps the most surprising finding is that respondents who do not participate in a loyalty program with their primary brands in these categories but who are fully engaged customers of those brands contribute a greater wallet share than do inactivated loyalty program participants. (See graphic "Which Customers Provide the Greatest Share of Wallet?")

Which Customers Provide the Greatest Share of Wallet?

Giving participants what they want

Activating and fully engaging customers is the key to maximizing investment in loyalty programs. But how do you get them to participate in the first place? And how do you satisfy this captive customer base?

Gallup's research finds that among loyalty program participants, the main drivers of engagement and activation vary by category: For activated and fully engaged department store participants in their primary store's loyalty program, the program itself is a key driver, followed by the quality of discounts and the quality of rewards. Among activated and fully engaged airline loyalty program participants, the top drivers are the quality of rewards, the program itself, and the ease of redeeming rewards.

The top drivers of engagement and activation in a grocery story loyalty program are the program itself, the quality of discounts, and the quality of rewards. And when it comes to credit card loyalty programs, the program itself is the top driver of activation and participation, followed by the quality of rewards and the speed with which participants earn them.

Companies that cannot activate their loyalty program participants and fully engage them with their brand are wasting what they spend on creating and marketing these programs. "If you're not taking the time or putting the proper resources toward fully engaging and activating your customers, you're leaving millions of dollars on the table," Katz says. "Fully engaging customers is the key to realizing a better return on investment."

Survey Methods

Results are based on a Gallup Panel study consisting of mail and Web surveys completed by 22,905 national adults, aged 18 and older. The study was conducted in June and July 2010. Gallup Panel members are recruited through random selection methods. The panel is weighted so that it is demographically representative of the U.S. adult population. For results based on this sample, one can say with 95% confidence that the maximum margin of sampling error is ±1.12 percentage points. Margins of sampling errors vary for individual subsamples. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

Bryant Ott is a writer and editor at Gallup.
Gallup http://www.gallup.com/businessjournal/149570/Making-Loyalty-Programs-Work.aspx Gallup World Headquarters, 901 F Street, Washington, D.C., 20001, U.S.A +1 202.715.3030