Cutting Costs for Loyalty Programs

Loyalty marketing is a major investment for retailers. Most organizations have devoted considerable time and resources to ensure their customer acquisition efforts deliver lifetime value. For companies with points-based loyalty programs, that investment is a significant P&L contributor. For many, loyalty marketing is often the foundation of customer insight and brand affinity.

Unfortunately, with stores shuttered and economic havoc in 2020, it's certain that retailers will be facing major cuts to operating expense and at the same time trying to figure out ways to retain and grow profitable customer spend. So, what are you going to do when “the hatchet comes down”?

First, don’t panic! Here's a structured, strategic process for you to follow. Doing so will help you meet your financial objectives with minimal impact on program performance, and perhaps be able to cut spending while improving your return on investment.

Second, approach this as you would any challenging project. Start with your assumptions and parameters, then move from the general to the specific, from major to minor.

Overall Considerations

The first thing we like to consider is whether this is voluntary or a nonvoluntary cost-cutting demand by management. Let’s assume this is nonvoluntary, as your program is performing to expectations, and all operational as well as technology solutions are performing well. You need to cut a program budget that's in good working order.

Next, consider how willing you are to make customer-facing changes. The scale on this ranges from a total revamp of the program to being seamless. In other words, either “everything is on the table”; you can tolerate significant, specific or minor changes; or all changes must be completely transparent to the customer.

Finally, look at your key performance indicators (KPIs) and how they match up to your forecast and past performance (taking into account the uniqueness of 2020). Some common KPIs are:

• program enrollment;
• active membership;
• lifetime value;
• promotional incremental lift;
• redemption rates and mix;
• communication engagement rates; and
• web/mobile/social engagement rates.

Completing these steps will help determine where you should make significant budget cuts.

Diagnostics

Once you have a good handle on the overall landscape, the next steps are to diagnose each budget area within your program to determine the best plan of action to meet your budget and ROI requirements. Let’s start from the general and move to the specific.

Your program is likely segmented into budget areas. Each of these areas has many subsections. The ultimate goal is to analyze each subsection to determine the opportunity for lowering costs. The key is to do this logically and strategically.

First, understand where you're currently spending money. The chart below is an example of how some programs segment their costs. The percent of budget is shown only for hard-cost sections, and provided as an illustration for comparative purposes.

Credit: Ascendant Loyalty Marketing

When probing into these areas, take a logical approach. First, determine your percent of costs for each spending area. Next, note which areas — or sections within an area — are “untouchable.” However, be careful, something you may think isn't feasible to review may actually be a strong candidate. The most common example is your technology platform. Whether you're using a home-grown or outsourced solution, its development was likely to have been an arduous journey and you have little desire to change providers and deal with new integration efforts. But don’t be afraid to explore this area, as there have been advances in technology features/functionality and costs have come way down. The complexity of updating your loyalty technology platform may be much less painful than you suspect.

Next, look for obvious areas of opportunity that you or your team are confident can produce savings without sacrificing performance. Communications, personnel and technology are typically the best areas for this type of reduction. Look at both the cadence of your communications and the support required. Are there lower-cost alternatives? Can you move to more digital communications vs. print? Can you stretch out the shelf life of your creative assets?

Go through each line item of your outsourced services and software contracts to determine the best areas for trimming costs. Also, look at your in-house delivery infrastructure for any of these areas and determine if an outsourced model could provide substantial savings.

At some point, you'll meet your budgeting goals — hopefully without much sacrifice or disruption to your program and organization.

Final Thoughts

Here are a few tips to consider:

1. Be conscious of your advice sources. Make certain you're getting unbiased recommendations.
2. If you uncover a surefire way to deliver more with the same budget, consider providing that solution as an alternative. While it’s likely to be met with a frown from the CFO, you just might have a big win for the organization.

Jay Weinberg is co-founder and partner of Ascendant Loyalty Marketing, loyalty marketing experts laser-focused on helping consumer-focused, middle-market companies efficiently and effectively improve customer retention.