Leveraging the Loyalty Margin: Rewards Programs That Work
Dylan Bolden, Patrick Hadlock, and Keith Melker
bcg.perspectives | April 21, 2014
Loyalty programs are top of mind these days. As the competition for share of wallet—or shopping bag or household budget—intensifies, more consumer product and service companies are adding loyalty programs to their marketing mix, and customers are signing up. The number of rewards programs jumped 27 percent from 2010 through 2012, according to research firm Colloquy. Membership has soared as well. The average U.S. household has 22 loyalty-program memberships and actively uses 10. (How many loyalty cards are in your wallet? How many tags hang on your key chain?) Some companies generate up to 60 percent of their revenues from loyalty program members.
Loyalty programs began as a tool of the travel industry, in which customer spending is high but the incremental cost of rewards is low. Customers assign a high value to a free hotel room or airline ticket, while travel companies can give these away virtually for nothing so long as the hotel or flight is not sold out. Loyalty programs have expanded into a host of other sectors with very different economics—in which rewards cost companies real money—including everyday-purchase categories with lower average prices and margins, such as convenience stores and gas stations. Many brands are now launching their first loyalty programs; others are relaunching programs for the third or fourth time. Long-time loyalty players continually adjust and improve their programs, raising the bar for new entrants. Market leaders refine, redefine, and reinvent the loyalty experience in a continuous effort to push incremental share—the combination of growth in membership and the additional amount spent by members—to new heights.