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Reinventing retention The Loyalty Growth Quadrant

The most successful brands across the world don’t need a designated loyalty programme to retain customers. Their services speak for themselves. Customers trust them and don’t need discounts and perks to stay loyal. However, in the journey to becoming a “super-brand”, what can we do to keep customers satisfied in the long-run? Are there new incentives we can explore that deepen engagement? Developing loyalty can be more of an art than a science: in this paper we stretch thinking beyond traditional loyalty schemes to a comprehensive behaviour model. Boosting Customer Lifetime Value (CLV) We believe that the objective of a loyalty strategy is to maximise CLV through deeper customer engagement. On the surface, CLV is the amount of spend per year multiplied by the number of years as a customer. We take this concept further. What if we could incentivise more sales through peer recommendation? What if an incentive scheme can improve profitability by bringing the cost to serve down through self care and community engagement? What if we could facilitate a greater share of wallet? Extending beyond traditional loyalty Most loyalty strategies directly incentivise just two activities – staying for longer and spending more on core products. This traditional loyalty model is referred to as the ‘earn and burn’.

We propose a loyalty strategy which extends way beyond this – one which incentivises a richer set of activities, whilst expanding the choice of offers. We refer to this as the Loyalty Growth Quadrant.

In this paper, we: • Look at the pitfalls of the traditional ‘earn and burn’ model • Present a new loyalty model in the ‘Loyalty Growth Quadrant’ • Quantify loyalty through lifetime value • Provide benchmarks and best practices

Traditional loyalty schemes reward spend with points This ‘earn and burn’ model does little for customer experience

The typical ‘earn and burn’ model… ‘Earn’

‘Burn’

Reward level

Redemption Free: Product A 30% off: Product B

15 points

10% off: Any product

10 points

5 points

Spend level £50

£100

Most loyalty schemes reward customers with points, based on how much money they spend. These points can be redeemed for products, services or discounts. This model is gradually being replaced by loyalty strategies which go deeper into the core service of the company and adapt dynamically to customer behaviour.

… doesn’t create stickiness through engaging rewards and activities of loyalty schemes +50% fail within 2 years of launch1 Relying solely on instant gratification discounts to keep customers from going does not create long-term trust and value.

77%

of loyalty accounts go unused2

People don’t have the space to participate in all loyalty schemes, especially when they have little differentiation.

14%

of loyalty points get redeemed3

Some forget to redeem, others don’t need the rewards on offer, others miss the expiry dates. While this feeds loyalty scheme profits in the short-term, it leads to churn losses in the long-term.

Expanding the extent of offers and activities will have a profound effect on loyalty

This ‘earn and burn’ model does little for customer experience

The Loyalty Growth Quadrant™ Extent of offer The Player

Personalised products

The Evangelist Google

Digital media

External

O2 Experiences

Amazon

Vitality

HSBC Vodafone

Vouchers

The Networker

The Redeemer

Add-ons

Internal

Monzo

Tesco

Nectar Core product

Spotify

‘Earn and burn’ giffgaff

Airtime Rewards Cashback Quantitative Spend

Tenure

Qualitative Self-care

Lifestyle

Peer network

Extent of activity

The extent of activity dimension is a pecking order of behaviours that hook a customer onto a brand. Companies should integrate highly sticky activities into their services to create loyalty. The extent of offer dimension ranks rewards by their effectiveness in engaging customers. Companies should compensate loyalty with highly sticky offers.

The Redeemer simply collects points and redeems them for a freebie every now and then. The Player likes to try different experiences, but doesn’t need external activity motivation to do it. The Networker is always engaged with the brand and its community, but doesn’t mind what they get back. The Evangelist lives and breathes the brand, advocates it to peers, and needs highly engaging offers in return.

The Loyalty Growth Quadrant in action We are witnessing innovators deploying elements of broader incentive and choice

The Loyalty Growth Quadrant in action From air miles to the tenth product free: the biggest players have tested customers’ loyalty for years.

Extent of offer The Player

The Evangelist

The Redeemer

The Networker

Quantitative

Qualitative

Personalised products

External

TMT players are quickly catching up, but they have a long way to go to incorporate stickier activities and offers.

Below we’ve curated a selection of examples from the quadrant. Look out for O2 and giffgaff: though part of the same corporate umbrella, their brands and loyalty strategies are differentiated.

Internal

Vouchers

Cashback

Spend

Self-care

Extent of activity Peer network

Loyalty schemes examples O2 Priority rewards all customers who use the O2 telco services with a large range of internal and external discounts and offers • Discounts at O2 Academy venues, live events and partner shops, e.g. restaurants, retailers • Categorisation and search functionality to helps users find relevant rewards Nectar rewards users’ spend with a large range of merchants via a spend-to-points system • Discounts at 500+ shops, e.g. transport, media, retail

• Physical card gradually being replaced with mobile app

Vitality has a health insurance loyalty programme, which incentivises lifestyle activities such as eating healthily and exercising. It uses strategic partnerships to offer rewards for lifestyle changes • Discounts or freebies for lifestyle products, e.g. Apple Watch, Virgin Active • Gamified reward system based on progress giffgaff encourages its members to participate in community discussions and expansion, rewarding them through payback and slick user experience • Technical issues, forums and improvement suggestions managed by members • Recruiter and ‘networker’ payback

Customer Lifetime Value increases substantially with high growth activities and offers For telcos, we estimate a 228% increase

The economics of loyalty To illustrate the effect of our proposed loyalty strategy, we’ve taken metrics based on an average European telco. As telcos generally have a defined, and even limited, product range and basic retention strategies, we have made prudent growth assumptions. Other markets such as retail or finance may see higher growth with this model. Lifetime (years)

Value (€/ year)

Lifetime Value (€)

5 years4 (1/20% churn)4

€2884

€1,440

After Redeemer loyalty strategy

5.6 years5 (1/18% churn)5

€3175

€1,775

+23% +23%

After Evangelist loyalty strategy

6.7 years6 (1/15% churn)6

€706

€4,730

+228%

Before loyalty strategy

Value before loyalty strategy Increased core product revenue Additional peer group spend Additional product commission

€288 + €72

+ €288 + €37 +

Reduced cost to serve Value after Evangelist loyalty strategy

€21 =

25% increase from €288 to €3606 new customer at standard ARPU7 2% of m-commerce spend8 fewer contact centre calls and retention discounts9

€706

How can we build a winning loyalty programme?

Global best practices help us design a bespoke customer engagement experience

Three initiatives to build a loyalty strategy We have identified three key initiatives to consider when growing loyalty through extending activities and offers: mobile engagement, data management and automation. Innovating in these three areas will not just enhance customer experience. When the loyalty strategy returns a critical mass of data, the quality of the core service has the potential to increase. Think of Google, whose user contribution strategy populates Google Maps services, or Spotify, whose social media integration feeds recommendation analytics.

Best practice examples Mobile engagement • Gamification • User community • Customer referrals • Digital marketplace • Reward search and selection functions

Not having a dedicated app is the reason for 25% of people abandoning loyalty schemes10

Data management • Trust through collection consent • Behaviour and preference tracking • Self-care functions • Identify high performing products with a ‘fail-fast’ model

GDPR makes it illegal to get data and send communications without users’ permission

Automation • Preference prediction • Communication timing and relevance • Customer-reward matching • Peer recommendation

AI is helping power chat bots and learn customer behaviour to automate services

The data behind our analysis

Our sources and assumptions 1. Emarsys, “3 Examples of Customer Loyalty Programs Fueled by Data” 2. The Economist, “Mobile technology is revamping loyalty schemes” 3. Smile.io, “Examining eCommerce reward redemption rates” 4. RDC analysis, typical churn and Average Revenue per User (ARPU) based on post-paid telco subscribers in the UK

5. RDC analysis, typical churn and Average Revenue per User (ARPU) based on post-paid telco subscribers in the UK; assumed a 10% churn decrease (20% - 10% * 20% = 18%) and 10% ARPU increase due to ‘earn and burn’ spend and tenure incentivisation 6. RDC analysis, typical churn and Average Revenue per User (ARPU) based on post-paid subscribers in the UK; assumed a 25% churn decrease (20% - 25% * 20% = 15%) and 25% ARPU increase due to peer incentivisation and expanded choice 7. We assume one successful recommendation per user per year, which is attributed a pre-loyalty scheme revenue of €288 per year 8. The additional third party product revenue is calculated as: commission % x share of wallet increase x average yearly spend; assume 10% increase in share of user spend (based on Eurostat 2017 data on average European household spend); 2% commission received by telco from selling third party products; this leads to 2% * 10% * €18,330 = €37 additional ARPU 9. Reduced costs due to a) a reduction in in-bound customer calls (based on Cirrus and Contact Babel, “The UK Contact Centre Decision-Maker's Guide 2017-18”), €3.2 average cost per call; average of 2 calls per customer per year = €6.4); reduced requirement to provide a retention discount – saving of 5% discount on ARPU = €14.4 10. The Economist, “Mobile technology is revamping loyalty schemes”

We make loyalty strategies work The content in this publication has been prepared for general information purposes only. We do not accept liability for any loss resulting from actions taken based on any material in this publication. The contents of this document shall not be copied or distributed for commercial purposes. When copied or distributed for noncommercial purposes, it shall include Red Dawn Consulting copyright notice. Red Dawn Consulting has provided rigorous market analysis and winning strategies to deliver growth for +100 companies in the Telecom, Media and Technology industry. Our strategies are grounded with an intimate understanding of competition, customers and emerging innovations from around the world.

Talk to us about building a winning loyalty strategy. Arun Dehiri

arun@reddawnconsulting.com

Managing Director Adriana Portela

adriana@reddawnconsulting.com

Senior Consultant

Level 1, Devonshire House, One Mayfair Place, London, London W1J 8AJ United Kingdom

+44 (0) 333 301 3450 www.reddawnconsulting.com