How the Best Loyalty Programs Maintain Success Over Time
The great majority of businesses today have a loyalty program, and for good reason. A well-thought-out loyalty program has proven to be an effective way of retaining a retailer’s most prized customers over time. At Dunnhumby we have found that our clients’ loyal shoppers are at least three times more valuable to the retailer than non-loyal shoppers and are also less likely to churn (2 percentage points less than non-loyal shoppers). Secondly, there’s the adage that “retaining a customer is cheaper than acquiring a new customer.”
There’s another reason – especially relevant today – why businesses need loyalty programs: to serve their customers through the toughest of times. Though inflation has fallen throughout the Americas, shoppers are increasingly looking for greater value when they shop. This is particularly true in the grocery retail market. As Dunnhumby reported in its 2023 Retailer Preference Index (RPI), value is the top consumer concern today, across all income brackets. A good loyalty program can serve its customers by helping them save with valuable offers and benefits, while allowing the business to deliver this value in a sustainable way, personalizing the offers and investing more effectively.
The headwinds for loyalty
Unfortunately, according to a Cap Gemini study, 77% of loyalty programs fail within the first two years. What accounts for this failure? First, there’s greater competition for loyalty. And according to the 2023 edition of the Bond Loyalty report, U.S. shoppers, on average, are registered in 18 loyalty programs, but actively participate in less than half.
To further understand the reasons for the failure rate for loyalty programs, and most importantly how to succeed in the long run, let’s take a look at three companies and their well-recognized top-of-class loyalty programs.
Starbucks – the end-to-end shopping experience
The world’s largest retailer of premium coffee boasts one of the most successful loyalty programs. In 2022, CNN reported that Starbucks had close to 30 million customers in its program, with 16% growth year-on-year.
How have they done that? Like many programs, Starbuck Rewards grants “stars” (the Starbucks equivalent to points) to its members that can be redeemed later for an array of rewards options. But the program goes one step further by extending its reach to ease the customer experience across the entire shopping journey with a seamless experience. Starbucks expertly uses first-party customer data to better serve the customer through personalization, like sending relevant messages to loyalty members to inspire the next shopping cycle.
In addition, as an early adopter of mobile technology, Starbucks has won praise for its ease of use and contact-free interface, which reduces friction for the customer while conserving costs for the stores. It also helps to streamline the order process and reduce errors in delivering the correct orders to customers.
Sephora – rethinking digital + in-store experience
By providing a personalized end-to-end experience, Starbucks fused the virtual and physical worlds it occupies. This is an area in which a retailer in personal care and beauty also excels.
Launched in 2007, Sephora’s loyalty program, Beauty Insider, has inspired a number of case studies in loyalty. It’s done so in part by providing “customers access to luxury products they wouldn’t have been aware of.” By positioning as a community that grants exclusive access, it engages customers in a way that meets their needs and aspirations. And like Starbucks, Sephora continued building on the exclusive customer experience. Two years after the launch of Beauty Insider, it introduced a three-tier system that provided customers with a range of perks, depending on the yearly total amount spent with Sephora. It offers a complete portfolio of benefits from more functional benefits such as discounts and free shipping, to more aspirational and emotional ones, such as exclusive gifts, events, and first access to new products, among other options.
Just as importantly, Sephora differentiated itself by embedding the customer experience with emotional connection – joy, excitement, and a sense of belonging. As Dunnhumby has illustrated in its 2024 RPI, emotional connection is what most effectively generates long-term loyalty. It continued its evolution by integrating the digital to in-store experience, enabling its staff to support customers who are already browsing and testing products online on the app, and providing continuity in their experience when they go in-store, resulting in a truly integrated and omnichannel experience. They do so by enabling staff with an app that, if allowed by the customer, shows their recent browsing history so the staff can provide a continuous and seamless customer experience.
Tesco – the art of Customer First science
In an article for Vogue Business, Sephora’s Sylvie Moreau, president of Europe and the Middle East, spoke about the company’s commitment to the in-store experience. Since the pandemic lifted, “bricks-and-mortar stores are the biggest winners.” Which brings us to a retailer that began in the bricks-and-mortar age. In 1995, Tesco, the British multinational grocery retailer, launched the grocery’s industry first loyalty program based on customer data science, the Tesco Clubcard.
With the support of Dunnhumby, Tesco set out on a long-term journey putting the customer first and in the center of all decision-making. By leveraging customer first-party data, Tesco learned to understand customer behavior across all grocery functions — customer strategy and insights, category management, customer engagement and experience, CPG collaboration, and, most recently, retail media. Among its many milestones along the journey, Tesco passed competitor Sainsbury’s to become the No. 1 grocer in the U.K. Today, as reported in Forbes, Tesco has a 27.4% share of the U.K. grocery market, with 21 million households using the Clubcard — accounting for 80% of its grocery sales.
The evolution of Tesco’s loyalty program is easy to appreciate over the long term. But the secret to its success is its incremental evolution. Tesco is consistent in a continual evolution of Clubcard, implementing new features recurrently to better serve its customers’ needs. For example, during the inflation crisis of 2009, it doubled loyalty points for customers. More recently, in response to the COVID-19 crisis, it committed to a series of actions to deliver lower prices and more affordable options on essential items and helped customers navigate those rough times.
Tesco Clubcard long-term timeline
The ultimate commitment
So what, if anything, do these companies have in common?
First, by leveraging first-party customer data, they have developed a deep understanding of customers’ behavior and needs. With a scientific, data-driven approach to knowing the customer, and deeply understanding their functional, experiential, emotional and aspirational needs, they were able to design the mechanics and features of their loyalty programs to meet those needs.
Second, they build capabilities to deliver an easy, inspiring, seamless experience that meets or exceeds their customer’s needs. The programs mentioned here have a varied set of benefits, but the key is how they deliver: easily integrating digital and physical worlds, streamlining the processes and journey so both customer and company are happy. That type of experience is valued by the customer, effective and profitable for the retailer and creates a competitive advantage not easily copied.
Third, and perhaps the most overlooked principle, each of these companies have been sure to continually evolve over the years, adjusting to the times, challenges and customer expectations. When a business launches a loyalty program, it is making a long-term commitment to its customers. It needs to nurture and evolve its program – as if it were a living being – to keep it attractive and meet that commitment in a sustainable way. To accomplish that, it is critical to have a robust measurement plan, to continually monitor the key indicators of success, customer engagement, and the use of benefits. Additionally, there must be a test-and-learn methodology for innovation and continuous improvement to maintain momentum.
As we’ve shown in this article, a business can follow the examples of successful brands across different sectors. But, in the end, it must follow both the ancient rule to “know thyself” and the modern rule of “know thy customer.” Adopting a truly data-driven approach to knowing the customer, allows retailers and brands to deliver a continually evolving loyalty program which works for everyone.
About the author: Ana Luisa Ares is Dunnhumby’s Customer Engagement and Media Manager for Latam. Ares has 20-plus years of experience in customer engagement, strategy planning, design, implementation and management of CRM strategies and loyalty programs across the Western Hemisphere. She has designed eight successful loyalty programs in the Americas, and two Lifecycle marketing strategies for grocery retailers, pharmacy, coalition, financial services, direct sales, CPGs, IT and airlines.