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The power of points: Strategies for making loyalty programs work

By Liz Hilton Segel, Phil Auerbach and Ido Segev

Loyalty programs require creativity and innovation to stay relevant and in sync with their customers.

Americans love loyalty cards. Three-quarters of households are enrolled in at least one frequent customer account, such as airline miles, hotel points and grocery cards. Many shoppers have a whole stack of cards to their name—the average household has signed up for no less than 18 memberships.

And while participation in loyalty programs has been growing over the past six years, usage of them hasn't. Most loyalty cards never actually get used at all. American households are active in less than 50 percent of the programs they have signed up for.

What's worse, most of these programs, even when used, are not driving sales or boosting customer satisfaction. Fewer than 20 percent of loyalty members say their memberships are influential in purchasing decisions and only 33 percent of loyalty customers feel that those programs are addressing their needs.

Such irrelevance represents a significant loss of opportunity for marketers. Loyalty programs are one of the best means companies have for collecting information about their customers and, if done right, for enhancing customer satisfaction and generating new purchases.

Not long ago, we did an analysis of U.S. retailers that yielded stunning results: Companies with loyalty programs posted a 2.28 percent comp sales increase, while those without loyalty programs saw 4.26 percent gains. There are a number of possible reasons for this ironic disparity, but marketing leaders see a big warning sign: Just because you have a loyalty program doesn't mean it's working.

Too many companies have built loyalty programs that don’t actively engage their customers or give them compelling reasons to want to use them. To fully take advantage of the promise loyalty programs hold, marketers need to first design everything they do with a crystal clear sense of purpose. For instance: What do you want your loyalty program to do? Win new customers? Increase wallet share? Save money? The first step to any loyalty program is concrete objectives.

This may sound obvious but, in our experience, most ineffective or value-destroying programs lack this basic discipline and thus end up adopting too many “me-too” approaches. Knowing your goal will help you move beyond just points and rewards – by targeting the right customers, designing the right benefits, and analyzing the right metrics.