Are you leveraging Customer Lifetime Value (CLV) to grow your loyalty program? It’s a term that has been floating around for half a century. The telemarketers of the 1980s first began theorising about what’s now called CLV and how it could generate more revenue. Decades later, CLV is not just a term, it is a critical tool for any marketer to understand the profitability of long-term customer relationships.
Data Tracking: The Norm in a Big Data Era
As the ‘Big Data’ era has progressed, tracking individual consumer purchases over long periods is now standard practice to gain behavioural insights into their most loyal shoppers.
Given the data now readily available, it’s assumed businesses will devote substantial resources to calculating the value of their customers and the cost of acquiring and retaining certain types of customers.
Loyalty and AI in Action: Wendy’s
Advances in data collection and predictive analytics, along with the mainstreaming of technologies such as consumer data platforms (CDPs), have ‘disrupted’ the application of CLV. Artificial intelligence and machine learning (AI/ML), in particular, have impacted how today’s businesses prioritise, calculate and seek to leverage CLV.
At Eagle Eye, we take a close interest in innovative, CLV-based marketing strategies. For instance, Wendy’s recently launched an ‘AI-Driven Loyalty Platform to Deliver Customised Rewards’.
Wendy’s is using AI to analyse data such as a customer’s purchase history to create ‘bespoke’ incentives that aim to resonate more strongly than off-the-shelf rewards. For instance, a Wendy’s customer who buys a coffee on their way to work will be offered a different reward to one who semi-regularly stops in to buy a hamburger for lunch.
Teaching an Old Loyalty Program New Tech Tricks
With these types of stories, everyone focuses on the whizzbangery – the AI, in this instance – rather than the old-hat “loyalty platform”. There’s nothing wrong with this. Indeed, one of my colleagues, Jean-Matthieu Schertzer, Eagle Eye Group‘s first chief AI officer, went straight to AI-enabled ‘mass personalisation’ when asked to comment on Wendy’s initiative. He noted, “Consumers understand that loyalty programs reward them for desired behaviour, which creates an expectation of personalisation.”
You might have immediately focused on the second half of that sentence, not the first.
But it’s worth remembering that the high-tech solutions that facilitate mass personalisation are usually bolted onto a pre-existing loyalty program.
Loyalty Programs Make Money
If you need to convince your organisation’s CFO to sign off on a substantial investment to launch or reinvigorate a loyalty program, here are some key facts about loyalty programs from one of Eagle Eye’s partners.
Philip Shelper is the CEO of Loyalty & Reward Co. This global consulting firm has helped create and improve loyalty programs for some of the world’s best-known brands (McDonald’s, Hugo Boss, Klarna, Rip Curl, Schneider Electric, Penfolds). Shelper literally wrote the book on loyalty programs with Loyalty Programs: The Complete Guide. He makes these three points to loyalty program sceptics:
- Loyalty Programs Generate Revenue: “Loyalty programs have evolved from marketing cost centres to valuable business units driving significant long-term profit outcomes for companies in almost all categories globally.”
- Loyalty Programs are Multi-Dimensional: “Loyalty programs can deliver value for companies in the following ways: driving profitability from behavioural changes; cost saving and operational efficiencies; improving strategic decision-making; as well as unlocking third-party data and other monetisation opportunities.”
- Loyalty Programs Build a Customer Journey: “Loyalty programs are a potent antidote to heavy discounting addictions. Providing marketers with an alternative value offering for high-value customers can help boost margins and focus customers on their next visit…”
How Can You Calculate CLV When Behaviour and Purchase Frequency Change?
Shelper has one final piece of advice on the vexed issue of calculating CLV. He notes that simple CLV calculations assume average purchase value and frequency remain unchanged over a member’s active period. As is often the case with marketing-related calculations, this makes the arithmetic more straightforward but doesn’t necessarily reflect what is happening in the real world.
“In practice, member behaviour changes, just as prices and margins change for businesses,” he says. “If a loyalty program is working, the assumption should be that purchase value, frequency, and, ideally, margin would increase yearly. As such, the calculation should be broken down into years, with assumptions changing and the total value summed to determine CLV.”
A loyalty Sandwich: Pret A Manger Delivers a Palatable Program for Consumers
Loyalty programs have been around forever, but they still offer near endless scope for innovation. Using solutions supplied by Eagle Eye, British sandwich shop chain Pret A Manger recently launched ‘Club Pret’. One publication described it as “the first in-shop, flat subscription service to be launched by a hospitality operator in the UK, with subscribers able to redeem up to five drinks per day for a fixed monthly price”.
That’s right, Pret A Manger is offering Netflix-style pricing. It’s not exactly the same given Pret customers can’t consume completely unlimited barista-made beverages. But it’s in the same ballpark, given most people would struggle to drink more than five coffees a day.
Even better, it’s a win for everybody involved. Pret’s customers can satisfy their thirst whenever they want (within reason). As my colleague, Eagle Eye’s Chief Sales Officer Al Henderson, observes, “Pret can now tie sales analysis to a view of where and who its most valuable customers are. This will enable it to develop new ways to foster greater loyalty at a time when the high street needs a much-needed boost. This game-changing digital initiative will also allow Pret to launch insight-led propositions more quickly, and at scale.”
Theoretically, Pret is on the hook to provide up to 155 drinks a month to anybody who pays the £30 (A$60) a month ‘Club Pret’ subscription. Few subscribers end up taking full advantage of their subscriber privileges. But even if they did, Pret still comes out ahead because it has found out that the increase in CLV more than offsets this.
The Perks of a Coffee-Fuelled Loyalty Program?
The results from Club Pret have been remarkable, with subscribers spending four times more than non-subscribers. Club Pret subscribers transacted with Pret 28 times per month, compared to non-members who transacted only two times per month. With some technological assistance from Eagle Eye, Pret created a compelling and transparent value proposition that increased customer engagement and boosted customer lifetime value.
Loyal Members Outspend New Customers
In mid-2024, marketers are confronting both disruption and the eternal challenge of convincing consumers to shop.
Loyalty program members outspend non-loyalty members by a wide margin, providing a source of long-term recurring revenue to businesses. Loyalty programs create a strong bond between the customer and the brand, driven by affinity, convenience and value. They increase the number of touchpoints a customer has with a brand and yield valuable first-party data related to purchase history and preferences. This means these programs can supercharge personalisation and engagement strategies and make a retail brand more prominent in a consumer’s daily life.
If you discover a powerful emerging technology that guarantees your high-value customers everlasting satisfaction and loyalty, you should deploy it immediately. But in the meantime, you might want to invest in improving the functioning and appeal of your business’s existing loyalty program. No matter how old school such an approach may appear.
