Creating a successful consumer rewards proposition

Three successful strategies emerging in the world of consumer rewards

It has always been challenging to create a successful consumer rewards proposition, but now it has become particularly difficult given the intensifying competition in the retail loyalty space and the business model pressures banks face from interchange* caps. Three trends have developed and impacted the way that brands are operating their rewards programme.

Firstly, the 2015 interchange cap (0.30% on consumer credit cards and 0.20% on consumer debit cards) which put a dent in European banks’ transaction revenue. The effects of interchange caps have been particularly felt by issuers with rewards cards in countries where interchange is regulated, as it has resulted in a reduction in interchange revenue meaning the reward programmes has less funding. As a consequence, cashback programmes are now significantly weaker than they were 3+ years ago. However, banks continue to compete with retail loyalty programmes (e.g. Nectar and Boots Advantage Card) that have not suffered the same constraints.

Source: The Telegraph

 

The second trend is that loyalty programmes’ third-party provider partnerships are diminishing, a key one being Sainsbury’s which paid £60M to take full ownership of its Nectar programme in 2018.  With the proliferation of experience management software, it has become easier for brands to run their own loyalty programme in-house at a global level. Companies are taking control over their loyalty programmes vs. outsourcing them, maximising the amount of insight they have on their consumers by utilising their strongest asset, customer data.

Lastly, the widespread usage of technology has shifted consumer interaction with rewards programmes, from pure points collection cards to interactive mobile Apps, enabling techniques such as gamification to come into play.

A recent report found that 26% of respondents were loyal to a brand because they liked its loyalty scheme, but 42% claimed they needed more than points to shop with a brand. So the appetite for loyalty programmes is there from consumers but needs to go beyond points. Brand loyalty is increasingly difficult to curate and maintain, so brands must evaluate how their loyalty programmes can remain relevant and add value, and with such disruption in the reward and loyalty space, new strategies are required to compete. We see three successful strategies emerging within the evolving landscape: Gamification, Personalization, and Partnerships.

Gamification 

Gamification refers to using game design elements in non-game contexts with the purpose of motivating and increasing user activity and retention. Research shows that the use of gamification adds value to businesses and business models by increasing consumer engagement, with 30% of companies that use gamification seeing registration conversion rates improve by over 50%. There is tremendous opportunity for loyalty programmes to benefit from the technique’s gamification employs.

A recent example of a brand leveraging gamification is Dominos, which launched its ‘Points for Pies’ initiative where consumers earn points by uploading a photo of a pizza, any pizza from any brand (even homemade), with the idea that loyal pizza consumers are rewarded with offers for Dominos (e.g. 60 points = 1 free topping).

Vitality’s ‘Active Rewards’ programme rewards its consumers based on their exercise levels, a subtle gamification tactic in line with the brand’s ethos of encouraging a healthy lifestyle. The more consumers exercise the more rewards they are offered. For example, users can link their ‘My Starbucks Rewards’ account to their Vitality account so once they reach 12 points, they can make a seamless redemption for a free Starbucks drink, alternatively 160 points a month can be redeemed for a monthly Amazon Prime membership.

Personalization

With companies regaining control over their loyalty programmes and obtaining access to consumer data, they need to ensure they are using it in the right way to generate highly targeted and personalized rewards. With many brands now doing personalization well, having personalization at the heart of the rewards programme has become more a hygiene factor than a motivator or value-add.

Many rewards cards have algorithms to develop offers based on historical spend, and it’s crucial to re-evaluate such models frequently to ensure that these are still relevant and can be built upon as consumer needs and interests change. However, brands should be cautious to what extent their rewards are personalized so that consumers do not feel an invasion of privacy. A great case study is when US retailer Target sent baby product coupons to an a young women based on her shopping activity before her family knew she was pregnant, resulting in the woman feeling as though she had been spied on and the brand receiving a wrath of negative publicity from the women’s family, although the algorithms used by Target had correctly predicted the women was indeed an expectant mother. Collaboration between a brand and consumers will create a stronger sense of personalization; one provider succeeding here is Avios. Avios’s app enables users to add their ‘favourite brands’ to their home screen, providing more visibility into offers that matter to them.

It might sound obvious, but focus is key. So, if it’s a travel credit card then rewards need to reflect the travel focus, or if it’s a beauty brand then it’s loyalty and reward programme should not be diluted with too many non-beauty offerings. Sephora is an example of a brand with the right level of focus. Sephora’s loyalty programme is widely regarded as best in class due to its three-tiered approach segmenting shoppers by annual spend (Beauty Insider, VIB, and VIB Rouge). The most premium tier, VIB Rouge, requires an annual spend of US$1,000 and enables access to free beauty consultations and makeovers, it has curated a level of exclusivity with consumers boasting on social media about being VIB Rouge status. Similarly, BrandAlley believes that loyalty programmes do not need to be discounts focussed, instead, by offering select VIP members early access to certain sales can make them feel valued.

Partnerships

Within the rewards space, the nature of partnerships between brands varies, but in essence it is about rewarding customers with brands they feel affiliated to.

Monese, a digital bank, recently partnered with Avios. The collaboration was a result of Avios asking consumers how they can make the interaction with the Avios loyalty programme more simplistic. The integration has kept the Avios loyalty programme relevant and front of mind for users, producing a more straightforward customer experience while also driving engagement for both Monese and Avios. We can expect to see more brands working together to create seamless loyalty experiences for their joint consumers, instead of multiple, siloed loyalty interactions.

Consumer behaviour is increasingly shifting towards subscription-based plans and rewards partnerships are also moving in this direction. In Japan, Diners Club enables cardholders to use their points to load their Starbucks card, JCB enables cardholders to pay for their Amazon Prime membership, and in the UK, American Express allows Membership Rewards points to be redeemed for Netflix subscriptions.

Alternatively, some companies are keeping rewards within their own brand ecosystems. GrabRewards in Singapore has a tiered-points system which enables points to be earnt on GrabRides, GrabFood and via GrabPay POS terminals. Consumers can then redeem rewards across the entire Grab family of brands (e.g. pay with points at GrabPay merchants, 40% GrabFood orders, etc.). M&S credit card rewards also keeps its rewards redemption limited to the M&S umbrella brand.

We see personalization, gamification and partnerships becoming prevalent strategies for brands reacting to an evolving loyalty marketplace. However, loyalty programmes may not be the right approach for every brand. Some brands are successfully engaging consumers via membership programmes, which consumers opt into and pay a fee for, but have no relation to loyalty. The likes of Amazon Prime and Lululemon have been able to charge consumers annual fees of US$119 and US$128, respectively, to enable users to have improved delivery options, access to member-only events and other exclusive benefits. Either way, the common thread weaving these successful strategies together is Know Your Customer. Once brands understand their customers, they can partner with the brands their customers love and make it a fun rewards experience to capture lasting loyalty.

*interchange is a fee paid by the merchant’s acquirer to the card issuer each time a card payment transaction occurs.