WHAT’S LOYALTY GOT TO DO WITH IT? THE RISKS AND REWARDS OF LOYALTY PROGRAMS

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Loyalty and reward programs are usually designed to achieve four objectives: increase guest spending, improve guest experience, maintain competitive position and capture new guest data. But do loyalty programs really achieve those aims? Today’s loyalty programs generate useful guest data, but what about the other objectives? And with the additional data comes additional risks in the form of securing that data. When balancing the risks and rewards of loyalty programs, many hospitality and gaming firms can be left wondering whether their loyalty programs buy loyalty and increase guest value, or simply add risk and cost without securing repeat patronage.

Loyalty programs are prevalent wherever the consumer goes, from their credit card company to their bank to their grocery store and local coffee shop. Your guests now expect that their favored hospitality and gaming companies will offer some sort of loyalty program, but instead of these programs being a given, there needs to be more strategic and measurable focus on what loyalty programs should achieve. Does your loyalty program encourage more business from the guests and patrons who bring you the best value? And who are these high-value guests? Frequency of purchases is not necessarily a good indicator of value, if each transaction value is low. High spend per purchase may not be a good indicator either, if your guest is costly to serve. And a guest’s past history with you is no guarantee they will return in the future.

With loyalty programs you have access to a lot of new guest data that you would not get without having a loyalty program in place, and this data is ripe for analysis. It’s most critical to use the data to measure the economic value that is being created. Is your loyalty program increasing margins and retention? In determining economic value, revenue is only part of the picture; profitability is certainly more important. But there can even be risks to basing decisions on a guest’s current profitability. External events and life milestones will materially affect a guest’s needs, behaviors and profitability over time. Acting on a present-day view of profitability, a company could misjudge guests with current low profits as having low future potential.

To consider the future profit potential of guests, it is necessary to calculate customer lifetime value (CLV) – a predictive measure of a guest (or a segment) as a long-term investment. Customer lifetime value can be defined as the net present value of the likely future profits from an individual guest – a measure of true value spanning the past, present and future. At its simplest level, the CLV calculation assumes that people are creatures of habit; you can extrapolate from past trends to predict future trends. By looking at other guests with similar demographics and patterns, you can make assumptions about this guest. CLV calculations show you which guests are most likely to offer the highest value over the long term, which in turn identifies the core attributes you should consider as you design a loyalty program, and enables you to assess the performance of the program over time.

Hospitality and gaming organizations need to make sure their programs create brand loyalty and not just program loyalty. They need to carefully manage the various aspects of the program design to create a perception of high quality. And they need to measure both the present and potential results through the lens of customer lifetime value.

In addition to the rewards that your guest loyalty program will bring, you also need to weigh up the risks. Beware of the possibility of turning loyal guests into price-sensitive guests. If you offer a loyalty program based discount, you may focus your guests on price, versus the experience and intrinsic value of your offering. Make sure that you balance any discounts with other offerings that make the guest aware of the value of their relationship with you, otherwise they may find it easy to defect to another loyalty program that offers a bigger discount.

By monitoring your programs performance carefully, you can pinpoint when you risk getting out of balance. A customer lifetime value calculation helps identify your most valuable customers so you can optimize the program not just for brand loyalty and retention, but also for economic value in real dollar terms. If you see your customer lifetime value decreasing in your most valuable segments, perhaps your loyalty program is too focused on price, versus value.

Even well-functioning loyalty programs come with inherent risk. It is essential that you safeguard your program data carefully. Rewards are a thrill for your guests to earn, but even your most loyal guest will be frustrated should their hard-earned rewards be lost or stolen. Customer loyalty fraud is on the rise. More and more criminal organizations are being attracted to stealing miles and points, which can be as valuable as currency. Hospitality and gaming organizations have millions of dollars of liability in their loyalty program, and where there is high value, there is also the risk of fraud.

Loyalty fraud can take many different forms. Some examples are the manipulation of loyalty points; such as transfers from genuine accounts to accounts set up by bad actors. Another form is when fraudulent purchases made using points from bona fide loyalty accounts. These transactions may take time to find, as most of your guests check their loyalty balance somewhat less frequently than they do their bank balance. Lastly, your employees can be involved in fraud, if they claim points on behalf of guests who do not have a loyalty program account and use these to redeem stays or other rewards.

If you are caught wondering if your loyalty program rewards are worth the associated risks, analytics can help. Using analytics, you can detect potential cases of loyalty fraud by identifying suspicious or generalized activity and previously unknown relationships. Analytics can empower analysts to quickly open investigations when suspicious connections are made and minimizes the impact of fraud on your guests.

Analytically derived scores, such as customer lifetime value can be used as a barometer to ensure that you are balancing between the risk and reward of loyalty programs. Using customer lifetime value you can examine your existing customer base and try to identify what the differences are between the guests who are part of your loyalty program and those who aren’t. Loyalty program managers should focus on growing their loyalty program in a manner that makes the guest profitable versus just a repeat guest. By incorporating the lifetime value of the customer you are able to do just that.

When you look at the amount of data that you have available to you today, the biggest challenge is your ability to draw the correct interpretations from it. Analytics can make the difference in mining your customer intelligence for the guest who will tell everybody about your firm, the guest who will show up regularly, and the guest who will pick your firm as opposed to any other.

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