From Box Tops to Databases — Loyalty Programs Boost Results

Remember collecting box tops, bottle caps or can labels as proof of purchase for cash or prizes? Loyalty programs are not new, but have evolved as advances have made participation and administration easier.

Whether manual or automated, the concept remains the same — communicate the program, expect high participation, but know that follow-through will be low. The purpose has never varied: increase purchase frequency while solidifying loyalty.

While box tops were bulky, today’s interrelated databases make it easier to collect intangible points that don’t clutter the kitchen drawer. Marketers can track activities with sophisticated computer systems that make the process quick and cost effective.

Taking Advantage of Float and Breakage
There are two advantages for issuers: 1) float, or the redemption of the rewards long after the purchase is made; and 2) breakage, or points earned but never redeemed.

Float benefits issuers because many participants set goals and save for awards; but once they attain that level, they often reconsider and set goals for bigger items. Typically, less than five percent of first-year points are redeemed that year. In succeeding years, it often grows by five percent per year, finally leveling off to 25-30 percent. As float builds, you profit by investing the assets of the accrual account, thus reducing overall expenses. After several years, a good deal of the cost can be liquidated from these earnings.

Some conservative programs try to encourage float by aging points, expiring or diminishing their value over time. Because participants have become savvy, expiration may actually increase redemption and costs because consumers keep closer track and redeem more often.

Breakage recognizes that no program redeems 100 percent of points issued, because despite intentions, many participants never get around to redeeming any or all of their points. Some will cancel their accounts, forfeiting their points — or you may cancel or place accounts on status for non-payment, forcing them into forfeiture.

You can maximize the positive aspects of breakage by specifying the redemption options, such as allowing redemption only via an official Web site or mail, and not by phone, fax or e-mail. You can also increase breakage through the types of rewards, offering merchandise and travel-related perks rather than cash or gift certificates, which drive costs up because you pay for the reward immediately, no matter when or if it’s ever actually used.

Program Design Considerations
As you begin the design process, it’s important to keep four basic tenets in mind. The program must be:

• Fiscally Responsible. The total cost of award redemption must fall within your funding driven primarily by interchange fees
• Easily Administered. Whether you administer the program yourself or outsource it, you should not have different rules and award structures within the program for a single target audience; Keep the managing of exceptions to a minimum
• Competitive. Consumers will participate in a limited number of programs and will compare your offers with those of other issuers; if yours compares unfavorably, you lose
• Compelling. Members must perceive your offer as attractive, understandable and attainable; you need to frequently remind them of the benefits so you remain top of mind

While loyalty programs vary widely, the market is concentrated in a few types of program focuses.

Co-branded airline tickets — An airline and financial institution collaborate and award a mile for purchases on credit and/or debit cards. The institution buys the airline miles each month. Issuers have an annual fee to partially offset costs and float/breakage losses. Participants add miles to their other airline earnings, and the airline program restrictions apply. Available on credit and debit programs.

Issuer-sponsored travel programs—The institution may buy airline miles or partner with a third-party travel organization, and participants earn a ticket valued up to a specific amount that may or may not be the full fare. You retain float and breakage, but these programs are expensive. They appeal to just a few customers because the threshold for earning a meaningful award is high and may take years before earning a travel award. Only high transactors participate, and they are frequent redeemers. Available on credit and debit programs.

Traditional travel and entertainment card —The American Express’ program has rapidly expanded to become a number of different targeted “ready spend” offers. No longer do they cater only to travel and entertainment spending usage. Their rewards feature a large selection of special event, merchant gift card, travel partner offers and entertainment opportunity awards. The participant accumulates value over a shorter time from one or more Amex cards combined into a single earnings pool. The funding — interchange, fees and merchant arrangements — is greater than a standard financial institution program, and the awards are usually sourced with Amex merchant clients and work on negotiated discounts.

Broad-based — Independent credit card processors and loyalty awards vendors offer well-structured programs that include travel, gift selections and your own products. The rewards are broad in appeal, administration costs are typically low and the partner will often furnish and manage the marketing. Cardholders earn rewards in a timeframe that keeps their attention, and you retain the float and breakage. Available on credit and debit programs.

A Loyalty Example
Fidelity National Information Services, Inc. (FIS), a leader in loyalty programs for financial institutions, provides program design, promotion award processing, marketing and administration. Its ScoreCard® program allows you to isolate the effect of each variable by first creating a statistical model that uses actual current experience to project reasonable expectations.  All programs are custom designed for each client.

One FIS ScoreCard client established the following broad-based program:

Travel — Coach-class, round-trip airline tickets ( 25,000 points) require a 30-day advance reservation, Saturday night stay and no blackouts. Destinations include the 48 contiguous states and Canada at a fixed price (non-coach tickets and those to Alaska, Hawaii and abroad are also available). Hotel rooms, cars, cruises and tours are available at stated point levels. A third-party travel partner handles bookings.

Gift Awards — Items range in value from 2,000 to over 500,000 points with more than 450 awards. A third-party supplier provides fulfillment.

As part of its ScoreCard program, FIS also:

• Generates daily, weekly and monthly reports that detail the previous month’s activity, as well as potential liability for unredeemed points
• Creates and maintains the consumer Web site
• Provides posters, tent cards and statement inserts
• Assists with internal announcements and staff training

Great Awards for Customers, Better Rewards for You
The days of soaking labels off chicken noodle soup cans are long behind us, but loyalty programs are alive, flourishing and heavily woven into the fabric of consumer expectations. When properly designed, promoted and administered, loyalty doesn’t cost — it pays.