LOYALTY MARKETING
SECTION ONE
SECTION TWO
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Four Metrics to Measure the Success of a Loyalty Program
(Part Two of Two)
How does a retailer collect data on a customer-specific basis? In order to collect purchase data on each
customer, a retailer needs to have a mechanism by which shoppers identify themselves as they check out.
The most common means of shopper identification is via a loyalty or rewards card that the shopper or cashier inputs into the point-of-sale (POS) system. Some retailers choose not to use a physical card and instead opt for a personal ID number such as telephone number.
It’s important to note that when considering a loyalty or CRM program that it’s not about the card. It’s about collecting, analyzing and acting on customer-specific data. Most retailers partner with a loyalty marketing provider to integrate a customer identification process into their POS system.
Once the retailer has collected the data, what are the most salient metrics to measure the success of a loyalty marketing or CRM program? ProLogic Retail Services organizes its customer measurements into the following four key areas: sales performance metrics, shopper activity metrics, Top Shopper metrics and New Shopper metrics.
1. Sales Performance Metrics
A standard industry measure of a retailer’s success is same-store sales growth. This metric is fundamental to understanding whether a retailers’ stores are growing or declining, and is frequently used as a key barometer to measure the financial stability of retailers.
The challenge with using same-store sales solely to measure the success of a loyalty or CRM program is that many factors influence same-store sales growth and it’s difficult to isolate the impact of the loyalty program. Same-store sales is an important overall metric for gauging a retailers’ financial health; ProLogic uses it in combination with other more loyalty-specific metrics to measure the success of our programs with retailers.
2. Shopper Activity Metrics
These metrics measure the participation of shoppers in the loyalty or CRM program. For a loyalty program to be effective, a retailer must have a high percentage of its shoppers enrolled in the program and self-identifying with each purchase. If a meaningful percentage of shoppers are not participating, then the retailer is not capturing enough data by shopper for the program to deliver effective results.
The key shopper activity metrics are the percentage of all shopper trips that are captured in the program and the percentage of total sales that are captured in the program. To more easily convey these metrics, we can assume the retailer uses a card and call these metrics “trips on the card” and “sales on the card”. The metrics are the same if the retailer has a cardless program and
uses another type of personal identifier instead.
ProLogic recommends that retailers strive for shopper activity goals of at least 60% for trips on the card and 80% for sales on the card. At these levels of participation, the retailer is collecting enough data on a customer-level basis to ensure that the program can work properly to segment shoppers and design effective promotions. For retailers with activity metrics below these levels, we work with the retailer to boost shopper enrollments and participation in the loyalty program.
Activity levels above these goals are difficult to achieve because non-participating shoppers can be new shoppers or very infrequent shoppers who will not opt to participate in the loyalty program.
3. Top Shopper Metrics
Top Shoppers are critical to a store’s financial performance because they exhibit all the characteristics that are elemental to a store’s success. Not only do they spend more than other shoppers, but they also buy across categories, enhancing their profitability as they purchase from
higher-margin departments. They also shop more frequently, which can spur their participation in continuity-type promotions. Top Shoppers typically purchase an average of 25 items per transaction compared to 10 items per transaction for an average shopper.
Top Shoppers also tend to defect at a lower rate compared to Occasional or New Shoppers. It is much less expensive for a store to retain its Top Shoppers than to grow the purchases of Occasional or New Shoppers. Some retailers mistakenly focus their marketing budgets solely on bringing New Shoppers into their stores when the reality is that New Shoppers always show a high rate of defection.
The wiser course of action is to focus on retaining and growing their Top Shoppers in each store by directing its marketing spend toward this segment. In addition to measuring their number of Top Shoppers per store, retailers should track the percentage of Top Shoppers among all their shoppers. For leading retailers, the percentage of Top Shoppers should range between 12% - 25%. Likewise, retailers should measure the sales to Top Shoppers, both in absolute dollars and as a % of total sales. Leading retailers typically see 40% - 60% of their sales going to Top Shoppers. Retailers should also measure the retention rates of Top Shoppers, which should be very high, on the order of 95%. To get more granular around Top Shopper retention, retailers can measure how many shoppers remain in the top tier vs. falling down into the tier of Occasional Shoppers.
4. New Shopper Metrics
New Shoppers are very important to a store’s customer base as they have the potential to add incremental sales and replace Top Shoppers or Occasional Shoppers lost to attrition. However, retailers must realize that New Shoppers are initially low spenders and exhibit a high rate of defection. Retailers should be careful not to over-allocate their marketing budget to attracting New Shoppers.
New Shopper retention rate typically runs at 40%, which is much lower than both Occasional Shoppers and Top Shoppers. Furthermore, only about 1% of New Shoppers ever become Top Shoppers and only 3% ever become Occasional Shoppers. In other words, 96% of New Shoppers will either remain low spenders or defect over the course of one year. It’s easy to see why retailers get much more bang for their marketing dollar by focusing on their Top Shoppers as opposed to an all-out strategy to acquire New Shoppers.
Conclusion
Loyalty marketing and CRM programs have delivered strong results for many supermarket retailers. These programs have emerged as effective tools for retailers to both understand their shoppers’ buying behavior and to communicate value and rewards. While these programs don’t guarantee shopper loyalty, they do guarantee retailers the data and knowledge about shoppers that is critical for proper decision making.
Loyalty programs have also enabled retailers to improve their financial results. By focusing their marketing dollars on higher-spending, more profitable shoppers, retailers typically see increased sales and profits as Top Shoppers increase their spending. Retailers also benefit from improved return on their marketing investment as they concentrate their spending on active shoppers and decrease their spending on inactive shoppers or “cherry pickers” who buy only on deal.
As leading supermarket industry analyst Kevin Coupe said in a March 2015 newsletter, “Marketing works. Data analysis works. And when you combine the two, it should not be surprising that it is possible to move the needle. What I don’t understand is why a retailer would not use data analysis to market more effectively to customers.”
This article was Part Two of an essay written by ProLogic Retail Services, which has been providing supermarket loyalty programs for over twenty years. It also draws from the work of loyalty marketing expert Brian Woolf and his book “Loyalty Marketing - The Second Act.” For more information: www.prologicretail.com.
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SECTION THREE
