to leave or not to leave? - red dawn consulting · 5.rdc analysis, typical churn and average...
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To leave or not to leave?
That should not be the question
“A brand is simply trust”- Steve Jobs
The most successful brands across the world don’t need a designated loyalty programme to retain customers. Their services speak for themselves. Customers trust them and don’t need discounts and perks to stay loyal.
However, in our journey to “super-brand”, what can we do to keep customers satisfied in the long-run? Are there new incentives we can explore that deepen engagement? Developing loyalty can be more of an art than a science: in this paper we stretch thinking beyond traditional loyalty schemes to a comprehensive behaviour model.
Extending beyond traditional loyalty
Most loyalty strategies directly incentivise just two activities – staying for longer and spending more on core products. This traditional loyalty model is referred to as the ‘earn and burn’.
We propose a loyalty strategy which extends way beyond this – one which incentivises a richer set of activities, whilst expanding the choice of offers.
Boosting Customer Lifetime Value (CLV)
We believe that the objective of a loyalty strategy is to maximise CLV through deeper customer engagement. On the surface, CLV is the amount of spend per year multiplied by the number of years as a customer. We take this concept further. What if we could incentivise more sales through peer recommendation? What if an incentive scheme can improve profitability by bringing the cost to serve down through self care and community engagement? What if we could facilitate a greater share of wallet?
We refer to this as the Loyalty Growth Quadrant.
Contact: Ioana Andrei,[email protected]© 2018 Red Dawn Consulting
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In this paper, we:
Look at the pitfalls of the traditional ‘earn and burn’ model
Present a new loyalty model in the ‘Loyalty Growth Quadrant’
Quantify loyalty through lifetime value
Provide benchmarks and best practices
The typical ‘earn and burn’ model…
Free: Product A
30% off: Product B
10% off: Any product
Spend level
Reward level
£150£50 £100
5 points
10 points
15 points
Traditional loyalty schemes simply reward spend with points
This ‘earn and burn’ model does little for
the customer experience
of loyalty schemes
fail within 2 years of
launch1
of loyalty accounts
go unused2
of loyalty points get
redeemed3
Relying solely on instant
gratification discounts to
keep customers from going
does not create long-term
trust and value.
People don’t have the space
to participate in all loyalty
schemes, especially when
they have little
differentiation.
Some forget to redeem, others
don’t need the rewards on offer,
others miss the expiry dates.
While this feeds loyalty scheme
profits in the short-term, it leads
to churn losses in the long-term.
… doesn’t create stickiness through engaging rewards and activities
1000points
So, let’s expand along the reward and spend dimensions
Most loyalty schemes
reward customers with
points, based on how
much money they
spend. These points can
be redeemed for
products, services or
discounts.
This model is gradually
being replaced by loyalty
strategies which go
deeper into the core
service of the company
and adapt dynamically
to customer behaviour.
Redemption
Contact: Ioana Andrei,
© 2018 Red Dawn Consulting3
77% +50% 14%
‘Earn’ ‘Burn’
© 2018 Red Dawn Consulting
‘Earn and burn’
Expanding the extent of offers and activities will have a profound effect on loyalty
This can redefine customer engagement
Contact: Ioana Andrei,[email protected]© 2018 Red Dawn Consulting
4
The Networker
Extent of offer
Extent of activity
Peer network
LifestyleSelf-care
Vitality
giffgaff
O2
Amazon
Tesco
Spotify
Airtime Rewards
The extent of activity dimension is a pecking order of behaviours that hook a customer onto a brand. Companies should integrate highly sticky activities into their services to create loyalty.
The extent of offer dimension ranks rewards by their effectiveness in engaging customers. Companies should compensate loyalty with highly sticky offers.
Nectar
Vodafone
HSBC
Spend Tenure
Monzo
Inte
rnal
Exte
rnal
Quantitative Qualitative
Cashback
Add-ons
Digital media
Vouchers
Experiences
Personalised products
Core product
The EvangelistThe Player
The Loyalty Growth Quadrant™
The Redeemer simply simply collects points and redeems them for a freebie every now and then.
The Player likes to try different experiences, but doesn’t need external activity motivation to do it.
The Networker is always engaged with the brand and its community, but doesn’t mind what they get back.
The Evangelist lives and breathes the brand, advocates it to peers, and needs highly engaging offers in return.
The Redeemer
© 2018 Red Dawn Consulting
giffgaff encourages its members to participate in community discussions and expansion, rewarding them through payback and slick user experience
• Technical issues, forums and improvement suggestions managed by members
• Recruiter and ‘networker’ payback
Extent of offer
Extent of activity
Peer networkSpend
The Loyalty Growth Quadrant in action
We are witnessing innovators deploying elements of broader incentive and choice
Self-care
O2 Priority rewards all customers who use the O2
telco services with a large range of internal and external discounts and offers
• Discounts at O2 Academy venues, live events and partner shops, e.g. restaurants, retailers
• Categorisation and search functionality to helps users find relevant rewards
Vitality has a health insurance loyalty programme, which incentivises lifestyle activities such as eating healthily and exercising. It uses strategic partnerships to offer rewards for lifestyle changes
• Discounts or freebies for lifestyle products, e.g. Apple Watch, Virgin Active
• Gamified reward system based on progress
Nectar rewards users’ spend with a large range of merchants via a spend-to-points system
• Discounts at 500+ shops, e.g. transport, media, retail
• Physical card gradually being replaced with mobile app
Inte
rnal
Exte
rnal
Quantitative Qualitative Cashback
Vouchers
Personalised products
The Networker
The Evangelist
The Redeemer
The Player
From air miles to the tenth product free: the biggest players have tested customers’ loyalty for years.
TMT players are quickly catching up, but they have a long way to go to incorporate stickier activities and offers.
Below we’ve curated a selection of examples from the quadrant. Look out for O2 and giffgaff: though part of the same corporate umbrella, their brands and loyalty strategies are differentiated.
Contact: Ioana Andrei,[email protected]© 2018 Red Dawn Consulting
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TMT lags behind incumbent loyalty players
The Loyalty Growth Quadrant in action
Loyalty scheme examples© 2018 Red Dawn Consulting
Customer Lifetime Value increases
substantially with high growth activities
and offers
For telcos, we estimate a 228% increase
Contact: Ioana Andrei,
© 2018 Red Dawn Consulting
6
Lifetime
(years)
Value
(€/ year)
Before loyalty
strategy
5 years4
(1/20%
churn)4
€2884
= Lifetime Value
(€)
=x €1,440
After Redeemer
loyalty strategy
After Evangelist
loyalty strategy
5.6 years5
(1/18%
churn)5
€3175 =x €1,775
6.7 years6
(1/15%
churn)6
€706 =x €4,730
Increased core product revenue €72 25% increase from €288 to €3606
Additional peer group spend new customer at standard ARPU7
2% of m-commerce spend8Additional product commission
Reduced cost to serve fewer contact centre calls and
retention discounts9
+228%
€288
€37
€21
To illustrate the effect of our proposed loyalty strategy, we’ve taken metrics based on an average
European telco. As telcos generally have a defined, and even limited, product range and basic
retention strategies, we have made prudent growth assumptions. Other markets such as retail or
finance may see higher growth with this model.
x
€288Value before loyalty strategy
+23%
The economics of loyalty
+
+
+
=
€706Value after Evangelist loyalty strategy
+
Mobile engagement Data management Automation
We have identified three key initiatives to consider when growing loyalty through extending activities and offers: mobile engagement, data management and automation.
Innovating in these three areas will not just enhance customer experience. When the loyalty strategy returns a critical mass of data, the quality of the core service has the potential to increase. Think of Google, whose user contribution strategy populates Google Maps services, or Spotify, whose social media integration feeds recommendation analytics.
• Gamification
• User community
• Customer referrals
• Digital marketplace
• Reward search and selection functions
• Trust through collection consent
• Behaviour and preference tracking
• Self-care functions
• Identify performing products in a ‘fail-fast’ model
• Preference prediction
• Communication timing and relevance
• Customer-reward matching
• Peer recommendation
How can we build a winning loyalty programme?Global best practices help us design a bespoke customer engagement experience
Contact: Ioana Andrei,[email protected]© 2018 Red Dawn Consulting
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Three initiatives to build a loyalty strategy
Best practice examples
absence is the reason for 25% of people abandoning loyalty schemes10
App makes it illegal to get data and send communications without users’ permission
is helping machines self-sufficiently learn and adapt to user behaviour
GDPR AI
1. Emarsys, “3 Examples of Customer Loyalty Programs Fueled by Data”
2. The Economist, “Mobile technology is revamping loyalty schemes”
3. Smile.io, “Examining eCommerce reward redemption rates”
4. RDC analysis, typical churn and Average Revenue per User (ARPU) based on post-paid telco subscribers in the UK
5. RDC analysis, typical churn and Average Revenue per User (ARPU) based on post-paid telco subscribers in the UK; assumed a 10% churn decrease (20% - 10% * 20% = 18%) and 10% ARPU increase due to ‘earn and burn’ spend and tenure incentivisation
6. RDC analysis, typical churn and Average Revenue per User (ARPU) based on post-paid subscribers in the UK; assumed a 25% churn decrease (20% - 25% * 20% = 15%) and 25% ARPU increase due to peer incentivisation and expanded choice
7. We assume one successful recommendation per user per year, which is attributed a pre-loyalty scheme revenue of €288 per year
8. The additional third party product revenue is calculated as: commission % x share of wallet increase x average yearly spend; assume 10% increase in share of user spend (based on Eurostat 2017 data on average European household spend); 2% commission received by telco from selling third party products; this leads to 2% * 10% * €18,330 = €37 additional ARPU
9. Reduced costs due to a) a reduction in in-bound customer calls (based on Cirrus and Contact Babel, “The UK Contact Centre Decision-Maker's Guide 2017-18”), €3.2 average cost per call; average of 2 calls per customer per year = €6.4); reduced requirement to provide a retention discount – saving of 5% discount on ARPU = €14.4
10. The Economist, “Mobile technology is revamping loyalty schemes”
Contact: Ioana Andrei,[email protected]© 2018 Red Dawn Consulting
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Our sources and assumptions
The data behind our analysis
Arun DehiriManaging Director
We make loyalty strategies work
Extent of offer
Extent of activity
The Networker
The Evangelist
The Redeemer
The Player
Where to?
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Red Dawn Consulting has provided rigorous market analysis and winning strategies todeliver growth for +100 companies in the Telecom, Media and Technology industry. Our strategies are grounded with an intimate understanding of competition, customers and emerging innovations from around the world.
Talk to us about building a winning loyalty strategy.
[email protected]’s LinkedIn
+44 (0) 333 301 3450 www.reddawnconsulting.com
[email protected]’s LinkedIn
Ioana AndreiConsultant