Loyalty, Rewards and Value:

What Do We Want from Our Customers?

Michael McCall
Research Fellow, Center for Hospitality Research
David Ogden
Principal Analytic Consultant
The Origins of Loyalty Programs

ƒ S&H Green Stamps ƒ American Airlines

AAdvantage (1981)
ƒ Strengths ƒ Strengths

ƒ What did they not ƒ What did they not

provide provide
Fast Forward: Loyalty Programs 2009

ƒ Widely Available in Virtually All Industry Segments

ƒ Expected By Consumers
ƒ Lack of Empirical Evidence Demonstrating Positive
Effects
ƒ Some Evidence of Negative Effects
ƒ Lack of Strategic Focus and Measurable Outcomes
“You know, I have this customer reward program. It is
kind of expensive but, I feel like I have to have a
program because everyone else has one. Honestly,
I don’t know what if anything it actually does for me.”

--- A Millennium Group Hotel Manager (2009)

Conceptual Model of Loyalty Program Effectiveness*
Structure of Loyalty Program Loyalty Program Effectiveness
~Program Tiers Î
~Number of Tiers ~Increased Purchase Frequency
~Tier Transitions
~Decreased Customer Price 
+ Sensitivity
Structure of Rewards
~Reward Type ~Customer Advocacy
Î
~Reward Magnitude
~Reward Frequency ~Extended Relationship Lengths
~Reward Framing
~Increased Share of Wallet
+
~Development of Consumer 
Customer Factors
Community and Connectedness
~Customer‐Program Fit Î
~Role of the Customer ~Increased Firm Performance
*McCall and Voorhees (2010), Cornell Hospitality Quarterly
Research Overview

ƒ Data Collected from Loyalty Program Members in

Two Industries
ƒ Sit Down Restaurants (N = 151)
ƒ Air Travel (N = 334)

ƒ Measured…
ƒ Perceptions of Brand Equity
ƒ Cumulative Satisfaction
ƒ Loyalty Program Quality
ƒ Share of Wallet
Key Results

ƒ Significant Main Effects on SOW

ƒ Brand Equity
ƒ Customer Satisfaction
ƒ Quality of Loyalty Program

ƒ Significant, Positive Interaction Effects

ƒ Brand Equity x Quality of Loyalty Program
ƒ Customer Satisfaction x Quality of Loyalty Program
Key Findings

ƒ As perceptions of the quality of loyalty

program improves, the positive effects of
brand equity and satisfaction increase

ƒ Further justification for the need to not only

have a loyalty program, but to ensure it is
viewed as “quality” by your customer base.
Research Overview

ƒ Data Provided by Firms in the Lodging Industry

ƒ 8 Years of Transactional Data
ƒ 100,000 Loyalty Program Members
ƒ 1.2 Million Transactions

ƒ Measured…
ƒ Spending (Room, Food and Beverage, and Other Services)
ƒ Basic Demographics
ƒ Upgrades and Downgrades
ƒ Other Actions to the Account
Key Results

ƒ Loyalty Program Members are well-represented as

8 independent segments

ƒ One highly valued segment emerged

ƒ Two additional segments appear to increase

spending based on the program

ƒ Five segments did not show substantial increase is

spending following enrollment
Key Findings

ƒ For ¾ of the loyalty program members, the enrolling

in the program did not result in increased spending.
ƒ This suggests a need to probe what benefits are missing
from the program itself

ƒ Highly valuable segment accounted for the majority

of the spending, but were grouped with other
“lesser” consumers in the top tier of the program.
ƒ These results suggest a need for an ultra-premium
category that is reserved for a very small minority
Future Research

ƒ Optimization of Program Structure and Rewards

ƒ Develop tradeoffs between high consumer value
rewards and low cost rewards
ƒ Instill rewards that drive engagement to foster true
loyalty

ƒ Assessing the Benefits of Loyalty Programs

ƒ Determine the effects of programs on consumer
spending
ƒ Assess moderating effects of competitive intensity,
promotional efforts, and program structure
General Recommendations

ƒ Don’t create price sensitivity among customers.

ƒ Think carefully about tier program management: Rewards
are easy to give hard to take away.
ƒ Think carefully about what the customer values.
ƒ Reward customer engagement.
ƒ We have more data than ever before on customers:
Separate true effects from artifacts.
ƒ Bridge the gap between academics and practice.
Loyalty Programs – value orientation

Loyalty programs are typically designed to:
• increase spending…frequency & monetary value
• increase customer retention
• maintain competitive positioning
• acquire additional customer data

Customer Lifetime Value (CLV):
• measure of cash flow from a customer, past & future
• basis for measuring true economic value
CLV 101: margin + retention = value
The essence of CLV Æ get higher margins, loooong into the future.
High

learn-from &
med high
Retention Likelihood

acquire more
CLV CLV
improve

low med
CLV CLV improve
(eliminate as a last resort)

Low Margin $ High

CLV – we’re talkin’ big dollars here…
Well-designed loyalty program Æ reduced customer churn.

How valuable is it to reduce churn? Consider…

with a monthly margin of $30,
a monthly churn probability of 5%,
(and a discount rate of 10% for present-value calculations)
customer future value = $491
…decrease monthly churn probability to 4%...
customer future value = $600

For 10M customers, that is worth over $1 billion…

net present value of incremental future cash flow!
 CLV – the basic concept

ƒ CLV is a sum of returns, over the “life” of a customer.

ƒ Sum margins (profits) from a given customer, from the time you acquire that
customer until they are no longer your customer.

Acquisition
Churn
Monthly Profit

sum margins
over the “life”
of the
$ $ $ $ $ $ $ $ $ $ $ customer,
including the
Time cost of
acquisition
$ Example: -100 + 75 + 80 + … + 63 = CLV
CLV – how hard can it be?

Predictive 
Customer 
Modeling & 
Profitability
Forecasting

Intelligence to 
Monthly Profit

UNKNOWN FUTURE Improve/ 
Optimize
$ $ $ $ $ $ $ $ $ $ $
Time
What is the value of each customer today?                
What is the expected amount of future money?
$ What can I do to increase future money?
CLV – step by step

value creation,
relationship mgmt,
improving & optimizing
customer lifecycles,
retention modeling,
margin projections
mathematics,
econometrics,
financial acumen
CLV – visualize the math

Margin projection,
$ $ $ $ $ $ $ $ $ $ $ $ …
adjusted for
cumulative
retention
probability, $ $ $ $ $ $ $ $ $ $ $ $ …
discounted
to net
present
value,
$ $ $ $ $ $ $ $ $ $ $ $ …
…and summed.
Customer Value Math – more than one choice
CLV – okay…now what?

ƒ After building a retention model…

ƒ Developing customer‐level margin projections…

ƒ And selecting the right formula to put it all together…

ƒ Now what?
CLV – leverage the mechanics

Customer Demographics Å customer segmentation
Customer Experience Å process improvements
Customer Behavior
Retention
Customer Loyalty / Tenure Propensity Future
Value
Marketing Treatments 
Future
up/cross‐sell, retention, acquisition Margins
Revenue
CLV
Å pricing
Account Adjustments
Bad Debt Historic
Value
Cost to Acquire Å channel strategy
Cost to Maintain / Serve Å cost controls
SAS Analytics – value evolution

Optimization
Data / Text Mining
Forecasting
Business Value

Reporting / OLAP Predictive Modeling

Data Management Statistical Analysis
Data Access

Data Information Knowledge Intelligence

Final Thought

“We are not talking about best practices, we are talking about NEXT
PRACTICES!”

Jim Davis, Sr. Vice President and Chief Marketing Officer, SAS
(Premier Business Leadership Series, Las Vegas, NV, October 28, 2009)