White Paper - The Great Value Proposition Debate

7/29/2019 White Paper - The Great Value Proposition Debate

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The Great Value Proposition Debate

Man is an economic animal in search o sel-importance.

Brian Wool, Customer Specic Marketing


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Introduction

Brian Wools quote illuminates the two behavioral levers that comprise the undamentaltool kit or building all loyalty-marketing value propositions. When properly leveraged and

applied, these levers can alter current patterns and create sustainable, protable customerpurchase behavior. Wool, a noted author and loyalty consultant, knew that consumers are

both rational and emotional in their purchase decisions. They want to know that theyve got-ten their moneys worth and are eager to inorm others what a good deal they received. Thishuman characteristic is at the crux o the economic animal argument.

But consumers also want to eel that theyre special. Not only are they responsive to any andall gestures o recognition, but theyll also smugly tell others o their unique status, reinorc-ing Wool s sel-importance observation.

Well-designed loyalty programs use these levers with a combination o hard and sot ben-etsree, tangible rewards and conspicuous, unmistakable recognition. While critics o loy-

alty programs oten decry this psychology o rewards as nothing short o bribery, long-timepractitioners o the art and science ooyalty marketing argue passionately that the blended

value proposition o hard and sot benets is undamental to program success and superiorreturn on investment.

The psychology of rewards

The psychology o the blended value proposition is simple. There is no better price to a cus-

tomer than ree, so the accrual o a hard-benet promotional currency that eventually leadsto a no-cost reward represents compelling, indisputable added value. Better yet, because the

points or miles act as deerred, accumulated incentives rather than temporal price reductions,loyalty programs preserve margin and shit the consumers attention away rom price.

Likewise, the sot elements o ego, status and sel-importance can set unique emotionalhooks into customers when delivered by a variety o special treatments, privileged access or

dierentiated experiences that allow or dened levels o relationship. By combining the hardand sot approaches, the loyalty marketer creates an aspirational ladder that invites custom-

ers to climb as high as they can.

When the loyalty program provides enough value, your customers will do the work. Aslong as the hard and sot benets are sufcient, theres no need to ping incessantly on your

customers cell phones or blast away at their inboxes. Customers will actively seek out ways tobuy more in order to earn more. Cognizant o the economic and emotional benets that ac-crue to them or their patronage, customers actually raise their hands and say, Hi, here I am.

Track me, market to mebut always reward and recognize me.

COLLOQUY has long advocated the need or both hard and sot benets in loyalty programsas the means to create signicant customer commitment and involvement while laying the

oundation or enduring customer loyalty. COLLOQUY ounder and original publisher, RickBarlow, noted in the inaugural issue (1990) that a balanced and well-blended value proposi-tion made the most sense. Barlow was the rst practitioner to go on record with the value

proposition debate. He also was the rst to coin the phrase hard and sot benets. He asked

questions about points versus discounts and communications-only programs that are stillbeing asked today.

Barlow believed that a compelling hard benet was a tangible reward, irresistible in per-ceived value and always available to the member or ree. He warned us not to mistakediscounts or hard benets. Although price reductions carry an economic incentive, they

arent ree; they require customers to dip into their own wallets to take advantage o theoer. Hence, discounts are sot benetsprivileges made available to members based on

their earned status in the loyalty program. Its a subtle distinction, but an important one.Barlow also warned that, while customers will take all the discounts you oer them, the



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Chart A

CUSTOMER STRATEGY RATIONALE

Added value is oten as simple as a communications-only strategy, a membershipcard, a newsletter, some survey questions and a way to know customers namesand preerences when they arrive to do business. Points cost lots o money whoneeds em?

A tangible reward, which may be earned in its entirety and requires the programsponsor to spend out-o-pocket dollars to provide it, and or which customers wouldotherwise have to pay. In other words, mix in some miles or points that convert to

ree stu and you have very willing, interactive customers, solidly within yourown magic marketing ortress. Can you aord this?

An intangible consideration extended to members as evidence o their specialstatus. Most oten taking the orm o special treatment, privileged access ordiscounted pricing and could require little or no out-o-pocket unding by thesponsor. We all know it worksevery time we step up to the separate check-inline, settle into an upgrade seat in rst class or drive right o the lot while themasses wait in line. How do you execute?

DIALOGUE

HARD

SOFT

tactic is easy or your competitors to match or beat. Discounts lack memorable impact andonly increase customer ocus on price. Barlow oten argued that discounts alone dont dene

the brand in a way that sets apart the relationship between you and your best customerses-pecially your top-tier, high-value customers.

The Great Debate

Loyalty marketers throughout the history o this discipline have asked similar questions. Whatvalue proposition works best? Points only? Discounts only? Dialogue and communications only?

All o the above? None o the above? The conundrum has been apparent or more than 0 years,and the best advice COLLOQUY could come up with is that a loyalty value proposition shouldcontain some magical mix o hard and sot benets with an overlay o customer dialogue. The

arguments and denitions look something like those ound in Chart A.

While Barlow and Wool may have been rst to put intellectual substance around the argument

o hard and sot benets, they werent the only voices in the wilderness. Other loyalty practitio-ners and marketing consultants have made the same argument:

A comprehensive and multi-aceted combination o recognition and reward (works), dier-

entiated in response to the ever broader and deeper understanding o the needs and preer-

ences and relative economic value o individual customers. Hard benefts (rewards) purchase

credibility, customer attention and customer inormation. Sot benefts (recognition) set the

emotional hooks o deeper and more durable loyalty.

Don Peppers, COLLOQUY Issue 6.4 Publishers Notes, 1998

The customer who has joined a loyalty program or a 10 percent discount will leave when

another program oers a 15 percent discount. True loyalty is earned when unique, personalized

or sot benefts are added to the mix. They tell the customer that they are part o a special group

by bestowing status on them via special treatment or access to exclusive services.Janet Kraus, CEO, Circles, COLLOQUY Breaking News, February 00

Sot rewards are very eective builders o retentiononce worthwhile privileges have been

earned, customers are unlikely to sacrifce them. It is oten the sot rewards that are remembered

or longest. Sot rewards are oten the drivers o advocacycustomers derive great pleasure

rom telling their riends about exceptional service that has been lavished upon them.

Robin Clark, The Wise Marketer, 004 Loyalty Marketing Guide



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While the experts may agree, marketers oten remain skeptical. Many loyalty programs arelaunched without a blend o hard and sot benets. Having engaged in numerous loyalty con-sulting assignments over the years and having heard extensive debate about the proper value

proposition in our public, educational workshops, the team at COLLOQUY realized that tacticaland operational hurdles oten prevented best strategies rom evolving.

A number o alse premises and real-world stumbling blocks continue to uel the debate. Here

are a ew o them:

Customers lie: Well, not really, but what customers say and what they do are oten at odds.Whenever consumers are surveyed as to what value proposition they preer, they invariably listcash and discounts as Nos. 1 and , respectively. But in a real-lie loyalty program, they more

oten than not choose accrual, rewards and special treatments as the real inuencers o theirbehavior. We have consistently seen the prospective customer ocus group derail the strategic

concepts o hard and sot benets beore the train ever leaves the station.

You cant aford it: You can design the perect value proposition on paperbut just try to imple-ment it. No sooner do you try than Operations begins lamenting the hidden cost o deliveringsot benets and the training required, while a vein in your CFOs head starts throbbing over the

issue o point liability. The result, in most cases, is the compromising o your strategic vision. And itgets worse when your business case still includes the rosy projections o increased retention and

spend ater youve been orced to water down your value proposition. Aordability is an ROI issue,

not a cost argument. Weak value propositions ail to change behavior. Without positive behavioralchange, youve only increased the cost o doing business.

Its too hard: Frankly, many marketers dont have the specialized expertise, time or the willing-

ness to exercise the gray matter required to design a truly dierentiated loyalty value proposi-tion. Why spend time thinking about all o those hard and sot benets when its so much easier

just to run another promotion? And its easy to model resultsater all, weve been runningthese discount days since beore we were born. Reliable predictions and tactical reports take

precedence over innovation and strategic thinking.

Empathetic as to the practical challenges, but rustrated over the lack o understanding, the

COLLOQUY brain trust has consistently looked or a solution to this conundrum. What i wecould oer incontrovertible proo that the right mix o hard and sot benets inuences custom-

er behavior better than any other value proposition? Numbers dont lie. I we can prove it, thencan we nally settle the debate?

When opportunity knocks

Fortunately, in 00-04, such an opportunity presented itsel. A client who was debating these

very issues engaged the consulting team at COLLOQUY to help them identiy the optimal valueproposition or their soon-to-be-launched loyalty program. When internal disagreement caused

the program design decisions to reach a stalemate, we proposed a real market test to quantiythe dierences being debated. The client agreedand the opportunity to put theory to the test

had nally arrived. While we hoped to ultimately settle the debate, we also relished the opportu-nity to nally shed some quantitative light on the subject.

The client, who granted permission to use this case in return or anonymity, is a big boxretailer with more than 400 stores in the U.S. and annual sales o over $4 billion. The target

audience in question consisted o consumers and small business owner/operators who werealready visible in the retailers transactional database because o their propensity to use the

merchants private-label credit card. The business objectives called or a lit in average spendper customer o more than 0 percent and an improvement in the rate o customer attrition

by 10 percent. Given the higher value segment characteristics o the target audience, achiev-ing these objectives would result in a substantial nancial benet and return-on-investment(ROI) or the retailer.

4 The Great Value Proposition Debate


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The debate over the value proposition required to achieve these objectives is an all-too-amiliarrerain especially in retail environments. Merchants, ater all, are merchandisers, and they knowthat discounts and rebates move the needle, especially when they have the r ight inventory

displayed and a needle begging to be moved. Proven rebate and discounting techniques canpredictably alter same store sales or comp revenues, and these gains usually drive avorable

opinions rom Wall Street analysts and the resultant higher stock prices. This debate is typicallymost ervent within the Executive Suiteand so it was with this retailer. They were inclined sim-

ply to give the target audience greater value through reduced prices and orget about points,rewards and special privileges.

Fortunately, the client s marketing team was curious. They believed a program that positivelyimpacted same customer sales would achieve similar results with potentially greater margin.

They knew that the price-derived value equation would move results, so they wanted to includethese proven tactics in their test. But they also wanted to know i Barlow,Wool, Peppers and

the others were right. To sort out the optimum value proposition or their target audience, theyneeded rm measures against a control.

Thats where we came in.

The test construct

The test construct we designed was simple and straightorward. It looked like this:

We created a total o ve dierent value propositions as test cells and conned each treatmentto a single test market. We careully matched each market to a control market that received no

value proposition stimulus. The market-matching criteria were extensive and sought to mini-

mize any potential noise in the results due to geography, weather, competitive patterns, marketdevelopment and other extraneous actors outside the parameters o the loyalty program.

The Reward cell oered loyalty program members the ability to accrue points they could re-deem or in-kind merchandiseproducts already sold by the retailer. We set the rate o accrualat approximately -4 percent o the members spend on each identiable transaction. This cell is

best characterized as a classic hard benets only value proposition.

The Service cell oered members discounts on selected items at up to 50 percent oa spe-cial pricing privilege or members only. Additional privileges included special checkout lanes,

preerred parking, git cards and oers rom local restaurants, and special spending reports thathelped the audience keep track o their purchases by department. This cell was a sot benets

only strategy, but it did includesome economic incentives.

The Combination cell oered members both the points accrual model o the Reward test and

the special PAGE privileges (but without discounts) o the Service test. This cell was the classicdenition o a blended value 5 proposition containing both hard and sot benets.

The Rebate celloered members a -4 percent rebate on all identied purchases; they could

take the rebate as either cash back or a balance reduction on their private-label credit card ac-count. In keeping with our classication o rebates as sot benets, we characterized the Rebatetest as such, even though the economic incentive was substantial and applied to all member

spending.

TEST HARD BENEFIT SOFT BENEFIT

Reward Merchandise

Service Discounts & privilege

Combination Merchandise Privilege

Rebate % o or cash back

Awareness Communications



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The Awareness cell was a communication-only strategy that used incremental, targeted andpersonalized direct mail to reinorce existing services oered by the retailer to the private-la-bel cardholders. This cell was a dialogue-marketing test using special communications as the

sole sot benet.

More than 75 stores participated in the test, and we auto-enrolled over 60,000 members romthe house credit card le. The control group consisted o approximately 0,000 customers rom

the same target audience who received no treatment, but whom we could still track.

With the exception o the Awareness cell, all benets were tiered at ve levelsthe higher thetier, the higher the value o the rewards, rebates and sot benets. We established a minimumspending threshold and communicated it as a requirement to qualiy or the rst tier o benets.

We considered the target audience a higher-value segment than the average customer o thisretailer because they displayed regular purchase requency and higher average transaction

values than the norm.

We ran two consecutive six-month test periods. At the end o each test period, the Rebate,Reward and Combination markets received their economic benets. The customers in the Re-ward and Combination markets redeemed their points or merchandise rom a tiered catalog.

The Service and Combination markets received delivery o their sot benets throughout thetest period.

And the winner is . . .

At the conclusion o the two test periods, we analyzed data associated with the program objec-tives or each test cell versus their respective control groups. While we hate to say we told youso, the proo is in the pudding: The results overwhelmingly avored the blended value proposi-

tion. What our theoretical evidence told us would win out actually did:The Combination testmarket, with both hard and sot benets. The results looked like this:

At the end o the two six-month tests, the Reward, Rebate and Combination cells all gener-ated positive revenue lit over control. The Rebate cell came close to stated lit objectives; theCombination cell actually irted with achieving or slightly surpassing the established metrics or

revenue change. For attrition measureswhich we dened as no transactions in the preceding1 monthsonly the Reward and Combination markets generated a positive result versus con-

trol. While both cells surpassed the preestablished metric, the Combination market did so withoverwhelming superiority. The Rebate test ailed to generate a positive attrition benet. Both

the Awareness and Service cells ailed to register a positive result versus control or either lit orretention. In other words, they were big losers.

The Combination value proposition not only generated the greatest revenue lit, but also camewithin a millimeter o achieving very ambitious objectives. This same proposition blew away

the attrition objective. Although this value proposition carried higher execution costs, it was theclear winner in the value proposition debate.

The Reward market, a hard benets only strategy, also saw increased revenue lit and experi-

enced an attrition benet, but not at levels sufcient to meet nancial objectives. The addedcosts o running and maintaining the points program and merchandise redemption optionsrequired either greater efciency o scale (only one market had this treatment), stronger lit

or greater time or the attrition benets to produce additional ROI. The Rebate market results


Awareness

Service

Reward

RebateCombination

Revenue Lit

Awareness

Service

Reward

RebateCombination

Attrition Beneft


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conrmed our belie that rebates are an eective tool or motivating a short-term jump inspendbut at this rebate level at least, they are ineective at sustaining sufcient interest andloyalty to stop churn.

What about customer value?

But our analysis didnt just concentrate on the primary metrics associated with loyalty programobjectives. We conducted an additional evaluation to examine the overall value o the members

in each test cell. Based on a proprietary Customer Value Score (CVS) methodology that usesa composite o recency, requency and monetary spend measures, as well as the principle o

transaction velocity, this evaluation took the derived value scores or each cell and indexed themto a benchmark o the Service market members.

The result? Members in the Combination value proposition test returned value scores a ull 10percentage points higher than benchmark market members, as evidenced below:

Hence, the Combination cellwith its blend o hard and sot benetswas not only producedimproved retention and increased yield, but also delivered the highest overall average customer

value to the retail organization.

The retailer requested one nal measurement. What would happen to revenue change ater theloyalty program stimulus was removed? We evaluated a ve-month post-test period by trackingthe continued transactional behavior o all members in the test markets. The results, which ap-

pear in the chart below, were interesting, to say the least:

The Combination market saw a continued increase in spend even ater the test ended. The

Rebate market essentially leveled o, keeping the gains they saw during the test even ater we

removed the Rebate. The Reward market, however, saw spending in the post-test period all inrelation to the test period, essentially returning to its pre-test spend. What was happening?

Heres where we enter speculative territory. Did the Combination market see continued lit

due to a halo eect attributable to receiving not only a tangible benet, but also recognitionthrough the delivery o sot benets? The intangible, emotional elements o this value proposi-

tion may have conveyed the message that these customers were highly valued by the enter-prise. Wooles sel-importance concept appears to have an ater-lie. Additionally, once wegained orward momentum with these customers, simple inertia may have kept the revenue

gains in place during the post-test period.


Sot Benefts

Only

Comm.

Only

Cash

Back

Hard Benefts

Only

Blend o

Hard/Sot

112

110

108

106

104

102

100

9896

94

In

dexedV

alues

Average Customer Value Impact

Test vs. Post Test Revenue Lit

Combination Rebate Reward Service Awareness

Test

Post Test


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Additionally, the Rebate market kept its test period gains while the Rewards market did not. I,as we surmised earlier, Rebates have less o a sustaining eect than Rewards, then why wouldntthe opposite eect have occurred?

Again, more speculation is necessary. Was the withdrawal o rebates rom customers less o

a shock to the system than the withdrawal o tangible hard-benet merchandise? Perhapscustomers saw the rebates as less dening, less value-add and more o a reection o special

status. As such, they carried a sot-benet impact into the post-test, essentially conrmingour belie that the perceived value o cash is not as strong as the perceived value o a reward-

based benet. Without the dening sot benets, meanwhile, the Reward market had no haloand no recollection o prior special privilege to oset the loss o incentives. The market re-verted back to its pre-test level o revenue. Apparently, the economic animal does exist and

his diet has to be ree.

Finally, the crazy patterns in the Service and Awareness markets were rankly puzzling. Did theService market members nd the sot benets o the program irrelevant to their needs? Did they

eel slighted by the oer? Even ater the stimulus was removed, the bad eelings lingered, andthe behavior continued to decline. In the Awareness cell, was the special nature o the commu-nications lost on members? Or was the post-test lit a delayed response to the Awareness com-

munications? Advertising and communications proessionals have preached or decades thatsustained messaging eorts are required to get the point across. Could it have simply taken a

little longer or communications to deliver revenue gains? Perhaps we should take a closer look

at the dialogue-only approach, and devise a deeper measurement plan over a longer period otime to sort out the puzzle.

The science of control groups

I the design, testing and interpretation o the value propositions and their results were pure art,then we must view the measurement disciplines used in this case as all science. The entire test

was made possible, and results deemed credible, because we used control groups.

To identiy incremental lit and the attrition benet o a loyalty programor any other metric,or that matteryou must establish some type o control group. There are a variety o methodsto do this. Some methods are more precise than othersbut were continually amazed by how

many loyalty programs ail to establish any control measures. Control goup methods exist along

a spectrum rom the ideal to what we consider secondary, or less than ideal:

A true control group consists o a random sample o the population that is never exposed to

the program stimulus. While this method is prevalent in the direct marketing arena, it can be di-cult to execute in loyalty-program designs that use in-store marketing and national advertising,

as was the case with our retail client.

In order to use a true control group, you must identiy customers beore the program begins,and you must track purchase behavior. Most retailers are unable to meet this necessary require-

ment, but direct billing or subscription industries such as telecom and cable television oten can.


Ideal Loyalty

Measurement Design

Secondary Loyalty

Measurement Options

True control group Hold-out

control group

Create a quasi-control

o like non-members

Participator vs. non-

participators

Pre vs post behavior

shits (members only)


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A hold-out control group basically acknowledges the real-world struggles o a true control mea-sure. The basic requirements are the same or both true and hold-out control groups: You splityour known customers into test and control cells, actively enroll your test population and hold

out those designated or control measures. I customers in the control group hear about yourprogram, you need a contingency method to enroll them and track their perormance separately.

Migration rom control group to test group can cause some bias in your measurements.

Financial service providers and hotels are good nominees or hold-out control groups. Bothindustries can identiy their customers, contact them when needed, track their historical spend

and match the patterns between test and control prior to the start o the loyalty-program pilot.Automatic enrollment or direct invitations are the only enrollment strategies that support trueor hold-out control groups. Our retail client used an auto-enroll strategy.

Unortunately, whats good or measurement isnt always good or marketing. I your program is

tender neutral, and youre trying to capture customer inormation and establish baseline behav-ior or previously invisible transactions, these solutions can be less than ideal.

To establish a quasi-control group, select a like group o non-test members whom you cantrack, perhaps by using stratied random sampling on customers who were invited but did not

respond, or establish a market control by identiying a matched market that closely resemblesthe geography in which youre testing. Our retailer essentially ollowed a quasi-control measure-

ment plan. Careul selection o the matched markets is extremely important in mitigating the

potential bias o geography.

The participator method assumes that only the customers participating in the program areaected by the program stimulus. By participation, we mean those customers who demonstrate

active engagement with the program through incoming interaction such as a phone call, a visitto the web site, point redemption or survey completion. This method works well in a subscrip-

tion environment, where customers can gain status in a loyalty program without showing a cardwith each purchase.

The least attractive method o establishing a control group is to compare the behavior o mem-bers prior to program involvement to their behavior subsequent to their involvement. Many

actors can bias the results: sel-selection, seasonality, competitive response, market conditionsand even human nature. You simply cant isolate other variables rom the program stimulus well

enough to gain true understanding.

The joys of market control

In this case study, we employed a market control system. Our clients customers shopped ingeographically concise locations, and the retailer displayed program materials prominently

in the test markets. This system allowed us to test each value proposition within the closedenvironment o a distinct geographic market while taking advantage o inexpensive in-store

advertising. The market control method also acilitated sta training, as each test market neededto learn only one value proposition. Customers not automatically enrolled in the program could

enroll on site. In addition, the retailer encouraged all members to register additional identica-tion vehicles in the orm o their preerred credit card.

In selecting the control markets, we considered the size o the markets, and kept an eye on therelevance that market would have in projecting rollout scenarios. To remove as much uncertain-

ty as possible during market selection, we analyzed and compared several variables, includingthe number o customers and stores, customer value, potential and likelihood to attrite, as well

as revenue trends, market actors, competition, climate and divisional placement. Rememberthat variables are unique or every industry; select the ones that are important to your business.



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You are what you measure

To best measure results at the individual member level, you must capture the test and controlgroup behavior or a dened period prior to the program, and or that same period during the

program. Metrics can include total spend, requency, spend per visit, recency, value score, at-trition score or any other metric important to your business. Make sure you include only those

members who have an identied transaction in the prior period. Then ollow these steps tomeasure program success:

1. Calculate actual change vs. year agoMember program behavior Member prior behavior = Member change in behavior

Control program behavior Control prior behavior = Control change in behavior

2. Calculate percent change vs. year ago

Member change in behavior / Member prior behavior = Member percent change

Control change in behavior / Control prior behavior = Control percent change

3. The KEY metric is the delta percent:

Member percent change Control percent change = Delta percent

The futures so brightThough this test helped shed substantial light on the Great Value Proposition Debate, the nan-cial ramications o the results needed additional exploration. Each value proposition carries a

dierent cost structure and a dierent pattern o results. Youll need to examine operational chal-lenges, ease o implementation, rollout scenarios and many other actors in a business-nancial

context beore you march into the CEOs ofce, pound your chest and tell him or her exactlywhat to do.

As or our test, we created next-step scenarios and nancial projections based on actual resultsor the Combination and Rebate cells. We selected the Rebate value proposition based on

managements insistencethey believed that the ease o implementing rebates might makeup or their perormance shortcomings.

We thereore designed ve scenarios or continuing the test and modeled nancial projections

or each scenario using proprietary loyalty nancial modeling tools with a proven track recordand standardized nancial math.

The scenarios broke down as ollows:

1. Continue test with current construct. Continue with the Combination value proposition in the current markets

. Continue with the Rebate value proposition in the current markets4. Expand the Combination test into additional markets5. Expand the Rebate value test into additional markets

The key metric outputs rom the nancial model that we evaluated were:

Year 5 Return on Expenses (ROE)

5-year Net Present Value (NPV) Time to Break Even



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Show me the money

And the results were:

1. Continue test with current construct

An obvious losing hand. The lit experienced in the Rebate, Reward and Combination mar-

kets isnt great enough to counter the decline in the Service and Awareness markets. Andthe attrition beneit generated in the Reward and Combination market, though signiicant,isnt great enough to counter the continued loss o customers in the Service, Awareness

and Rebate markets.

2. Continue with the Combination value proposition in the current markets

3. Continue with the Rebate value proposition in the current markets

Neither scenario meets established nancial hurdles or investment. The Combination valueproposition, however, does return positive results or the ve-year ROE and NPV metrics. In ourscenario, we estimated it to break even in Year . The Rebate value proposition, meanwhile,

doesnt break even during the ve-year examination period. It returns a projected negative Year5 ROE and NPV.

4. Expand the test with the Combination value proposition into additional markets

5. Expand the test with the Rebate value proposition into additional markets

Assuming an expansion or rollout o either value proposition in additional markets, theCombination strategy produces a resounding inancial win. We projected break-even or the

end o Year 1. The Year 5 ROE and NPV returned very positive projections that met the CFOscriteria or success.

Unortunately or you merchants in the audience, the Rebate strategy is a major loser. It canmeet neither the ROE nor the NPV standardsin act, both return negative results over the ve-

year nancial projection period. While the revenue lit is evident, it comes at a reduced marginand does nothing to increase retention over the long haul. The more markets you expose to

such a strategy, over the longer term, the worse the nancial results become.

The Combination value proposition does carry additional expense loads or the retailer. Whilethese expense loads have a variable cost component associated with the rewards unding, sot

benet delivery and program membership size, they also carry a xed component covering theinrastructure, technology and program management expenses required to run a hard and sot

benets design. More critical mass beyond the original test market means more leverage o thepositive eects rom increased revenue and higher average value per customer. More time or-

ward means that the accumulated eect o improved retention begins to build nancial equityand really kicks in accelerated returns. In other words, you should base your decision to run with


Combo-

Current

Rebate-

Current

Year 5 ROE

Combo-

Current

Rebate-

Current

5-Year NPV

Combo-

Expansion

Rebate-

Expansion

Year 5 ROE

Combo-

Expansion

Rebate-

Expansion

5-Year NPV


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this value proposition not on the cost o running such a program, but rather on the return as-sociated with your investment.

The lessons in this case are proound. While some o you will wish or more nancial methodol-ogy details and better calibration o the accompanying graphs, we humbly remind you that we

had to hold back some o the nitty-gritty in order to receive permission to publish this case. Forour part, were grateul that at least one retailer was willing to share what they learned during

an actual loyalty test. The actual numbers or this retailers nancial model are ar less importantthan the procedure and discipline used to answer an extremely important business and cus-

tomer management question.

I youre not using test and control methods to evaluate alternative loyalty program designs,

then shame on you. Though challenging, the techniques are available and can be perormed byanyone who has the tools and mindset. I you dont have pre-established objectives and a rm

measurement plan or reporting your results, then rankly, youre beyond our help. And i youdont use those results to build sound nancial models, simulations and ROI projections, then its

no wonder you never get invited to the Executive oor.

In this case, its wise to ocus not on the specicsbecause yours will be dierentbut rather

on the disciplines involved. Do things the right way in order to do right by your best customers.And i you need outside help, dont be araid to ask or it.

The debate: settled?

Loyalty programs with hard-only or sot-only benets can be successulwe all know o ex-amples in the marketplace. Likewise, many programs eaturing a combination o hard and sotbenets have ailed miserably.

But, in a study o nearly ,000 loyalty programs in the COLLOQUY archives (1990-004), we ound

that 8 percent o all new loyalty initiatives ailed. O those programs pulled rom the market,77 percent had weak or no sot benets; 75 percent had no demonstrated dialogue tactics with

their best customers; 8 percent did not appear to use the customer inormation they collectedto advance their program, rene their measures, or improve the value proposition or theirmembers. This isnt pure coincidence. Rather, its the art and science o loyalty marketing talking

back to the audience that created it.

Just like your customer base, our case study is unique. Taken alone, it may not settle the GreatValue Proposition Debate. But it does shed powerul light on the subject. Certainly it invites

more study, greater experimentation, and rigorous research. The entire loyalty industry wouldbenet. We hope weve gotten the ball rolling.

The Great Value Proposition Debate was originally published by

COLLOQUY Volume 1, Issue 5, 005.

Permission to use has been granted by the publisher.



13/13

Marketing Strategists is an independent consulting practice ocused on the responsible

design and enablement o your best customer and loyalty marketing strategies. We

specialize in creative, customer-ocused, data-driven marketing solutions. Founding partners

Mike Capizzi and Terri Gaughan collectively bring over 50 years o experience and the

passion or best customer initiatives to deliver proven insights and results.

Learn more at www.mktgstrategists.com

Marketing Strategists, LLC

545 Ridge Avenue

Greendale, IN 4705

USA

[email protected]

Mike Capizzi, Founding Partner

+1 81-57-747

+1 81-90-1915 cell

[email protected]

Terri Gaughan, Founding Partner

+1 51-8-5480

[email protected]

Terri Gaughan

Mike Capizzi

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