Do loyalty programs work? An interview with Radek Hrachovec

About Radek Hrachovec

‍Radek Hrachovec dedicated the last 20 years of his professional life to loyalty programs. He became one of the most skilled practitioners within the loyalty industry in Central Europe and received the prestigious Certified Loyalty Marketing Professional (CLMP) certification. He is also a long-serving judging panel member at The International Loyalty Awards. 

About Voxwise

‍Voxwise helps corporate clients to become more customer-centric, create value out of customer data using marketing automation and omnichannel customer engagement. Voxwise provides customer data platform integration, data analytics and consulting in many areas of loyalty, pricing, and CRM. 

How to measure whether a loyalty program is working?

The challenge of measuring whether customer loyalty programs work is an enduring conundrum. Loyalty programs don't operate in a vacuum. The very best approach to quantify the ROI of a loyalty program is to calculate the difference between the behavior of a long-term control group and equal members in the program. Sounds great in theory, but quite unattainable in reality.

The second best way is to use standardized metrics like Net Loyalty Score. The results of Net Loyalty Score correlate with actual customer behavior, which was backed up by extensive transactional analysis. Net Loyalty Score is a reliable benchmark, allowing for comparison of the state of the brand’s customer base against the rest of the market and industry. That, in combination with the assessment of different customer groups, paints an accurate picture of the effectiveness of a loyalty program.

How can marketers prove to various stakeholders that the loyalty program is working?

There are a plethora of analytical procedures used to model customer behavior. Comparing control groups, measuring partial effects of every direct marketing campaign, assessing pre and post-redemption behavior, for example. All of these have one disadvantage, however, it’s quite difficult to explain the result formula to a vastly diversified audience of stakeholders.

At one point, we, too, were struggling to find a simple, reliable, and easy-to-understand method of measuring movements in customer loyalty. That’s why we invented Net Loyalty Score - a bulletproof benchmarking metric. 

The results are presented on a single scale from -100 to +100, resembling a thermometer. The warmer the color, the more loyal the base of customers.

What factors make up loyalty program success?

Let's put it a bit differently. What factors cause loyalty initiatives to fail? We are living in an era of data, and loyalty programs are designed to produce tons of it. If a company is not able to turn the customer data into actionable insights, utilize the knowledge to create better offers, and elevate communication with advanced personalization, then it is clearly underdelivering.

A common problem that hinders loyalty program success is lack of differentiation. If the loyalty program is not unique or offers little value compared to other similar programs, then it fails to attract and retain customers. Generic rewards with too many rules and restrictions can be confusing and off-putting, thus failing to offer any benefits.

Other factors that impede loyalty programs are the lack of soft benefits that foster emotional connections with existing customers. Complicated processes with regards to reward redemption, in combination with steep devaluation are also a significant success blocker. When the vast majority of the customer base is not able to experience any reward, even very well-intentioned loyalty activities backfire. 

However, the biggest barrier to loyalty program success is lack of management support and insufficiently trained and motivated employees, resulting in a disastrous debacle.

How do you measure loyalty program effectiveness with the Net Loyalty Score?

With Net Loyalty Score, we use a standardized methodology to measure three main loyalty domains. Using an online survey, we focus on three attributes that determine customer loyalty: appreciation, first choice, and emotional loyalty. Then, we calculate all the individual scores for each customer and classify them as either loyal or “cold”. Net Loyalty Score is the difference between genuine loyal and “cold” customers.

How do you optimize loyalty program performance?

There is a very straightforward approach to boosting loyalty program performance. First, we need to determine which customer segments in respective databases are loyal and find out why. This is where Net Loyalty Score comes into play. As I mentioned above, the methodology is standardized, which means segment comparison is reliable. 

Through the combination of RFM analysis, NLS and additional research, we gain a clear picture of customer behavior. Following a detailed analysis of factors making up the desired behavior (we call them “loyalty drivers” internally) and the “pain points” faced by disloyal customers, we generate a path towards a more successful loyalty program.

What are 5 good examples of successful loyalty programs?

• Starbucks for its ability to keep cohorts of its fans consistently enthusiastic and engaged. 
• Amazon Prime as the most successful subscription loyalty program on the planet.
• Gopass as an example of great utilization of gaming mechanics.
• Shell GO+ in the UK for truly  embracing the surprise and delight approach. 
• Vodafone VeryMe for a very original proposition based on connecting members with what they love.
• Airlines & Hotels like Delta SkyMiles, American Airlines AAdvantage, Marriott Bonvoy, Hilton Honors for their ability to manage enormous amounts (50+ million) of members and still be meaningful and relevant.

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To get some loyalty program inspiration, check out the Top 100 Loyalty Programs report, or peek into the future of the loyalty industry with our Loyalty Trends 2023 research.