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Loyalty trends 2023: a year of cost-driven innovation

Updated: Feb 15

Today, the global economy is in an uncertain situation. This is caused by many factors beyond the scope of this article, but the result is that customers are more conscious about value, and companies are focusing more on cost control.

Until a few years ago, brands would have reacted to an uncertain economy by cutting services that deliver customer value. Some brands will do this in 2023, but actually, the loyalty & marketing industries have learned from recent experience that this costs you money in the long run.

So, while the major loyalty trends for 2023 will be oriented around cost control, this will be accompanied by refocusing investment where it’s most profitable. This article shares the lowest hanging fruit for keeping customers engaged and delivering more profit to the bottom line.

During 2023, brands will make it easier for more customers to realize value from loyalty program participation. This will help them engage many more customers – particularly in the mid-to-long tail: previously not seen as a valuable target for loyalty marketing, but now recognized as a leading source of incremental revenue.

The brands that do this most effectively will become influential outside their core offering, and become indispensable to customers even when they’re not shopping with them. This will create valuable incremental profits with little or no additional spending.

Technology cost is one of the primary areas where brands stand to achieve savings. When consumer spending is strong, keeping legacy systems is an expensive convenience, since it avoids the big job of replacing technology.

Fortunately, loyalty technology is now much more flexible and cost-effective. In fact, cloud-based loyalty solutions can be deployed like a thin layer of modern technology in front of legacy systems to significantly extend their useful life.

The key trends of 2023 will be related to three main pillars:

  • cost control

  • embedding loyalty mechanics across the business

  • delivering more personalized value to a wider based of members.

AI will be a feature of many of these trends, and at the end, we’ll also touch on B2B loyalty programs, SMEs, and NFT/cryptocurrency-based loyalty – which are all responding to the driving trends described above.

1. Focus shifts from revenue growth, to cost control

Every recession reminds us that we have to reel in our excesses and focus more on cost control. As well as being a prudent response to difficult circumstances, additional degrees of discipline lead to greater efficiency over time.

As we have heard hundreds of times, encouraging more customers to allocate an increased share-of-wallet to your brand can be 7-10 times less expensive than acquiring new customers.

Getting customers engaged with the loyalty program remains the primary objective, because offering 1-2% in loyalty points is much less expensive than paying affiliate marketing fees, offering cashback, relying on discounts, or paying Google and others to send you customers.

During the covid-19 pandemic, we saw brands offer points for purchases across new sales channels, and the ability to stay engaged with the loyalty program – even if purchase volume or frequency dropped. We also saw programs introduce many new redemption options, so less frequent customers could redeem with more choice and freedom. This drove important engagement at low cost. Expect to see more of the same in 2023.

Similarly with reducing your IT costs: if you swap out expensive legacy IT systems for cloud-based software, you empower your team to get more done at lower cost, and with fewer dependencies on the IT department or vendors. More on this below.

Cutting cost has 2-4 times more impact on ROI than generating incremental revenue. For those who have not considered this, let me share an example. If your company generates $1 in additional revenue from your member base, that might require 10 cents in marketing cost. If you sell products or services with a 40% margin, you earned 30 cents in contribution margin for the company. However, if you reduce cost by $1 without impacting customer lifetime value (LTV), then this has 3 times the impact on the bottom line.

This example income statement shows that $1 in incremental revenue only generates 30% profit. By comparison, $1 saved in operational costs goes straight to the bottom line.

Said another way, if you can deploy new technology with an implementation cost of $5,000, but it reduces the amount paid to vendors by $200,000, then you have had more impact on the company’s profitability than generating $600,000 in incremental revenue.

Savings must be achieved by becoming more efficient, not by reducing customer value. It is easy to devalue your points/miles, or cut other benefits, but this only leads to a downward spiral that cuts into revenue and profit derived from loyal customers.

Brands who pursue this strategy will find themselves left with customers who are more mercenary by nature – who only respond to discounts or cashback, rather than recognizing the full value of your brand.

2. Rising influence of technical buyers, brand-side

One important thing we have noticed in the past two years is that the innovation team, the Head of Digital, or people with similar titles, have broader responsibility for CX across channels. They have also been much more actively involved in procuring new loyalty technology to drive customer engagement.

2 years ago, we published an article arguing the CX team and loyalty team should combine or closely coordinate activities, since they have similar objectives. At many brands, we are now seeing this play out, even elevating the importance of loyalty-driving engagement to optimize ROI across customer engagement initiatives.

The rise in technical or CX leaders getting involved in procuring new marketing technology is putting conversations about ROI at the forefront, and forcing a lot of legacy beliefs and practices to be rethought. These experts understand how to achieve ‘lift’ and it is refreshing to see them involved and asking good questions.

A classic example we stumbled on a few months ago was a brand spending about 15,000 hours per year in call center support to enable loyalty program members to obtain vouchers, when redeeming points for product discounts. If call center agents cost $15 per hour, this was costing the organization $375,000 per year. We enabled a white-label points exchange screen to get customers to activate the vouchers online. Not only did NPS go up by 5% – because most customers prefer to serve themselves when they can – but cost went down by 90%. This had an enormous impact on profitability. The businesspeople involved in this project had broad enough insight to see how a little new technology could quickly solve three problems across multiple departments.

Spending money wisely on your tech stack is hugely important. Most companies blindly spend whatever has been in the budget for the past 2-10 years. But, the economics of loyalty technology have changed dramatically in the past 10 years. What used to cost several million dollars to implement can now be done with no CapEx or license fees, and often within a few weeks.

Any large hotel group, airline, or retailer spending over $500,000 per month on legacy technology could get their operating cost down under $50,000 per month with more flexible, modern technology. Many times, replacing the core loyalty system is a complicated, multi-year endeavor, but we are seeing brands embrace the migration in interesting new ways. The most impactful is related to deploying microservices to replace one component at a time – which quickly affects cost and dramatically reduces project risk.

If your team is trying to prepare for the future, but your vision is too heavily biased by historical constraints, then you will box yourself in a corner that will have negative consequences for the remainder of this decade. I have seen time and time again that loyalty and technology leaders make false assumptions about what is possible based on their past experience, and when they finally recognize what is possible with modern technology, their eyes become as big as baseballs, and subsequently their minds start racing about amazing new possibilities.

In your own best interest, talk to those suppliers with modern technology to see what is now possible at dramatically lower cost. An hour or two of time invested will allow your team to make much better-informed decisions.

3. Easier redemptions, and pay with points

After technology costs, some of the biggest wastes of money in loyalty are:

  • issuing points to the wrong people

  • the negative impact of breakage on customer experience and loyalty.

I believe points should be awarded to nearly every customer on every purchase, but blindly giving a blanket 1% to everyone is a waste of budget. The level of incentive should be tailored based on the customer, i.e., whether they purchase is habitual or incremental. In particular, making points more obtainable and useful for customers beyond your most frequent is critical to unlocking revenue from your mid-long tail customers.

Your goal over this decade needs to be “how do I become indispensable to customers?” What real problems can you solve in their lives that save them time, money, or deliver other forms of incremental value that the customer notices, appreciates, and rewards with loyalty?

So, the greatest shift we have seen in the past 36 months is giving customers more choice and freedom in how they use their points/miles. This is especially in the form of more redemption options for customers who only have $5 to $25 in points value; this is your less frequent customer, or the longer tail. Often these people are big spenders in your category, but you are currently only getting a modest share of their wallet.

People spend across competitors when they don’t care about any one of the brands. These people also tend to be skeptical that the brand cares about them – especially when they see unbelievable offers (like “fly to Paris for 19€”), or a great deal of hype. The brands that have been winning in 2021 and 2022 are clear and transparent about value. Your less frequent customer wants to know “What do I get?” If it is useful or valuable to the customer, you will get more share of wallet.

Those customers who are less frequent with your brand may not have been a focus during the past decade, but among them are individuals who can increase frequency and basket size with the right incentives. Combining incentives with better segmentation and AI can help identify which of those “average-looking” customers should be provided with incentives to shift more share of wallet to your company.

To reinforce this observation with real data, we have seen a large swing in transaction types during the past 36 months on the Currency Alliance platform. Prior to covid-19, 78% of the value transacted on our platform was related to accrual transactions. Today, 72% of the value is related to redemptions. This is a massive swing – especially considering that the overall value transacted has grown by over 1,400% during the same period.

I don’t think this switch from focusing on earning points to redeeming points is related to Covid-19. Probably 50% is correlated to the mix and type of partners that have joined the platform in the past 36 months. 20% is due to the global economic situation in the past 6 months – where customers are more interested in extracting incremental value to meet basic needs.

But the rest is related to what I think has been a major trend in the past 2 years. Companies with loyalty programs have focused a great deal more effort on providing interesting redemption options for their less frequent customers – so those spending less and earning fewer points can also find valuable rewards and be motivated to collect points in the first place.

4. Martech powering better loyalty personalization

The benefit of targeting the mid-tail is that you will find many customers that are spending as heavily in your category as your best customers – but spreading share of wallet between you and your competitors.

Many of these customers don’t join loyalty programs because they don’t expect to benefit. However, as suggested above, enticing them to join and finding ways to capture higher share of wallet is perhaps the easiest way to grow your business. Furthermore, with the customer enrolled in the loyalty program, you gain the permission needed under GDPR and similar legislation to process their data and use it for marketing. This is another reason that we are seeing many brands focusing on mid-long tail customers who were not previously enrolled in the loyalty program.

AI is becoming increasingly helpful in making this data actionable. Among the unknown, but potentially valuable customers in the mid-long tail are also a lot who will never be profitable. In a digital marketing ecosystem where nearly every customer action can be recorded, you can identify more clues as to customers who resemble your best customers, and who may become loyal with the right incentives.

For a long time, this detective work been happening based on broad customer segments, but AI has the potential to do this with greater accuracy, so that incentives can be targeted with minimal waste and greater ROI. This is an important way in which AI stands to improve profitability in loyalty programs.

Of greater importance, though, is that it is hard to profile customers accurately based only on your own data. You need insights on how these people engage with other relevant and complementary brands. This has led to a significant increase in adding accrual or redemption partners into a more open loyalty network. The partners provide more data from beyond your own four walls.

As we discussed in our article on the importance of partnerships, the data insights you can get from partners really helps profile individual customers based on their true lifestyle preferences.

The other trend we are seeing is dynamic reward pricing – where the value of a redemption changes based on the context of the transaction (i.e., the seat may go unfilled), or the member involved (i.e., this customer will be especially motivated by this offer).

Dynamic pricing of inventory has become a lot easier recently thanks to improvements in the commerce technology stack. With more brands now adopting microservice-based architectures, it’s increasingly possible for brands to share data between pricing, inventory and loyalty systems, and price rewards based on the individual member profile. Once again, AI will greatly help to process the large amounts of data involved in real time and automate the issuing of offers.

Of course, customers will often not know that their pricing has been personalized – but the benefit to the brand will be the same. As the most progressive brands adopt better technology and seek to drive down costs, their ability to provide personally relevant customer experiences will improve rapidly over the next several years.

5. Brands innovate around digital CX as an effective loyalty driver

In ecommerce, agility around the customer experience (CX) is now widely regarded as one of the leading factors in marketing effectiveness. A trend of the last 2 years – and one that continues to gather pace – has been companies adopting headless, microservices architectures in order to innovate around the customer experience and tailor content to specific customer segments.

This is contributing to loyalty in two ways.

Firstly, better digital experiences are themselves loyalty factors, since they are often preferred and demanded by customers.

Most customers prefer to serve themselves. Not all customers prefer self-service, so it is important to provide value-added customer service, but nearly 100% of the things your team does for customers can be automated. This allows customers to decide how they want to be served.

By enabling this, not only do you probably reduce cost by 75%, but you also increase satisfaction, allowing customers to engage with your brands 24/7 (rather than 8-12 hours per day). Think about when you need to call your Wi-Fi, mobile, or electricity provider. You hate that the call might take 15-60 minutes, and that the first person or two that you talk to has no idea how to meet your needs. Everybody ends up frustrated.

Some customers (like retired people) might have nothing else to do, but your most profitable customers, and those with the greatest LTV, have plenty of other things to accomplish in their lives each day.

Reducing friction is the best way to maximize retention for those people you have worked so hard to acquire in the first place. Be respectful of the customer’s time and you will win more confidence/trust.

The second benefit of digital CX is that it’s a valuable source of useful data, which can provide the raw materials for AI-powered segmentation and personalization. This has been behind the increase in gamified experiences, especially in apps, where the customer is nearly always logged in, providing their consent for data gathering while they engage.

6. An increase in fraud drives innovation around fraud prevention

In a recent article on API security in loyalty and travel systems, we explained why legacy loyalty systems are popular targets for fraudsters – i.e., they store a lot of monetary value, and they often exchange or store data insecurely. Fraud is essentially a business cost – so, as explained above, reducing fraud by $1 is worth $3-$4 in revenue. Furthermore, reducing fraud related to account takeovers saves direct cost, and also indirectly avoids a negative experience for those customers that would have been affected.

As with the other trends in this article, fraud is also a trend that will be enabled and accelerated by modern technology – because fraudsters also embrace new technology to pursue new exploits.

Brands will increasingly add security software to their loyalty systems to monitor for fraud and prevent transactions when suspicious activity is suspected. This is a relatively quick and affordable improvement, but it does not address the underlying problem.

The main improvement that needs to take place is adopting technology with underlying, built-in security features that have been common in financial services systems for years.

You can read about this in detail in our blog here, but the key points are around storing and exchanging the minimum required data for any transaction, and encrypting stored data. This means that even if a hack takes place, the information that criminals extract is unlikely to be of much use.

The other point is around accounting standards. In many widely-used enterprise systems, new points are generated out of thin air when sold to partners or given to customers, and the points/miles simply disappear when they expire or get redeemed. This is opposed to conventional accounting standards where every transaction is recorded to the ledger. Maintaining a comprehensive ledger that complies with accounting standards enables reporting, audit trail analysis, and rolling back transactions in case of intentional tampering or unintentional mistakes.

Currency Alliance’s SaaS loyalty points bank records transactions according to these standards, and our software and API have the security features described above. This claim is supported by the extensive due diligence we have been through with banks and other Fortune 500 clients.

Adopting such technology not only lowers brands’ direct costs in software fees but also simplifies administration and greatly reduces their exposure to risk – providing further incentives for brands to invest in modern technology in 2023.

7. B2Bs & SMEs launch loyalty initiatives on affordable cloud-based systems

Three years ago, a small or medium-sized business which wanted to launch a loyalty program had two options. You either had to invest $250,000 in a sophisticated loyalty system, or use a simple app from the Google or Apple app store for $100-250 per month.

Most SMEs cannot bet $250,000 on a solution. Instead, they settled for a single stamps-based loyalty program, or simple points-based program that had lots of nice marketing materials describing how it would grow your business by 30% to 50%. In most cases, SMEs stopped using these solutions after 3-6 months because they simply don’t live up to their promise.

There are now better options available. The martech industry has generally moved towards cloud-based solutions which charge based on platform usage, so if you have few customers or transactions, your fees stay low. The cost of sophisticated loyalty software has come down by 90%, so almost any company can now operate an enterprise class solution for $100 per month. This means that many SMEs can now affordably run effective loyalty programs.

As we have predicted in each of the past 5 years, many more companies will embrace customer loyalty solutions to reduce the cost of customer acquisition and retention, but over the next 3-5 years we will see the smaller brands offer the points/miles from larger loyalty programs that common customers prefer to collect. This requires the type of connectivity and collaboration platform operated by Currency Alliance.

Alongside new loyalty solutions, headless ecommerce backends are being used by companies at all scales, in many new industries. This has been behind the boom in B2B ecommerce – a wider digital marketing trend for 2023 – since companies whose businesses were previously too complex or specialised for legacy ecommerce platforms are now finding technology suited to their needs.

These systems allow the brand to easily integrate whichever complementary microservices it prefers, including its loyalty system of choice, enabling an increase in the number of B2B loyalty programs – all while allowing each company to design and control the customer-facing frontend screens, and tailor them to their business.

A lot of monolithic systems providers have responded by claiming their technology has the traits of modern software.

You cannot buy loyalty technology based on the marketing baloney that vendors publish about their solutions. When a legacy vendor claims a major new release of their platform, most of the backend is still a monolith; they have simply moved the hosting to the cloud and bolted on an API.

To buy software effectively, you need to first define your objectives, then look for cloud-based solutions that can adapt to your needs, test the viable alternatives, and decide how to proceed.

Fortunately, marketing and technical leaders are increasingly sophisticated and can spot a pig with lipstick – so a further trend for 2023 will be that monolithic vendors, despite their claims, get left even further behind.

8. Less excitement about NFTs/crypto

During early 2022, we spent a great deal of time discussing the resurgence of blockchain after the 2018 crash, as well as how NFTs can drive loyalty.

I continue to believe that blockchain as a technology (and not cryptocurrency as a store of value) will have a tremendous impact on business and society over the next 5 to 25 years. I just don’t think the use cases in loyalty are superior on blockchain versus using modern non-blockchain solutions.

Nearly every blockchain loyalty company that has surfaced since 2016 has now disappeared. Observing the attempts at innovating by blockchain companies has been interesting, but the solutions are not 10 times better – so didn’t gain traction.

Fungible loyalty tokens represent great customer value propositions, but they run against the primary objectives of a business setting up a loyalty program in the first place – which is to keep customers coming back to their business (and not letting their loyalty incentives get spent elsewhere – especially at a competitor). A universal, fully-fungible loyalty token, which the customer can spend anywhere, gives them little reason to come back and spend with your brand. In this regard such schemes are nothing more than cashback or discounts, but with added unnecessary complexity and cost.

I do believe certain types of NFTs, when thoughtfully created for a customer, can engender loyalty but I remain skeptical about whether most people care. Certainly a niche of customers are interested, so including such incentives in your portfolio of rewards and methods of recognition is relevant.

But I believe such novelties represent edge cases.

These can be worth experimenting with, but the vast majority of your resources still need to be focused on more traditional, and fundamentally more effective methods of delivering customer value.

Set your loyalty program on the right path for 2024

A company’s speed to adopt new, profitable business practices has always been a leading competitive factor. Today, this is primarily taking place around cloud-based technology. Affordable innovation is causing business practices to evolve, and rulebooks to be rewritten, at an unprecedented pace.

That pace can seem overwhelming for some companies, but the advantage that it implies is that there’s way less guesswork required in order to make effective decisions, and far less time needed to test whether each decision was in fact correct.

In the early days of frequent flyer programs, brands started investing wisely in their most profitable customers. Then, over the next 30 years, that investment became steadily more wasteful. With the ‘easy win’ already won, brands need to start focusing on the less frequent customer. As described throughout this article, the investment in acquiring more business from the mid-tail and longer-tail customer is paying significant dividends.

Change is always uncomfortable, especially when it’s foisted upon you. If you’ve been a forward-thinking company for the last decade, you’ll have got over the discomfort, and will be seizing on new opportunities to engage more customers and win greater market share.

If you’re just getting started on your digital transformation, 2023 could be a bumpy ride.

But in an age of rapid innovation, it’s also possible to leapfrog your competitors. The most important thing is to build a foundation that keeps cost low, while enabling the flexibility to adapt to an uncertain future, so you can become indispensable to your customers.

This article was first published by Currency Alliance. Permission to use has been granted by the publisher.

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