5. The price of Loyalty - (068-077)Loyalty v4 68 11:30 AM...

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The price of loyalty Jim Cigliano is a consultant in McKinsey’s New Jersey office; Margo Georgiadis is a principal in the Chicago office; Darren Pleasance is a consultant in the Silicon Valley office; Sue Whalley is a princi- pal in the London office. Copyright © 2000 McKinsey & Company. All rights reserved. oyalty programs, which give consumers rewards for repeat purchases from particular merchants, are almost as common among retailers as cash registers. McKinsey research found that about half of the ten largest US retailers in each of seven sectors have launched such programs, and the rate is similar among top UK retailers (Exhibit 1, on the next spread). Moreover, loyalty programs are popular with customers: in the United States, 53 per- cent of grocery customers are enrolled in them, to say nothing of 21 percent of the customers of casual-apparel retailers. Of those who join grocery pro- grams, McKinsey research indicates that 48 percent spend more than they would otherwise, though the figure is only 18 percent in casual-apparel programs. Yet even 18 percent represents a sizable number. If anything, we expect interest in loyalty programs to intensify. Faced with slowing revenue growth in many categories and the emergence of competing Internet start-ups, retailers are eager to deepen their relationships with existing customers and to increase their share of wallet. Retailers that have stand-alone loyalty programs—in other words, programs without corporate partners—must work out ways of dealing with alliance programs, which M A R K E T I N G 68 James Cigliano, Margaret Georgiadis, Darren Pleasance, and Susan Whalley Do you know if your loyalty program is working? L
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bring groups of retailers together to offer rich rewards as well as rebates beyond the reach of most individ- ual retailers. But retailers are reluc- tant to face some seri- ous questions. Is heavy investment in loyalty programs likely to make a difference in the behavior of customers? Do they really value these programs? Are any retailers getting their money’s worth? The answers are not straightforward. Many loyalty programs are successful; they enhance the value propositions of retailers, capture valuable data, draw in higher-profit customers, and persuade those cus- tomers to spend more. But as many or more programs unwittingly deploy value-destroying mass-discount vehicles, and the problem is likely to worsen as retailers respond to sluggish growth. Every such retailer would do well to consider some hard facts about the real profitability of most programs, the economic traps behind the numbers, and what it takes to ensure success. The trouble with loyalty Many loyalty programs struggle with three stubborn facts. First, the programs are expensive. Our research revealed that 16 major European retailers had a total of some $1.2 billion tied up in annual 70 THE McKINSEY QUARTERLY 2000 NUMBER 4 E X H I B I T 1 Retailers are looking for loyalty Category killers • OfficeMax • Staples • Toys “R” Us Department stores • Dayton’s • Federated
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