Why Your Brand Needs to Tap Into Loyalty

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How to prepare your brand for the future of loyalty epsilon.com The evolution of loyalty and customer experience

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Contents Introduction 3 What is loyalty? 4 Customer-centric loyalty 5 Reward mechanisms in traditional loyalty programs 6 The importance of building connections 8 Developing an effective loyalty strategy 9 Building emotional connections 10 Where to start 12 How Patagonia handles loyalty 14 How Walgreens integrates loyalty 15 Conclusion 17 About Epsilon 18 When you see this symbol throughout the report, click on it for more information. The evolution of loyalty and customer experience

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Introduction Consumers today have more choices and more channels to shop than at any other time in history. This means your brand must face the ever-important challenge of creating unique and effortless customer experiences at each and every touch-point. Pre-recession, most retailers relied heavily on the store associate to create memorable customer experiences. Although the associate continues to play a key role, shrinking staff sizes and customers embracing online shopping leaves a gap in the service model. At the same time, customers with limited discretionary income and stretched wallets began looking for retailers that provide greater value for their dollar. Post-recession, every customer expects more than just value. They expect experiences that make them feel uniquely special and that exceed their expectations. Today’s consumers have more access and choices than ever before and they don’t want to just be a number. They need to know that you appreciate and value them. The challenge these days is two-fold: you’re looking for ways to not only acquire new customers who may be younger or different than your existing customers, but also to further engage and satisfy your current loyal customers. It can feel like you’re constantly splitting your attention between two competing avenues. The evolution of loyalty and customer experience

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What is loyalty? Even though everyone seems to be thinking about or implementing loyalty programs, the whole concept of loyalty is quite broad. They range from very targeted, surprise-and-delight CRM to very complex, tiered loyalty programs which serve very different purposes. There are more than 3.3 billion loyalty program memberships in the US. That’s a 26% increase from 2102.1 Colloquy Loyalty Census, 2015 1 Colloquy Loyalty Census, 2015 2 The 2015 Loyalty Landscape Report, Loyalty360, 2015 3 The evolution of loyalty and customer experience Loyalty is one of the hottest topics today and the reason is simple—loyalty programs allow you to acquire more customer data than ever before. Customer data allows you to be more targeted with your marketing and stop the margin erosion caused by mass-marketing heavy discounts. It’s the best tool for marketing optimization, but in order for it to be effective, your loyalty program must be designed properly. American households hold memberships in 29 loyalty programs but are active in just 12 of them.2 The average number of programs in which consumers are enrolled continues to climb— from 10.9 programs per member in 2014 to 13.3 programs per member in 2015.3

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Customer-centric loyalty It’s all about loyalty. In an effort to set your brand apart, you need to find unique approaches to loyalty beyond just doling out points and issuing certificates. No longer just a points program, loyalty is now about forming relationships, building engagement and enhancing your customer’s experience. Rather than being just a program, loyalty is becoming a vehicle for your brand philosophy. The new breed of successful loyalty programs are going beyond perks and building emotional connections with customers. Unparalleled customer loyalty begins and ends with the quality of the relationship a brand has with their customers. We believe that relationships are the strongest driver of business success. Loyalty is all about people. And no two people are alike. The journey to customer centricity requires you to think of loyalty as a strategy rather than a program. The explicit loyalty program lives within the context of the broader customer experience strategy and marketing plan. The goal of comprehensive, integrated, holistic loyalty and customer experience strategies is to engage with your customers, build meaningful relationships and encourage them to be repeat customers. Personalization is the expectation from customers, it is present in their emails, websites and interactions. Creating an experience that is truly personal and engaging can be accomplished through The evolution of loyalty and customer experience Loyalty as a program = A business-centric approach Loyalty as a strategy = A customer-centric approach behavioral targeting and insight that real time data provides. Understanding and using this data connects you with your customers in ways that will build trust and engage interest. A great loyalty program benefits both the customer and the brand. Customers not only get economic rewards, but experiences with the brand such as insider tips, content, in-store events and reviews. They can easily provide feedback and see tangible acknowledgement of their loyalty. On the flip-side, brands get rich consumer insights, engagement and, ultimately, brand strength within the industry or category. You can better understand your customers’ behaviors, buying habits and demographics, which allows you to make more appropriate product recommendations and provide enhanced value to customers.

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Connecting with your customer requires more than a transaction Traditionally companies have based their loyalty rewards on purchases. This transactional mindset is evolving as loyalty becomes a mindset and not just a program. Transaction-based rewards 97% purchases Engagement-based rewards Overall, only 25% of companies reward any one of these forms of engagement: 16% 14% mobile app social media in-store 6% 4% 2% activities participation in gamification programs downloads engagement check-in’s4 Fixing the Cracks: Reinventing Loyalty Programs for the Digital Age, Capgemini, 2015 4 The evolution of loyalty and customer experience

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Because loyalty is evolving from a simple pointsbased system into something more robust and customer-centric, loyalty membership is steadily increasing. U.S. consumers are signing up for loyalty programs in droves and participating in all the reward activities the program has to offer. Loyalty is evolving from a simple points-based system into something more robust and customer-centric. Loyalty memberships are steadily increasing as U.S. consumers take advantage and participate in all of the reward mechanisms that programs have to offer. But that doesn’t mean they are happy with the loyalty program you have in place. The key for today’s shoppers is to give them targeted, personalized messages and offers, including rewards they actually want and will use. Your loyalty members want opportunities to interact (and get rewarded for it), from downloading your app to participating in activities. US loyalty membership growth: 2012 to 2014 Driving behavior through targeted offers is only part of the equation. You must be responsive and provide information and resources that guide and reinforce the decision they’ve made to shop with you. As a brand, you must be available to consumers whenever and however they are interacting with you, much like a trusted friend, rather than just focused on completing a transaction. 2012 2.6 billion 3.3 billion billion 2014 Specialty retail Dept store retail 433.5 billion members 229.6 million members 26% increase 20% increase 18% increase Your loyalty customers want to engage with you, but they expect you to know them and they expect you to get it right. The evolution of loyalty and customer experience

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The importance of building connections To gain a competitive advantage, you must achieve elevated levels of engagement and experience. Without a brand connection, completely satisfied customers demonstrate significantly lower brand and business equity. 13% Recommend brand Increase spend Remain committed Increase SOW 71% 1% 18% 5% 41% 3% 19% Repurchase brand 8% Continue servicing 8% 82% 80% Weak connection Strong connection Percentages = customers who responded ‘highly likely’ 5 Igniting Customer Connections: Fire Up Your Company’s Growth by Multiplying Customer Experience & Engagement, Andy Frawley, 2015 5 The evolution of loyalty and customer experience

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Developing an effective loyalty strategy through emotional connections Customers today are more than just buyers; they are stakeholders. They are educated and empowered and using digital tools to make their shopping journeys more efficient, relevant and meaningful. Making a purchase isn’t just a transaction anymore; it’s making an investment into your brand. In return for that investment, customers are increasingly seeking an emotional connection with the brands that speak to a higher purpose or have a culture of doing the right thing. Customers are most engaged with the brands that share their values. Measuring customer engagement & experience Experience/Emotion Accessible/ convenient Responsible staff Is a respected leader Opened/ clicked email Referred others Knowledgeable staff Is trustworthy Posted online review Searched brand online High quality products Is innovative Called customer service Downloaded a brand app Good value for the money Values are consistent with mine e ri e n c e Linked on Facebook Ex p Opted to receive email t Friendly staff Retain and grow your customers’ spend The evolution of loyalty and customer experience En Followed on Twitter on Visited website Em ot i m en ge ga Engagement

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Are you thinking that building emotional connections is taking loyalty a bit too far? See the stats for yourself: Emotional drivers are the strongest determinants of brand and business equity. Successful organizations align what they sell with why customers buy6. What most brands sell Why customers buy Top 2 key drivers: Freshness Low prices # of emotional connections Trust Clean rooms Convenient locations Alignment with my values Recognition for loyalty MSRP MPG Trust in the dealership Confidence in the brand Igniting Customer Connections: Fire Up Your Company’s Growth by Multiplying Customer Experience & Engagement, Andy Frawley, 2015 6 The evolution of loyalty and customer experience

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64% of retailers say their loyalty/rewards program is the best way to connect with consumers7 New research suggests that brands that support customers’ well-being benefit from increased engagement, interest and loyalty. Further, according to Edelman Wellness 360’s ‘American Well-Being Study’, 65 percent of consumers said brands “could be doing even more” to facilitate their journey towards a stress-free life and 85 percent of consumers said they would buy from brands which “effectively engage in well-being.”8 This means that customers want you to care about them and to behave in socially responsible ways. Emotional connections matter9 Apparel retail spend per visit: $100 Banking products: 4.4 Tablets’ weekly paid content: 25% Apparel retail spend per visit: $137 Banking products: 3.1 Tablets’ weekly paid content: 11% Apparel retail spend per visit: $109 Banking products: 3.1 Tablets’ weekly paid content: 10% 1x I’m satisfied Enhancing the Retail Omnichannel Customer Experience, SPS Commerce 7 http://www.bizreport.com/2015/04/increase-brand-loyalty-by-supporting-consumers-emotional-wel.html 8 Intelligence Across 1,000,000 Consumers, 280 Brands and 20 Industries, 2003-2013, Motista 9 The evolution of loyalty and customer experience 3x 1.2x I see your brand as unique I’m emotionally connected

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Where to start To start building emotional connections with your customers, you need to understand what your values are. What do you stand for? What don’t you stand for? Who determines what your values are? What issues or social conversations do you want to get involved in? Once you understand your brand values internally, let the external world know, but be sure to first weigh the implications of publically speaking out for or against something. The more your brand values are emphasized and used in imagery in marketing materials, social media and promotions, the stronger connection the shared values can create with your customers. It’s no surprise, then, that many of today’s most effective loyalty programs are moving beyond just rewarding transactions and toward actually engaging with the customer. They are using the customers’ loyalty to help others and build a true emotional connection based on shared values. An emotional connection triggers action10... “In the last 3 months, which of the following have you done...” % of customers 40% +165% 32% 30% +227% 22% +117% 25% 20% 10% 0% +593% 5% 1% Downloaded or used brand app 12% 7% +396% 0% 1% Followed brand on Twitter Low emotion Opened or clicked on an email High emotion The evolution of loyalty and customer experience Visited brand website Online search for brand % Proposed increase in action of happy customers (eg. spend money, influence other customers) Igniting Customer Connections: Fire Up Your Company’s Growth by Multiplying Customer Experience & Engagement, Andy Frawley, 2015 10 11%

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The companies who are the most successful at building emotional connections with customers are those who are leveraging their values and letting their stance be known. While most companies focus on more neutral values that aren’t disputable—like caring for the environment or supporting child education—others stand up for their values and put themselves out there on more controversial topics. But impactful loyalty programs aren’t stopping there. They are providing tools, services, products, information and resources to help customers learn about and get involved in specific causes or issues. Sometimes the chosen focus makes sense with the company mission, like an environmental perspective for an outdoor company, but that doesn’t have to be the case. The evolution of loyalty and customer experience Establish deep, reciprocal connections with your customers, building loyalty for life

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How Patagonia handles loyalty Patagonia isn’t shy about their stance on environmental topics; it’s even part of their mission statement: Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis. According to the Patagonia website, “For us at Patagonia, a love of wild and beautiful places demands participation in the fight to save them, and to help reverse the steep decline in the overall environmental health of our planet. We donate our time, services and at least 1% of our sales to hundreds of grassroots environmental groups all over the world who work to help reverse the tide11.” They put themselves out there in very overt ways, allowing customers who share these values to easily see what they stand for and how they prove it in their daily operations. Customers can trust this and it inspires extremely strong loyalty. http://www.patagonia.com/us/patagonia.go?assetid=2047 11 The evolution of loyalty and customer experience

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How Walgreens integrates loyalty Walgreens’ Balance Rewards took the approach of inspiring customers to get involved by partnering with Fitbit and MapMyFitness to let members rack up points for physical activity tracked within the apps. This approach works off of the shared value of health and wellness, but took it one step further by actually rewarding customers for their hard work. Syncing with existing tracking companies makes it simple for Walgreens to implement, yet customers benefit from more Balance Rewards for exercising. Customers feel like Walgreens supports them in their efforts and helps them reach their goals, making for a strong emotional connection. This well-being component of loyalty gives your customers an opportunity to be a part of the larger community. Use your social channels to build followers, inform advocates and inspire customers to take action. Watch the video of Julie’s Walgreen’s journey The evolution of loyalty and customer experience

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Putting it all together 1 2 3 4 Giving people a chance to engage with you in a variety of meaningful ways leads to a stronger connection. If your brand mission or the causes you support align with your customers’, you automatically have a connection. Now it’s your job to leverage that connection to turn those people into loyal supporters of you (and indirectly, everything you support). It’s time to shift your approach to loyalty by placing a greater focus on the total customer relationship, engagement and advocacy. Consider offering members discounts on inhouse classes, trainings or special events. Partner with third-party vendors to offer meaningful content and insider perks in addition to discounts on supplies, passes or experiences related to your core values. Think holistically about your program from a customer experience perspective. Your approach may include CRM and/or loyalty activities, or just one, but the idea is that every touch point you have with the customer should be seamlessly integrated and designed to enhance the customer experience. This omnichannel approach means you have an integrated strategy for brand marketing, CRM and your loyalty program, and that integration includes point-of-sale, mobile, apps, online stores, in-store signage, email campaigns and more. And finally, the concept of loyalty and customer experience continues to evolve. Don’t be afraid to embrace that evolution and create personal connections with your customers. There is no one-size-fits-all approach to loyalty, but if you know your customers, you may have ideas about how to engage them and give them the experience they want. Trust your intuition, but do your homework and leverage customer insights and data to push the boundaries. The evolution of loyalty and customer experience

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Conclusion As the market has evolved, we have seen a shift in the demand to close gaps in the customer experience. Loyalty is no longer simply a technology platform or a points program. Customer loyalty to a brand is the direct outcome of a seamless customer experience. If you don’t currently have a loyalty program, what are you waiting for? It’s now or never to create the connections that will lead to true loyalty. The online world is shrinking. Retail and customers are empowered to be very selective about who they enter into retail relationships with. How can you acquire new customers but also further engage your current loyal customers in this competitive environment? A loyalty program can help. The tools we have at Epsilon enable seamless customer experience for our brand customers. We start with the consumer identification at the individual level. We capture their interactions across all touches. We organize scattered fragments of data into clear, unique human identities. We interact with powerful enterprise marketing technology platforms with predictive capabilities and cross-channel tools to give you the ability to connect with your customers. We consult and design to solve even the most complex business challenges while keeping the customer at the center of everything we do. Contact us to learn more about how you can develop a best-in-class loyalty experience that creates emotional connections with your customers. We lead in loyalty. So do our customers. The evolution of loyalty and customer experience

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About Epsilon Epsilon is the global leader in creating connections between people and brands. An all-encompassing global marketing company, we harness the power of rich data, groundbreaking technologies, engaging creative and transformative ideas to get the results our clients require. Recognized by Ad Age as the #1 World CRM/Direct Marketing Network, #1 U.S. Digital-Agency Network and #1 U.S. Agency from All Disciplines, Epsilon employs over 7,000 associates in 70 offices worldwide. Epsilon is an Alliance Data company. For more information, visit epsilon.com, follow us on Twitter @EpsilonMktg or call 800 309 0505. epsilon.com The evolution of loyalty and customer experience Copyright © Epsilon 2015 Epsilon Data Management, LLC. All rights reserved. For more industry news and insights, subscribe to A Brand New View.

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