Rewards Budget
So, it all sounds good. Gratify customers with atomic rewards. But the big question is: where does the money come from? The short answer: the reacquisition spends.
It is a reality for every brand that customers churn. At some point of time, they become inactive and then move away to another brand. That is why brands use loyalty programs as a way to drive retention and transactions. Case in point: Burger King in the US just launched a loyalty program. From a CNBC story: “The Royal Perks program gives customers 10 “crowns” for every $1 spent at the chain’s restaurants. Members can redeem their points across the majority of the menu and will receive free daily perks, like upsizing drinks or fries. Burger King’s North American chief marketing officer, Ellie Doty, said the first wave of members has predominantly been customers who have already been using its app and website. With the restaurant-level launch, it’s hoping to lure frequent consumers who prefer to order via the drive-thru lane or counter.”
A loyalty program works in two ways: more revenue from existing customers and less churn to competition. If you already have signed up for Starbucks’ loyalty program, all things being equal, you are more likely to seek out Starbucks for your next coffee than an alternative brand.
Before the inactivity or churn happens, customers end up ignoring brand messages. Brands can track opens and clicks in emails or website visits and app opens at an individual level so they can get a good assessment of who is likely to churn. Other than offering discounts on the next purchase, there is no lever for enticing the customer to stay on. This is where atomic rewards comes in. By ensuring the attention doesn’t waver and engagement does not diminish, these rewards keep the relationship alive and prevent a downward slide.
What is the cost of a churned customer? Not only does a brand lose future revenues, but it is highly likely that the brand will end up spending money to reacquire the same customer via digital ads on Google and Facebook. This may happen unknowingly since marketers don’t really know each of their customers. Non-customers are routinely targeted via ads, and these ads do not distinguish between totally new customers and recently churned customers. An acquisition is an acquisition.
My belief is that a third of the spends being done by marketers is actually on reacquisition. A past customer is more likely to get retargeted than a totally new customer because the past customer was a customer once and thus had matched the brand criteria. Given that most brands spend 80-90% of budgets on acquisition, it means that 25-30% of the budget is being spent on reacquisition. This is the budget that should be redirected to atomic rewards.
In other words, a rupee a month spent in rewarding existing customers could end up saving Rs 100 that would otherwise be spent a couple years later on reacquisition. The proverbial “a stitch in time saves nine” could not be more true!
