THE CLARUS Blog

How Premium Loyalty Plays a Critical Role in the Path to Profitability

We’ve been in a growth economy for a long time, but the tide is turning.

Companies used to focus on growth at all costs, but the mentality is now shifting towards profitability.

And based on results from 2019, it’s becoming clear why.

In the eyes of risk averse investors in the public sector, profitability equals sustainability.

Uber, Lyft, and Pelton are prime examples of billion-dollar IPOs that tanked.

Uber was one of the most anticipated IPOs of 2019.

The beginning showed promise: The ridesharing company’s stock rose more than 11% in the first seven weeks after going public. But those initial share price gains were short lived.

Uber’s stock price is down 24% since its IPO, following concerns that the company is spending too much money and not growing revenue fast enough.

The company’s losses continue, leaving investors worried.

Uber laid off 400 employees and announced a hiring freeze just two months after going public; not a good indicator for a company that’s supposed to be in growth mode.

Lyft went public at a valuation of about $24 billion in March 2019. Since then its share price has tumbled more than 40%.

The company is unprofitable right now and lost $463 million in the third quarter of this year.

Peloton, which sells expensive, tech-heavy workout equipment — as well as monthly workout subscriptions — has seen its stock slide 11% since its IPO.

It has a very good customer retention rate (95%), but some investors are concerned that buying luxury workout equipment— could be a difficult proposition if a recession comes.

 

Brands are Starting to Realize Something About Profitability

Customer acquisition is not enough to attain profitability.

That’s a big problem for brands that are primarily focused on growing their customer base.

It costs five times more to acquire a new customer than it does to keep a current one.

Consumers are more empowered and have more choices than ever before.

They can find any information they want regarding products, pricing and competitors within seconds.

It has gotten exponentially harder to cut through the clutter and grab peoples’ attention.

And what happens once you do acquire a new customer?

It costs 16 times more to bring a new customer up to the same level as a current one.

So, it’s clear that enhancing relationships with your existing customers is a key to retail profitability now and in the future.

A 2% increase in customer retention can lower costs by as much as 10%.

One of the most powerful ways to make those relationships better is through your loyalty program.

But can offering discounts and promotions that cut into margins really help with profitability?

 

If Loyalty Programs Are Margin Killers, How Can They Build Profits?

Most free traditional loyalty programs provide discounts yet haven’t been shown to increase loyalty.

That has earned them the nickname “margin killers”.

But premium loyalty programs offer a very different model for the customer. In these programs, your best customers pay a fee in exchange for elevated benefits and experiences.

These programs offer the best of your brand to your best customers.

This allows brands to offer the best possible benefits.

Brands see elevated levels of engagement from their best customers because these programs provide instant benefits 24/7 that members can use immediately.

More than half of all premium loyalty participants shop with that program’s retailer at least once a week

RH, the upscale, home furnishings company, is a great example of a brand that transformed from a promotional model to a premium loyalty model.

The RH Members program helps boost profitability.

In fact, it provided 95% of the company’s core business and reduced inventory year-over-year by 30%, or $225 million by streamlining operations.

One of the main attractions of premium loyalty is its impact on customer retention rates. Premium loyalty also clearly shows brands that invest in their customers are the ones who become profitable.

Eighty-seven percent of consumers who are satisfied with the special benefits offered by a retailer’s premium loyalty program will likely choose that retailer over a competitor that is offering a lower price.

With a premium loyalty program, your customer acquisition costs are greatly reduced, your program members are highly engaged and more valuable, and your company is more profitable.

 

The Answer to Profitability Lies in Your Best Customers

Making your best customers exponentially more valuable lies at the heart of premium loyalty.

With the public sector becoming more concerned about profitability in 2020 and beyond, retailers are under more pressure than ever before to grow sustainably.

Focusing on retention and making your best customers more valuable are two big ways to achieve profitability.

Remember, a loyalty increase of 7% can boost lifetime profits per customer by as much as 85%, and a loyalty increase of 3% can result in a 10% cost reduction.

Keeping your customers at the center of everything you do is critical.

How does loyalty play into your strategy to increase profitability in 2020?

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