University of WisconsinMadison

UW E-Business Consortium
www.uwebc.org

EnhancingCustomerEngagementThrough
LoyaltyPrograms:OpportunitiesandLeading
PracticesforOnlineRetailers

ProjectSponsor
AmericanGirl

ProjectReport

Authors
AveryWine
CarlieLaughlin
MishaliPatel
SaniyaChitale

December2012

2012 UW E-Business Consortium

For more information, contact
raj.veeramani@uwebc.wisc.edu (608) 262-0861

ExecutiveSummary

Customerloyaltyprogramsaregainingprominence,especiallyintheretailingindustry.Throughloyalty
programs,companiescanincreasedatacaptureregardingcustomers,increaseretentionrates,anddrive
customerengagement.TheaimofthisprojectistoassistAmericanGirlindefiningtheirstrategyfor
creatingacustomerloyaltyprogram.Toachievethisprojectobjective,ourteamstudiedtrendswith
loyaltyprogramsandconductedathoroughcompetitiveanalysisofloyaltyprogramstogaininsightinto
leadingpractices.Subsequently,weassessedAmericanGirlsuniqueassetsandcapabilities,and
formulatedideasandrecommendationsforcreationoftheircustomerloyaltyprogram.
TheloyaltymarketisexpandingrapidlywithalargeincreaseinmembershipsintheU.Soverthepast
fewyears.Althoughmembershipgrowthisstrong,lessthanhalfofmembershipsareactuallyactive.An
averageU.S.householdwillonlyredeemroughlyonethirdoftherewardsitearns.Thisprovides
evidencethattheperceivedvalueofaprogramisessentialtoitssurvival,aswellasthecustomer
engagementusedtosustaintherelationshipwiththecustomer.Businessesaredrawntoloyaltydueto
thefactthatacquiringanewcustomerissignificantlymorecostlythansellingtoanexistingone.Also,
currentcustomerstypicallyspendmorethananewone,andloyaltyprogramscanprovideanincentive
foracustomertofollowthroughwithpurchasesandpurchasemorefrequently.Theengagement
channelsthatcompanieschoosetousewiththeircustomersareextremelyimportant.Ourgroup
researchedsomeoftheleadingengagementopportunitiessuchasOmnichannel,mobile,socialmedia
andGamification.
Inthecompetitiveanalysis,ourgroupresearched46companiesindifferentindustriestofindwhich
loyaltyprogramsweremostpopular,successful,andwhy.Aninitialscanwastocategorizecompanies
withorwithoutloyaltyprograms.Wefoundofthe46companies,42companiesdidhaveloyalty.We
concludedthatmanycompanieshadprogramfoundationseitherbuiltfromacreditcardsystem,
rewardscardorpaidloyalty,withcreditcardandrewardcardbeingthemostpopular.Wealso
concludedthatthemaintypesofloyaltyprograms,ortypesofrewardsofferedcanalsobecategorized
as:simplepercentoffallpurchases,buyngetone(orsomething)free,tieredrewards,andcustomer
relationshipwithfrequentspecialoffers.Wedeterminedtieredrewardsaddedthemostvaluetoa
loyaltyprogram,withNordstrombeingaleadingexample.Duringthecompetitiveanalysis,wedissected
thelifecycleofaloyaltyprograminto7keyoperationalstepsthatthecostumergoesthrough.Some
overallkeytakeawaysfromthisoperationalstepanalysisweresimplicityiskey,theprogramshouldbe
understoodquickly,customersshouldseevalueinrewards,allowentrytiercustomerstoreceivesome
benefitstokeepthemengagedinprogram,andtieredloyaltyprogramsengagecustomersand
encouragefrequentpurchases.Thennonloyaltycompanieswereanalyzedtoseehowtheyengagewith
customers.Somefindingsincludedadditionalexperienceslikecookingclasses,privateparties,and
charitylunchins.Oncethisanalysiswasdone,anotheranalysiswasconductedfromtheAmericanGirl
pointofviewoftheloyaltyprogramoperationalsteps.Duringthisanalysis,wewereablemake
suggestionsonhowAmericanshouldgoaboutmakingtheirloyaltyprogram.

Ourrecommendationsweredrawntheindividualoperationalstepsandthegoodexampleswefound
duringthecompetitiveanalysis.OverallrecommendationsforAmericanGirlincludeatieredloyalty
programwithapointbasedtrackingsystem.Werecommendofferinganincentiveforthelowestlevel
tiertoencourageinitialuserstosignup.ThefirstspecificrecommendationwehaveisthatAmerican
Girlshouldmarkettheirloyaltyprogramthroughallchannels(onlineandotherchannels),andhighlight
theirprogramclearlyatthetopofthewebsite.Thenacoloredandtierleveledchartshouldbeusedto
showthebenefitsclearlyandhowtoachievethem.Inaddition,AmericanGirlshouldofferother
channelsforsigningupandprovideaspecialincentiveorgiftforsigningup.Thenafterthesignup
processtheusershouldbeimmediatelyidentifiedandclearlyindicatethattheyareindeedamember.
WerecommendthatAmericanGirlusetheassetstheyalreadyhaveandleveragethemtobuildtheir
loyaltyprogram.Additionally,therewardsshouldbevaluabletothecustomersothecustomersees
valueinjoining.Manyoptionsshouldbeavailabledistributingrewards.Lastly,AmericanGirlcantake
manystepstoengagewithcustomerslikebirthdayparties,charms,onlinegames,etc.

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Acknowledgments

Thegroupwouldliketothankseveralpeoplewhocontributedtoresearchinganddeveloping
recommendationsforaloyaltyprogramcustomizedforAmericanGirl.Thesuccessand
recommendationsforthisprojectwouldnotbepossiblewithoutthem.

AmericanGirl

KarenWalz,WebManager
o Provided50initialcompanies
Jumpstartedtheinitialresearch
o Providesusefuldocumentsregardingloyalty
Confirmedandsupportourresearch
o Offeredguidanceandsupport
o ArrangedfortouratAmericanGirlstore
o Weeklyconferencecalls

DebbyOchoa,SeniorHRManager
o OfferedspecializedtourofChicagoretailstore
Helpedgenerateideasforengagement
o Eagertoanswerquestions

UniversityofWisconsin

ProfessorRajVeeramani
o Offeredgreatfeedbackonprogess
o Providedgoodframeworktoorganizeresearch
o Providedarticlesandabookonloyalty

Thankyouforallyourtimeandhelpthroughoutthisproject.Itwasapleasureworkingeveryone.

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TableofContents
ExecutiveSummary..................................................................................................................i
Acknowledgments..................................................................................................................iii
1Introduction.........................................................................................................................3
1.1ProjectBackground&Motivation...............................................................................................3
1.2ProjectObjectives......................................................................................................................3
2CurrentLoyaltyMarket.........................................................................................................3
2.1DefinitionofLoyalty...................................................................................................................3
3CompetitiveAnalysisCreatingLoyaltyLandscape..............................................................6
3.1CompanyResearchMethodology...............................................................................................6
3.2ProgramFoundation...................................................................................................................7
3.3TypesofLoyaltyPrograms..........................................................................................................7
3.3.1SimplePercentoffonallPurchases.............................................................................................8
3.3.2BuynGetOneFree......................................................................................................................8
3.3.3TieredRewards............................................................................................................................8
3.3.4CustomerRelationshipwithFrequentSpecialOffers..................................................................9
3.4AnatomyofLoyaltyProgram:OperationalSteps........................................................................9
3.4.1OperationalStep:FindProgram..................................................................................................9
3.4.2OperationalStep:UnderstandProgram....................................................................................11
3.4.3OperationalStep:EaseofSignUp.............................................................................................14
3.4.4OperationalStep:FeedbackAfterSignUp................................................................................16
3.4.5OperationalStep:EarningRewards...........................................................................................17
3.4.6OperationalStep:RedeemingRewards.....................................................................................19
3.4.7OperationalStep:StayingEngaged............................................................................................21
3.4.8OperationalSteps:KeyTakeaways............................................................................................23
3.5NoLoyaltyProgramCompanies................................................................................................23
4OpportunitiesforEngagement...........................................................................................26
4.1Omnichannel...........................................................................................................................26
4.2Mobile......................................................................................................................................26
4.3Gamification.............................................................................................................................27
4.4SocialMedia.............................................................................................................................28
5AmericanGirlAssets...........................................................................................................28
6DestinationSpots...............................................................................................................29
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7BuildingAmericanGirlsLoyaltyProgram...........................................................................31
7.1Tiers.........................................................................................................................................31
7.2OperationalSteps:Recommendations......................................................................................32
7.2.1OperationalStep:MarketingProgram.......................................................................................32
7.2.1OperationalStep:DescribingProgram......................................................................................33
7.2.2OperationalStep:EnrollingMembers&CollectingData..........................................................34
7.2.3OperationalStep:ProvidingCustomerFeedbackAfterSignUp................................................36
7.2.4OperationalStep:ProvidingRewards........................................................................................36
7.2.5DistributingRewards..................................................................................................................40
7.2.6StayingEngagedWithCustomers..............................................................................................40
8LookingAhead....................................................................................................................42
8.1FormulationofProgram...........................................................................................................42
8.2CustomerCareProgramManagement...................................................................................44
8.3ServiceProviders......................................................................................................................44
8.4Technology...............................................................................................................................45
8.5PlatformProviders...................................................................................................................45
8.5Marketing.................................................................................................................................46
8.6Financials.................................................................................................................................46
9Conclusion..........................................................................................................................48
10Appendices.......................................................................................................................49
10.1AppendixA:46CompaniesforCompetitiveAnalysis................................................................49
10.2AppendixB:CompanyAnalysisMethodology..........................................................................49
10.3AppendixC:CompetitiveAnalysis............................................................................................50
10.4AppendixD:RankingofLoyaltyProgramServiceProviders(Vittal&Murphy,2012)................51
11Bibliography.....................................................................................................................52