By Kelsea Alderman, Oren Eizenman, Jad Hamdan, Jake Hart and Jamie Wilkie
Consumer-facing businesses have an opportunity to unlock holistic value. By better integrating their loyalty programs with pricing strategies, they can drive growth in a muddled economic landscape.
The year 2024 is proving to be another challenging one for consumers and for the companies, brands, and retailers that cater to them. With strong consumer spending after a period of record-high inflation and fears of a recession, consumers are continuing to shift their habits: budgeting more for essentials, trading down in search of better value, and demanding more from their favorite retailers.
These crosswinds can feel destabilizing for consumer-facing businesses. As these companies continue to grapple with inventory, pricing, and interest rate uncertainty, they need to go above and beyond to stand out in a crowded market, while ensuring that they deliver customer value and drive profit margins.
Companies can accomplish this dual mission by combining their loyalty tactics and pricing strategies for better personalization, bolstering the holistic value they can deliver to their customers.
Most companies already have several ways to provide value to customers through loyalty, pricing, and promotions (among other benefits), but very few look at all these levers in concert to create an integrated customer strategy and experience. The lack of a unified value proposition can lead to a disjointed experience for customers. At worst, this could result in consumers shopping less, spending less when they do shop, or switching to a competitor. The result: suboptimal margin investments and nonincremental promotion and loyalty tactics.
Creating a cohesive, holistic value equation across pricing and loyalty levers can be the key to propel the next horizon of growth for customer-facing businesses.
In this article, we will explore how businesses can capture value from this holistic value proposition, highlight some of the biggest obstacles we’ve seen in activating this mission, and look at how organizations might begin to think about how to overcome them.
Tiers of opportunity
As with loyalty programs, there are tiers to the value that can be captured from a holistic and integrated customer value proposition. We will explore the opportunity potential across three tiers: bronze, silver, and gold. Each successive level brings more value but is also more difficult to activate than the preceding one.
Bronze opportunity: Building a larger pool of loyalty customers through pricing benefits
Businesses can first unlock the value of integrated pricing and loyalty by using price-based benefits to expand loyalty programs.
On their own, loyalty programs can be helpful tools to drive long-term engagement and stickiness. Pricing can be a very effective way to improve and expand the reach of loyalty programs by giving these programs new levers and tactics to deliver tangible value to their customers.
Usually, offering exclusive promotions (such as percentage or cash discounts) to loyalty program members is the most straightforward way to capture the benefits of integrated pricing and loyalty, because it makes the value proposition of loyalty programs abundantly clear. In this way, price-based loyalty benefits are typically very effective. They can encourage extra sign-ups from nonloyalty customers and establish a strong, clear link between the program and the value it delivers. This end-to-end shopping experience helps create more loyalty customers, who often make more frequent or larger purchases than nonloyalty members.
One of the best examples of pricing benefits boosting a loyalty program is Amazon Prime. Amazon first launched its Prime program in 2005, offering free shipping to members who were willing to pay an annual flat fee. Amazon used the incentive of preferred pricing for loyalty members to launch Prime Day in 2015. During the first year of Prime Day, Amazon brought in just under $1 billion in sales. By 2023, Prime Day generated nearly $13 billion in sales, with analysts estimating that the event led to an incremental $5 billion in revenue for Amazon.
Prime membership has grown similarly over time. As additional benefits have been added—such as two-hour delivery with Prime Now, or free e-books through Prime Reading—the number of Prime members has skyrocketed. Amazon’s ability to integrate pricing and loyalty has had a dramatic impact: as of 2023, about 75 percent of all US households were Amazon Prime members, spending more than four times as much as nonmembers over the course of their lifetimes.
Silver opportunity: Using pricing benefits to encourage changes in customer behavior
Once retailers can effectively use price-based benefits to expand their loyalty programs, they can build on these capabilities by trying to change the behavior of loyalty members with better incentives. One way companies can do this is by leveraging loyalty-based pricing benefits (in addition to cash-based benefits) that can optimize the lifetime value of customers more effectively than traditional discounts.
Loyalty-based offers have been proven to be more effective than traditional approaches in delivering incremental, long-term value to certain customers. Instead of cash discounts, some companies have successfully utilized points-based currencies. These can spur additional purchases, encourage greater engagement, drive conversion by keeping customers within a retailer’s ecosystem, and encourage existing loyalty customers to unlock higher status levels within loyalty programs. Activating this capability requires rigorous data and analysis to understand incrementality and points breakage to ensure continuous engagement while managing margins.
In the retail world, integrating pricing and loyalty to this degree is pretty uncommon. Airlines are a standout B2C exception. For years, major airlines have offered benefits such as improved mileage rewards, upgrades, free checked bags, preferred seating, and deeper discounts for high-tier status members, who in turn spend more. This strategy of keeping rewards within the system through miles and encouraging growth up the loyalty ladder through price-based benefits has helped many travel loyalty programs become billion-dollar profit centers.
Sometimes, airlines also offer sophisticated, under-the-hood special pricing for high-tier loyalty program members. Those with special status might every so often notice lower fares on certain route options that are accessible only through their loyalty status. Airlines may not market this explicitly, so as to retain flexibility in how and when to offer special pricing. But by quietly leveraging this tool, they encourage members to fly more frequently. In a crowded market of airline loyalty programs, benefits that go beyond points and rewards—linking customers back to pricing—are far stickier and can generate new value.
Gold opportunity: Integrating loyalty and pricing to create new value through personalization
The gold opportunity, a best-in-class impact for pricing and loyalty integration, is a fully personalized shopping experience that offers tailored promotions, member benefits, marketing, and personalized customer journeys.
Typically, companies test and scale personalization through a combination of loyalty data and insights (for instance, customer identification, purchasing patterns, and shopping preferences) and pricing or promotional levers (for example, discounts and storewide events). We’ve seen significant impact when this strategy is integrated successfully. At companies with pilot programs, we have seen a 2 to 4 percentage-point margin improvement on gross margin dollars through personalized marketing experiences (such as customized imagery, text, and emails based on purchase history) and pricing offers (such as offering deeper discounts for higher loyalty tiers), as compared with standard mass offers and experiences. This top-down strategy encourages companies to test and iterate, continuously optimizing for individual customer segments.
We’ve observed that personalized messages and offers should be used in addition to mass or nonpersonalized touches as part of a broader optimization strategy rather than fully in place of them. The best retailers use the combination of at-scale and personalized experiences to keep customers engaged, balancing strategies across occasions (such as maintaining mass strategies during large, market share events like Black Friday) in a way that best optimizes for both the brand and the customer.
The beauty—and challenge—of personalization is that it gives the customer what they want at any given moment. This might mean a coupon for 25 percent off over the US Memorial Day weekend, a personalized message for a loyalty anniversary, or a mass message and offer for Black Friday, all of which might change the following year.
The secret to what promotions and tactics work is always changing, and retailers need to be prepared to constantly add new tactics to the recipe to keep customers engaged.
Challenges to ‘going for gold’
Although some organizations have successfully started integrating loyalty and pricing, it’s still far from commonplace, with very few examples of a true best-in-class approach. So far, success stories are mostly outliers, and many consumer-facing companies have only just begun to scratch the surface of what’s possible. For those that have made some inroads, maximizing the impact and value potential is often still a challenge.
Companies that struggle to operationalize loyalty and pricing integration do so mainly because of siloed organizations and limited analytical and technological capabilities. By examining companies that have successfully managed this transition, we have identified the three biggest challenges consumer-facing businesses typically face on this journey.
Coordinating cross-functional teams and building new ways of working
The most significant shift that companies must make to integrate loyalty and pricing functions is bringing together the marketing-led view of customer centricity with the merchant-led view of product centricity. Traditionally, these two organizational pillars have lived in isolation from each other, with coordination at the very top and only for specific, targeted initiatives. To capture the full value from loyalty and pricing integration, these teams need to be deeply integrated and connected, with guidance from the executive level.
The challenge of bringing marketing and merchandising teams together is only half of the problem. The other critical challenge is transitioning the mindsets of teams from traditional, brand-led ways of working to personalized, customer-led ways of working.
The best approach to integrate these two functions is through a unified tool set—a single place for reporting, planning, and consolidating understanding of how these loyalty and pricing levers combine into a total holistic value investment pool of offers and engagement. That way, the separate parts of the marketing and merchandising organizations can build a unified strategy, bridging functional gaps in their organization traditionally limited by different tools, approaches, and strategies.
Building analytical and technical capabilities to drive enhanced decision making
The second critical impediment is lacking a deep bench of analytical models and tools that are needed to unlock value across bronze, silver, and gold opportunity areas. This makes it extremely difficult to see the impact of integrated loyalty and pricing functions. Standing up the modeling needed for loyalty-backed pricing strategies and personalization requires a few critical, challenging, and complex pieces. First, companies need to build a strong, clean data foundation on which the new stack of models will be created. This requires a deep dive into legacy data systems and often also requires the creation of new business and customer-facing metrics and attributes—such as elasticity-based propensity scores—that need to be created and maintained.
After the data foundation is set, teams need to conduct heavy amounts of quality assurance and checking to ensure that the data is accurate. Companies often underestimate the difficulty of this step. Once the data foundation is set and checked, teams need to build complex models to answer questions like: What is the next best action for the customer? What is their promotional sensitivity, and does it differ by category or product? What is the best channel and timing for the customer to engage?
Once all the models are created and validated, they need to be integrated into existing operational processes that are connected to automated tools and downstream execution channels that can handle the new levels of complexity. To execute these strategies well, consumer-facing companies need a range of tools to manage and deliver content and offers at the individual customer level, with up to billions of versions required for hundreds of millions of customers.
Keeping everything clear and simple for customers
The single biggest challenge retailers face is translating the complexity of loyalty and pricing integration into a simple, personalized experience for customers. The objective is to use new processes, analytics, and automation to give the customer the right experience at the right moment, rather than offering a swirl of touches that result in a chaotic and unorganized experience. Businesses that do this well rely on advanced decisioning capabilities—embedded as part of the new automated marketing technology stack—to prioritize and distribute the appropriate touchpoints. If done well, customers might never realize that their experience differs from someone else’s. If not done well, companies risk flooding their customer base with excessive and disconnected touchpoints.
Now, more than ever, customers are expecting more from their favorite businesses. Brand promiscuity is at an all-time high at a time when loyalty programs have proliferated. At the same time, few companies have made real advances in differentiating their customer value propositions through integrated pricing, loyalty programs, and better personalization.
The sector is ripe for evolution. Driving loyalty alone isn’t enough to retain and engage customers, while pricing alone is becoming less effective. Improving the holistic customer value proposition with an integrated pricing and loyalty strategy can fuel greater future growth. But it isn’t easy and requires new ways of working, deep analytical capabilities, and tools for integration and dynamic changes over time. But companies that can capitalize on this new capability may well speed ahead to the leading edge of the consumer-facing economy.
This article is a collaborative effort by Kelsea Alderman, Oren Eizenman, Jad Hamdan, Jake Hart, Emily Reasor, and Jamie Wilkie, representing views from McKinsey’s Growth, Marketing & Sales Practice.
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