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Optimizing a Customer Loyalty Program: A Retail Case Study

The Company

A major US grocery chain with $5+ billion in annual revenue and over 800 stores

The Challenge

The grocery chain had recently upgraded its customer loyalty program in select markets to include rewards for frequent, high-spending customers. An initial analysis showed that sales increased as a result of the program, but the incremental profit impact was unclear. The grocer sought a more detailed Test & Learn analysis of the loyalty program in order to understand the cause-and-effect relationship between the program upgrade and profits.

The Solution

Using Test & Learn for Customers™, APT identified a representative subset of the members of the new loyalty program and compared them to a custom-matched control group of customers who did not participate in the program. The software confirmed that there was a significant sales lift in response to the upgrade vs. control customers who were not participating in the upgrade program. APT then determined that the sales lift was driven by a significant increase in the number of transactions per rewards member; however, the average basket size had actually dropped. APT also identified that there was a marked decrease in the number of transactions from customers without a loyalty card. These results confirmed that the increase in transactions per customer more likely reflected increased card usage, rather than an increase in the number of transactions. Adjusting for changes in card usage rate, the APT software calculated that the loyalty program upgrade increased spending much less than the client initially thought. APT software then disaggregated the results and determined that the program’s profitability varied significantly by customer.

The Results

While the program was on average unprofitable, APT identified specific types of customers that responded profitably to the program. In fact, if targeted to just these customers, the program could be profitable, potentially generating up to $5 million of annual incremental profit.
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