The Current, delivered daily.
As consumer confidence dips down and the cost of customer acquisition continues to go up, building loyalty is becoming increasingly critical for brands and retailers.
Whether it’s driving repeat purchases or the launch of new rewards programs, there's profitability to be found in any economy when brands can keep existing customers coming back, and find ways to encourage them to purchase more when they do.
The incentives that are introduced as part of loyalty programs can take on a place in the retail ecosystem all their own. In particular, rewards points became highly sought-after over the last decade, not only for the gamified experience of collecting them, but for the gift cards, discounts and other perks that they unlock.
As brands seek to make the most of their rewards programs, there are new signs that points could be used for direct purchases. In a survey conducted over the summer, 83% of consumers said they would pay for a product with points either online or in-store if given the option. The survey of 500 US consumers, conducted in August by The Wise Marketer in partnership with loyalty solutions provider Engage People, also found that 80% of consumers would be willing to use points in combination with cash to complete a transaction.
The findings suggest a willingness by consumers to engage in pay with points (PwP), in which reward currency provided at checkout for one good can be used as a payment method for a next and future purchase of another good, as well. About four in five respondents indicated they would use this method both online and in-store, so there's room to offer PwP across channels.
Amid a sea of rewards program procedures and continued innovation in areas like NFTs, PwP stands out in its simplicty: Get points, then buy more products. Here's why it holds particular promise amid cloudy economic forecasts.
Rewards and consumer psychology
The reason this approach may be appealing lies not just in the fact that it provides more payment options to consumers. It also gets at what motivates people to buy. In consumer psychology, points are what’s known as a reinforcer, said Engage People CTO Len Covello.
“A reinforcer, when presented after a behavior, causes the probability of that behavior's occurrence to increase,” said Covello. “Rewards or reinforcement is an objective way to describe the positive value that an individual ascribes to an object, behavioral act or an internal physical state.”
In this case, the person would ascribe that positive value to the accumulation of points because it helps them achieve the secondary goal of redeeming the points for a reward.
“In loyalty programs, program members accumulate rewards because they have exhibited some action, such as shopping at a store, using their credit card, or some other behavior that the program owner desires,” Covello said. “In the case of paying with points, the reward is the greater ubiquity of the reward currency in achieving the desired consumer objective like redeeming for a trip, a product, fuel, or a service – really, the world of redemption in this model is infinite.”
The evolution of points
Points-based loyalty programs date back as far as the Betty Crocker catalog, and they are now ubiquitous across not just retail, but also the frequent flyer programs of airlines, the rewards programs of hotels and credit cards.
With more popularity, the way that consumers use points has also evolved.
“Rather than simply being redeemed for a specific purchase like a trip, points are now seen as any other payment method or currency that consumers want to use in the same way as cash, debit, or credit,” Covello said. “Consumers are using points to make more mundane purchases on sites like Amazon, while also using them on more aspirational products like electronics or jewelry.”
In North America, companies issue approximately $48 billion in loyalty points or miles annually to program members, Engage People found. The result is a new form of savings. There is an estimated $100 billion in points available to spend that members have banked.
Increasingly, Engage People is seeing an increase in transactions and points redeemed as more of the owners of these loyalty programs make PwP available. Program members who were a part of loyalty programs redeemed over 44 billion points.
With 40-year-high inflation driving up prices and interest rates rising as a result of rate hikes, loyalty points could become even more attractive to consumers. When consumers pay more for essentials like food, fuel and housing that they need, points can become a way to pay for things that they want.
“Consumers want to utilize points for discretionary or aspirational items because they think of this as ‘found’ money,” Covello said. “Accessing this pool of funds for purchases in inflationary times provides a real benefit to consumers, helping to increase the purchasing power for program members.”
Adding a payment option
For brands and retailers, adding PwP can become a payment option that gets added at checkout, just like buy now, pay later or cryptocurrency. Getting started with the program requires an existing loyalty program that issues points with an established value. Infrastructure must also be in place to help support program member communication and messaging.
“Since loyalty points are used to purchase products online or in-store like any other currency, it removes the need to manage returns or catalogs for the program owner,” Covello said.
In the end, PwP stands as a way to offer flexibility to consumers, and allow them to shop in the way that best works for them. When retailers provide that, customers remember it, and are more likely to keep coming back. That’s a reward for the retailers in its own right.
Trending in Shopper Experience
Product innovation, marketing and ecommerce helped boost sales 49% in the holiday quarter.
The clouds are getting darker in today's retail environment, but e.l.f. Beauty is shining. Digital commerce and marketing growth is a primary reason.
The makeup and skincare brand posted the following results for the quarter ended Dec. 31, 2022:
- Net sales increased 49% to $146.5 million year-over-year, driven by retail and ecommerce.
- Adjusted EBITDA was up 69% year-over-year, accounting for 25% of net sales.
- The outlook for the fiscal year was lifted. Net sales are now expected to be $541-545 million, up from $478-486 million.
The brand is also outperforming category trends. The cosmetics category grew 8% over 2021, while e.l.f. grew 36%.
“We grew our market share by 150 basis points and increased our rank to the #4 brand as compared to #5 a year ago,” CEO Tarang Amin told analysts. “We continue to be the fastest-growing top five brand by a wide margin.”
The strong results proved validating for a brand that prides itself on offering affordable cosmetics, and digital-forward marketing. They were also another sign of the resurgence of beauty as people return to in-person experiences post-pandemic and seek affordable luxuries that can provide joy despite tougher economic conditions.
Here’s a breakdown of the digital drivers of growth for e.l.f., and how it is showing strong results in a tough economic environment:
Marketing: Viral brands and sustained investment
A special @elfyeah radiance report: It's an E.L.F.ING GLOW STORM! Please exercise ✨extreme iridescence!✨ (and thank you @weatherchannel for inspiring the glowcast!)🤍 #elfpartner
The brand prides itself on marketing that is both bold and pioneering on emerging channels.
One example came in the form of a holiday kickoff with the singer Meghan Trainor delivering a Weather Channel-informed report on social channels to celebrate the restock of the brand’s Halo Glow Liquid Filter, which was a viral sensation.
“The trifecta of e.l.f., The Weather Channel and Meghan Trainor helped us reach new audiences and entertain our community,” Amin said. “The campaign generated over five billion press impressions, exceeding last year's holiday campaign by a wide margin.”
The combination of innovation on product and virality in marketing helps attract a new audience for the brand.
“They see the viral buzz,” Amin said. “They see other people talking about this prestige quality, these great prices and particularly these days with platforms like TikTok, we get consumers doing their own demonstrations and comparisons.”
When it comes to metrics, Amin said the brand explores, “What percent behind each product are we pulling in new users?”
It's often up more than 50%, and attracts the core consumer in Gen Z as well as millennials and Gen X.
“I think the quality of these products at the prices we have and our ability to engage them really are attracting even more consumers to our franchise,” Amin said.
e.l.f. also deepened its marketing investment. The overall share of marketing is now 16%, as compared to 7% three years ago. It will increase to 17-19% this fiscal year.
“We recently completed our annual Nielsen marketing mix analysis and again saw exceptional ROI results, giving us further confidence that our marketing and digital initiatives are driving brand demand and delivering profitable growth,” Amin said.
Strong ROIs were observed across digital advertising and influencer marketing, while PR was “off the charts,” Amin said. Experimentation also plays a key role in developing these channels.
“The other thing about us is, we're not afraid to test and learn our new platforms. So we were one of the first beauty brands on TikTok. In the early days, it was hard to get attribution on TikTok. We now can see almost immediately when something goes viral on TikTok, the impact it has on our business and our ability to be able to attract that,” Amin said.
Ecommerce: Growing the squad
When it comes to ecommerce, Q3 digital consumption trends were up over 75% year-over-year, said CFO Mandy Fields. Digital channels drove 17% of total consumption in Q3, up from 14% a year ago. In the quarter that includes the holidays, digital channels were particularly strong through Black Friday and Cyber Monday.
A big point of emphasis for digital growth is the company’s Beauty Squad loyalty program, which provides early access, exclusives, free gifts and bonus points. The program grew enrollment 25% year-over-year to 3.5 million members. The loyalty program helps to boost the value of individual customers.
“Our loyalty members drive almost 70% of our sales on elfcosmetics.com have higher average order values, purchase more frequently, have stronger retention rates and are a rich source of first-party data,” CFO Mandy Fields said.
No slowdown in sight
Plenty of brands and retailers reporting earnings over this week are speaking of a slowdown in demand as a result of inflation and cooling demand in the economy. They also talk of consumers trading down to more affordable and smaller products that challenge margins. Amin batted away that kind of talk.
“No, we've not seen any slowdown in demand,” Amin said.
The response spoke to the unique place that beauty sits in this moment.
“What I'd tell you is, historically, mass color cosmetics, mass skin care has fared really well in…recessionary environments,” he said, referring to the Lipstick Index that posits beauty sales rise during economic downturns as people seek the small joys when they have less to spend on bigger items.
But there’s also a timing factor coming out of the pandemic.
“This is a category that really did suffer during the pandemic when people were restricted from their normal behavior,” Amin said. “So I've long felt there's a lot of pent-up consumer demand for the categories in which we compete, and we very much are seeing that.”