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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
The no-fee subscription program is adding customers, and they are spending more over time.
When it comes to pets, loyalty is a valued trait. Chewy is showing how the same is true for online sales of pet products.
At a time when recurring revenue is more important than ever for brands and retailers, the pet ecommerce marketplace is growing uptake of its program that automatically replenishes goods.
Chewy said sales from Autoship customers totaled roughly 75% of net sales in the first quarter of 2023, ticking up from 73% in Q4. That’s a new record for the program’s penetration. Autoship sales, which reached $2.08 billion, grew 18% over the first quarter of 2022.
Crucially, the program is also driving loyalty, as Chewy eyes bigger baskets and long-term relationships. With consumers pulling back on discretionary purchases, many retailers are eying ways to ramp up engagement with their best customers. Autoship is a long-running example that is seeing gains now.
The Autoship service allows customers to subscribe to regular orders of pet products, with no membership fee attached. It’s a particularly strong fit for pet food and other consumables, which tend to be bought and used in regular intervals.
“Our Autoship subscription service is a powerful tool for us, driving recurring and predictable revenue and long-term customer loyalty,” Chewy CEO Sumit Singh told analysts.
Responding to a question from analysts, Singh recalled a period soon after its 2019 IPO where 60% penetration for Autoship was seen as a positive. Singh said the growth since was a result of improvements to reduce friction in the customer experience, as well as the business model behind it.
The fact that it’s a free subscription is particularly attractive to consumers.
“In fact, it leads to a discount for the customers who sign up for that program, and that discount is funded by our vendors, so we don't have to fund it ourselves,” Chewy CFO Mario Marte said.
A “symbiotic relationship” between the marketplace and brands is at the heart of the program, Singh said.
“It's one of the more effective mechanisms to fuel brand loyalty for our supplier brands,” Singh said. "Their participation greatly showcases the value that both of us find in it.”
Overall consumer trends are also benefiting the program. In recent months, sales have shifted more toward consumables and healthcare as discretionary spending on hard goods softened. The essentials tend to be the products that are sent in the Autoship program, since they are in need of refilling.
At the same time, Chewy has expanded selection within the program. The number of SKUs available for Autoship has increased significantly in recent years. Chewy has also grown the categories of products available through the program. Healthcare was a newer addition to Autoship since its debut at Chewy four years ago.
“When you think about the proposition of a health customer, humans are bad at feeding humans medication. We forget to feed our pets,” Singh said. "So if you have the option of putting that on recurring delivery, combined with an ongoing engaged program and the notification engine put behind it, etc., etc., it fuels even stronger compliance rates.”
The shopper experience through Chewy’s site has also encouraged customers to build bigger baskets.
It all results in a reliable customer pool that is made up on not only repeat visitors to the marketplace, but signed up to a program that keeps them locked in with Chewy.
Ultimately, this is a base from which Chewy can continue to build.
When it comes to defining success of Autoship, Chewy doesn’t only measure the active customers it has in the program, though those are growing. The marketplace is also keying in on net sales per active customer, which grew 15% to more than $512 in the first quarter. Like Autoship penetration, this was a record high for the company. Both the number of subscribers and the amount that they spend are driving growth in the program.
Autoship also helps to drive increased customer lifetime value (LTV), which serves as a measure of loyalty. These customers tend to spend more with Chewy over time, so they are a crucial driver of long-term sustainability.
In the end, Autoship sales are good for the top line, as well as the bottom line. Repeat orders allow the company to better plan for shipping, so it can optimize its fulfillment network accordingly. This is especially important as Chewy expands automated fulfillment capacity through four new centers.
“Seventy-five percent of our sales going through the Autoship program allows a predictable, repeatable base of volume that allows us to fulfill that demand in a manner that optimizes asset utilization across the company and allows us to kind of flow that revenue, you know, into the bottom line,” Singh said.
A reliable revenue stream that drives growth over time is good for a business during any economic period, but it’s especially important at a time when many retailers have shifted from a mentality of growth to meet surging demand to profitability when consumers pull back. It’s also a bulwark against potential competitors who may try to replicate Chewy’s service. They may open a pet marketplace, but they won’t have all of Chewy’s Autoship customers.