Retailers lean into loyalty programs as privacy regulations ramp up

Despite — or perhaps in light of — these pressures, the retail sector is investing more deeply in customer loyalty. Proprietary research from MediaRadar reveals that US marketing spend on customer loyalty programs increased nearly 2.5 times between Q1 2020 and Q1 2021. Still, retailers face a number of challenges to building these programs by effectively capturing and applying consumer data — while maintaining consumer trust and keeping an eye towards privacy.

Shopping, shopping everywhere

The primary challenge lies in the evolving shopping experience. Data from the US Department of Commerce indicates that e-commerce sales accounted for 14% of all retail sales in Q4 of 2020, up from 11.3% during the same period in 2019. The proliferation of social commerce and connected television (CTV) have furcated the shopping experience even more.

“Retailers are competing on many new fronts for each individual transaction,” says Ryan Monahan, senior vice president of product solutions at shopping intelligence firm Catalina. “The traditional customer journey is extinct as shoppers can now make their buying decisions without leaving their couch or during a conference call.”

At the same time, the rise of direct-to-consumer (DTC) companies is only making the landscape more complex. Whereas a shopper in years past would have to visit a large retailer like Macy’s or a specialty store like Mattress Firm to purchase a new mattress, today they can order directly from a swath of new brands that ship directly to them — like Casper and Purple. The DTC space has expanded to encompass everything from home goods and personal care items to pharmaceuticals.

Todd Krizelman, the chief executive and founder of sales enablement platform MediaRadar, believes DTC companies are especially well-positioned to succeed. “They are digital first. They almost always have started in the last 10 years. They have younger teams who are more likely to embrace current go-to-market conditions. They don't have to worry about all the expense of legacy systems.”

The success of traditional retailers is more varied, Krizelman says. Big retailers like Best Buy and Target have the resources to adapt. “Even if they had terrible systems in the past, they bought their way out of the problem. And the pandemic accelerated their innovation.” On the other hand, many mid-sized retailers lack the resources and expertise to evolve at speed, which he says is “the JCPenney story or the Kmart story.”

Catalina’s Monahan agrees that the players poised to win in the race for loyalty will be those with the resources and technology to enhance the customer experience. “Retailers who develop an ability to connect with current and prospective shoppers using personalized engagements across the entire digital universe — not just the digital properties they own — will be the ones with the best opportunity to grow.”

Shopping for first-party data

Enhancing the customer experience through personalization, as Monahan proposes, is an objective of most retail loyalty programs. The success of such efforts relies, first and foremost, on the collection and use of customer data. Information about what a customer is buying (and how often), their demographic characteristics and other signals help retailers paint a picture of who the customer is and how to effectively connect with them and drive higher engagement, sales and loyalty.

However, with the sun setting on the third-party cookie as of 2023, retailers and brands face new hurdles to tracking consumer behavior online and reaching audiences with relevant messages. At the same time, the world is witnessing a an influx of regulatory activity that flips the script on traditional means by which businesses capture and use consumer data. Instead of allowing them to purchase or access data from second or third parties, these regulations require businesses to gain consumer consent, or opt-in, in order to collect, store, use or sell their information.

With restricted access to consumer data, retailers will be forced to build up their own first-party datasets. And loyalty programs can be an effective and mutually beneficial means by which to do so. Velia Carboni, chief digital and technology officer at VF Corporation, which owns brands including The North Face, Timberland and Vans, says that consumers generally don’t mind sharing their data — so long as it means they get some clear value in return. “People want to share more information about themselves so that we can use that to inform new products, to provide access to new product launches or new content and other special things,” she says. “First-party data is [becoming] more critical, because if you start to lose those insights, it's really hard as we try to create new products or create new experiences for our consumers without understanding them.”

Innovation abounds

As consumers become more informed about how businesses use their data — and oftentimes warier of sharing it — retailers and brands are getting creative in the ways by which they incentivize enrollment and keep customers coming back for more.

Conor Ryan, co-founder and chief information officer at StitcherAds, a Facebook-focused marketing partner, says retailers are ditching the simple sign-up-to-get-discounts model in favor of more innovative approaches that drive loyalty. He points to Nordstrom’s program as an example. Shoppers who sign up are offered exclusive access to shop from upcoming catalogs before they’re released. “They are giving this incentive to customers to ‘pre-shop,’ when in fact, they’re accelerating the capture of that first-party data so that they are now prepared to re-target those customers and cross-sell and up-sell.”

Retailers are also developing creative ways to encourage shoppers to share more specific kinds of data. MediaRadar’s Krizelman says, “I was shopping for cameras on Target’s website and it was like, ‘Are you a professional photographer? Or someone who's really into it as an interest? Are you just going to an event like a wedding and you wanted a new camera?’ I thought that was so interesting because clearly they had cameras at a price point that was like $10 to $1000. Presumably I will now start seeing targeted emails, or advertisements on the website or even on my receipt when I check out. When I go to the store, you could imagine them placing something that says, ‘10% off your next camera purchase’ for whatever type of camera I had said I was interested in. That's what this loyalty stuff really allows for.”

Others still are focused on building robust platforms that go beyond loyalty to keep customers engaged — and help the retailer capture increasingly more data with this engagement. Luke Kigel, vice president of Walgreens media and head of Walgreens Advertising Group, says the retailer’s new platform, myWalgreens, is “a customer engagement platform as much as anything else.” He says, “It's more than just the loyalty program, although the loyalty program is a component of it. Our hypothesis is that a more engaged customer will be rewarded with better experiences and offers but also will be part of an ecosystem that allows us to have a robust first-party data set, which is core to our value proposition.”

Ultimately, experts agree that an effective customer loyalty program will be key to retailers’ success in the coming months and years as first-party data becomes the only surefire means by which to reach customers with relevant messages, drive engagement and cultivate loyalty.

“We're going to see an awful lot more investment in [customer loyalty programs] being pushed by retailers,” StitcherAds’ Ryan predicts. “The technology already exists in order to do all of this. Every retailer is paranoid about the privacy concerns of customers, but it's all about saying, ‘Here's the experience I can deliver to you if you give me the data and the permission to do that.’”

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