MBB First Round - FastFashion - Customer Loyalty

• The loyalty program aims to boost revenue by enhancing customer engagement.
• Customers receive a free loyalty card (not a credit card) when they join the program. By scanning their card at any FastFashion store, they earn 10 points for every $1 spent. Once they accumulate 1,000 points, they can redeem them for $5 off their next purchase.
• While all of FastFashion’s major competitors also offer loyalty programs, their specifics remain unclear.

A sample answer would go along the following line:

• Profitability of loyalty card program
  • What are all of the costs associated with this program?
  • How much additional revenue has this program generated?
  • Is the program profitable?
• Customer awareness and usage
  • What percentage of customers are aware of this program?
  • What percentage of customers have signed up for this program?
  • Of those that signed up, what is the usage rate of their loyalty card?
• Competitor benchmarking
  • Do competitors also have a loyalty card program or something similar?
  • How are competitors’ loyalty programs performing?
  • Can we leverage any best practices from competitors?
• Strategic alternatives
  • Are there other strategies or programs that can increase customer loyalty or engagement?
  • Do these other alternatives have a higher return on investment?

Chart conclusions

• The loyalty card program represents a small percentage of total transactions and total spend.
• While the chart does not indicate the total number of loyalty program members, it suggests that program penetration is low, especially for a program launched five years ago.
• There may be opportunities to improve marketing efforts to drive higher customer participation.
• Loyalty members account for 20% of transactions but contribute 25% of total spend. This could indicate that the loyalty card encourages larger purchases per visit.
• Alternatively, it’s possible that customers who already spend more are simply more likely to join the program. Additional data is needed to understand the cause.

Math solution

Step 1: calculate spend by customer type

$160M spend * 25% = $40M spend by loyalty

$160M spend * 75% = $120M spend by non-loyalty

Step 2: calculate number of transations by customer type

4M transactions * 20% = 800K transactions by loyalty

4M transactions * 80% = 3.2M transactions by non-loyalty

Step 3: calculate average spend per transaction per customer type

Loyalty average spend = $40M / 800K = $50 per transaction

Non-loyalty average spend = $120M / 3.2M = $37.5 per transaction

Conclusions

• Loyalty customers spend on average $50 per transaction compared to $37.5 per transaction among non-loyalty customers
• Loyalty customers spend roughly 33% more per transaction
• However, we do not know whether this is driven by the loyalty card or driven by the fact that customers that sign up for a loyalty card already spend more per transaction, on average

The key takeaway from this chart is that the customers that are likely to join the loyalty program already have a higher spend per transaction than those that are unlikely to join the program.

Let’s calculate how much higher the average spend is for customers that are likely to sign up for the loyalty program versus customers that are unlikely to sign up:

($48 - $38) / $38M = 26% higher spend per transaction (rounded)

Recall from the previous problem that loyalty customers spend 33% more per transaction than non-loyalty customers. Therefore, the loyalty program likely only increases spend per transaction by roughly 33% - 26% = 7%.

While we do see loyalty customers having a higher spend per transaction than non-loyalty customers, a large proportion of this is caused by the fact that loyalty customers would already have a higher spend per transaction even if the loyalty program did not exist. Accounting for this, we estimate that the loyalty card increases average spend per transaction by 7%.

• Customers tend to have either no loyalty cards or many loyalty cards
• Since 50% of customers have 3 or 4 different loyalty cards in their wallet, this suggests that loyalty cards may not actually promote loyalty as customers will carry each loyalty card for each retail store they go to
• While this chart suggests that loyalty cards may not determine where a customer will shop, a loyalty card could affect how much they purchase in a given store
• Recall from the previous problem that we estimated that a loyalty card increases average spend per transaction by about 7% for FastFashion
• 35% of customers do not have a loyalty card; there could be an opportunity to target this segment to get them to sign up for a FastFashion loyalty card, which should incentivize them to spend more per visit

While FastFashion’s loyalty card program may not determine where customers shop, it does increase the average spend per transaction by about 7%. Therefore, the program should be continued and improved. 

There are two main areas of improvement:

• We can improve marketing efforts to increase the number of customers that have FastFashion’s loyalty card. 35% of customers do not have any loyalty card from any of the national retailers
• We could provide additional incentivizes to steer customers towards purchasing higher margin items. For example, we could give double or triple points for purchasing higher margin items.

For next steps, I’d like to look into two areas. One, look into the costs of the program to verify that the program is profitable. Two, look into competitor loyalty programs to see if there are any best practices FastFashion can leverage.