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Obe Ejikeme, fund manager of Carmignac Portfolio Human Xperience, explains the importance of customer loyalty programs on his outlook and how it is incorporated into his investment process.
Customer loyalty programs have become a cornerstone of modern marketing strategies, designed to encourage continuous customer engagement, and repeat purchases. These programs offer a range of benefits to both businesses and customers, fostering long-term relationships and enhancing brand loyalty. This report delves into the significance of customer loyalty programs, their impact on customer retention, and the macro variables that influence their effectiveness.
The concept of loyalty programs has evolved over time. Early forms of loyalty programs can be traced back to Ancient Egypt, where beer tokens were used as a form of rewards. In 1793, a merchant in Sudbury, New Hampshire, began rewarding customers with copper tokens for future purchases. The S&H Green Stamp program in 1896 and the Betty Crocker Points Program in the 1930s are notable examples of early loyalty efforts.
Today, customer loyalty programs are evaluated through key metrics such as Repeat Purchase Rate, Customer Lifetime Value (CLV), Redemption Rate, Customer Retention Rate, and Average Spend per Member. These metrics highlight the effectiveness of loyalty programs in driving repeat business, long-term revenue, customer engagement, retention, and increased purchase values.
In the US, 8 in 10 Americans are members of at least one loyalty program, and taking a McKinsey survey from 2020, 60% of members of paid loyalty programs are likely to be repeat clients1.
Loyalty matters
Loyalty programs are designed to encourage customers to continue shopping or using the services of a business over time. They offer various rewards, such as discounts, points for future purchases, and exclusive deals, which incentivize customers to remain loyal to a brand. The data gathered from these programs can reveal customer preferences and habits, aiding in marketing research on how repeat customers boost the bottom line by cutting overhead costs and enhancing customer experience. Acquiring first time customers can be up to 5 times more expensive and the probability of closing a sale with an existing customer is 60-70% versus 5-20% for new prospects1. While there is a cost in implementing a loyalty program, we do not foresee this as a large impact on margins. From a Return on Investment (ROI) point of view, 83% of Loyalty program owners who measure ROI reported a positive return on investment and that their program generates 5.2 times more revenue than what it costs2.
While brick-and-mortar still represents 85% of total US retail sales, there is evidence that consumers are increasingly using digital content even within traditional bricks-and-mortar stores to compare prices or check on customer reviews. Overall, retailers, both brick-and-mortar and ecommerce are responding to this by creating loyalty program/branded apps which enhance and improve customer engagement3.
The digitalisation of loyalty programs go hand in hand with the ongoing shift towards digital sales. These technological advancements coupled with consumer preferences and corporate investment in their digital channels have driven this shift and should continue over time. Indeed, this digitalisation enhances the customer experience by gathering data insights and leads to increased customer engagement. The data on digital sales are stronger than ever. Latest data available in 2024 show that in the US, brick-and-mortar sales growth lagged behind e-commerce sales growth by 81%, showing the shift towards the digital world4.
Successful loyalty programs share key factors
- Offering meaningful rewards that customers value.
- Creating emotional connections with customers.
- Providing personalized experiences.
- Aligning benefits with the brand's core values
and customer interests. - Continuously evolving to meet changing
customer needs. - Incorporating both monetary and experiential
rewards.
In the digital age, artificial intelligence (AI) driven loyalty programs that use predictive analytics offer personalized experiences and dynamic rewards, which enhance both customer satisfaction and retention. Such programs can take different shapes and forms: Points-based programs remain popular, rewarding customers with redeemable points, while tiered and subscription models provide escalating benefits and exclusive perks. Value-based programs align rewards with customers' values, and hybrid programs combine multiple elements for flexibility. Coalition programs enable earning and redemption across partnered brands, and gamified programs use game-like features to boost engagement. These varied approaches, powered by AI, collectively aim to strengthen customer relationships and drive repeat business in an increasingly digital world.
Macro an important factor
Customer loyalty programs offer numerous benefits, especially in challenging economic environments. Higher interest rates can lead to reduced consumer spending, but loyalty programs can encourage customers to continue purchasing by offering rewards and incentives. For example, during the 2008 financial crisis, Starbucks launched its loyalty program offering free drinks and food items. It maintained customer loyalty and drove repeat business during a time when discretionary spending was low. These programs can help businesses maintain a steady stream of revenue and foster long-term relationships with customers, even when borrowing costs are high.
Inflation can impact on the perceived value of loyalty rewards. During times of inflation, Tesco's Clubcard has been a valuable tool for customers in the UK. The program offers points for every pound spent, which can be redeemed for discounts on future purchases. This helps customers save money on their grocery bills, providing some relief from rising prices.
During periods of geopolitical uncertainty, poor economic growth, and regulatory changes, customer loyalty programs become even more crucial. Economic downturns can lead to reduced consumer spending, but compelling loyalty rewards can motivate customers to continue engaging with a brand.
Whilst at the time of writing both the 2022 and 2023 rise in interest rates and inflation are behind us, today’s macro risks are around economic policy uncertainty and economic growth. We believe, similar to what we have seen in the past with examples given above, that companies that have solid reward driven loyalty programs can benefit in such environments. These programs will benefit from client retention and repeat business.
Loyalty programs and the Carmignac Portfolio Human Xperience fund
Carmignac Portfolio Human Xperience targets two distinct angles of social investing. As well as focusing on human capital and consequently employee experience, the fund focuses on customer experience, which links up to Loyalty programs. This customer angle is a unique feature in social focused equity funds which tend to primarily invest in topics around employees and human capital and overlook the customer. The customer angle is important to us as we see it as the revenue driver for a company and without considering it, we would find it harder to identify the growth catalysts of our underlying companies. Indeed, in terms of client retention, Bain & Company identified that a 5% increase in customer retention equals a 25-95% increase in profit10.
From a process perspective we integrate information from loyalty programs when scoring companies on customer satisfaction. Input from surveys and news flow regarding the programs are taken into account when scoring companies within our Human Xperience framework. For example, positive news flow on a company’s loyalty program will have a positive impact on their score.
Case studies
Among the holdings within our fund, customer loyalty programs are a big component of why we think these holdings add value over the long run from a client retention and revenue growth perspective.
Although these programs can differ in their approach and how they are set up, their aim and outcomes are similar. The following examples give you an idea of the different types of programs in place and how they add value to both the customer and the company.
Conclusion
Our analysis shows that loyalty programs are now more crucial than ever as a marketing tool for enhancing customer experience. These programs not only help gather data for deeper analytics and understanding of client needs and preferences, but their integration with e-commerce and digital sales has significantly increased their usage.
We incorporate this as a key factor into our Human Xperience philosophy and investment process when looking at the alternative data inputs from surveys and news flow that are used to score customer experience.
In the current market environment, we see these loyalty programs as an asset for both risk management from a macro perspective and growth in many cases as we prepare for the adaptation of AI in and ever increasingly digital world.
Carmignac Portfolio Human Xperience
A thematic Fund focused on customer and employee experienceDiscover our Fund pageCarmignac Portfolio Human Xperience A EUR Acc
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| Carmignac Portfolio Human Xperience | 19.2 | -21.8 | 22.6 | 17.6 | -9.7 |
| Reference Indicator | 17.2 | -13.0 | 18.1 | 25.3 | -9.3 |
| Carmignac Portfolio Human Xperience | - 0.5 % | + 5.2 % | + 4.9 % |
| Reference Indicator | + 5.2 % | + 7.5 % | + 8.0 % |
Source: Carmignac at Apr 30, 2025.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor).
Reference Indicator: MSCI AC World NR index
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