Loyalty 360: For retailers new to the loyalty and engagement space, looking to develop or enhance their programs, would you explain the difference between a closed loop card and an open loop card offering?
Lockwood: An open loop prepaid card is issued by a major network — Visa, Discover, MasterCard, American Express — and can be used wherever those brands are accepted. A closed loop card is restricted to the store that is represented on the front of the card.
Loyalty 360: Who is more likely to earn & use a closed loop card vs. an open loop card?
Lockwood: Consumers generally respond well to rewards offered in both formats. However, generally speaking, consumers respond better to the flexibility of an open loop card. Therefore, a reward provider interested in getting more consumers to take them up on the original offer will often leverage an open loop card to make a more enticing offer.
Loyalty 360: What are the earn rates for open loop vs closed loop? What are the in-store burn rates for those same cards?
Lockwood: When speaking about reward programs, we focus heavily on acquisition of the offer, and spend back into the store. Acquisition is driven by making the most enticing offer possible. If the reward values are equal, consumers typically see open loop cards as the better offer, compared to closed loop cards.
However, retailers and manufacturers are aware that closed loop cards offer the best chance for customers to return — for the simple reason that those cards can only be used back in the specific location. 100% of spend on those cards occurs at that specific location. For that, the reward provider might sacrifice some of the acquisition of the original offer.
At Young America, our focus is on not only implementing the reward for our client, but backing up the offer with a specialized marketing campaign that provides messaging through the whole cycle, from initial offering to redemption and return to store. We recognize and utilize the strengths of both to get consumers to make the original purchase at the client’s store – and keep coming back.
Loyalty 360: Should a special offer be added alongside each reward type to incent spend in store or is this only an added value with open loop card offerings? On average what sort of lift in in-store spend or redemption does one see by incorporating a special offer alongside the reward?
Lockwood: It’s far too easy (and not very effective) to just throw a reward out into market and hope it works. Our goal with our clients is to advise them on everything from the operations of implementing of the offer to the marketing of the offer — and every offer is different. Since open loop programs result in better up-front acquisition, we tend to favor those rewards and back them up with strong spend back components to ensure optimal ROI. Customizing those programs is the key to a successful campaign.
The industry sees varying rates on open loop spend back based on retailer and vertical, but we generally estimate generic programs spend back at around 5%-15% purchase back in store. With our enhanced design, we have introduced programs that have achieved over 80% spend back to the retailer. Results vary, and we aim for two to four times the current spend back level in stores – it all ties into unique messaging and placement of messaging.
Loyalty 360: Are some businesses more suited to using closed loop vs open loop and visa versa? Or is your research showing that open loop is the better approach for all?
Lockwood: Not necessarily. We find that there is quite a bit of variety of offerings, even among comparable businesses in the same retail category. Rather than focus on the specific business model or retail category model, we advise each client and develop programs on a case-by-case basis. Our goal is to get customers in the store “early and often.” To do this, we help clients determine the best program option based on a number of factors, including the specific offer, product and budget, to name a few.
Read more about recent research and insights on this topic in Young America’s recent press release, “Asking Customers to Spend Rewards in-Store is More Effective Than Forcing Them, According to Loyalty Experts at Young America - Choice, Convenience Preferred by Prepaid Rewards Card Recipients”