If you are a loyalty program manager, most likely you will agree that a loyalty program can be an expensive exercise. Not only does it require a substantial infrastructure and a large amount of human time to support, but also once started it is difficult to pull the plug without offending customers. Therefore, it is critical to design a loyalty program so that it will encourage customer participation and achieve maximum business benefits. In this two-part series, I would like to discuss some key points in this area. In this first part, I will discuss what are the design factors that a loyalty manager should consider. Next week, I will talk about what academic research has taught us about some of the design factors.
Before continuing, I would like to acknowledge the inspiration for this topic from one of my readers in Europe, Kim Jorgensen, who had inquired me about optimal loyalty program design. The inquiry stimulated me to think more extensively about this topic and hence this series. Thank you, Kim!
Now let’s get down to business.
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Design Factor Cluster 1: Participation Requirements
- Voluntary or automatic enrollment: Do you automatically enroll all consumers into the loyalty program? Or do you want consumers to self-select whether they want to join your loyalty program? Most companies use the voluntary enrollment approach. But automatic enrollment is also possible if you have a way of tracking consumer transactions (such as with banks and credit cards).
- Free or fee: Whether you charge customers a fee to be in the loyalty program. With a free program, you are likely to attract more participation. With a fee, it can help self-identify the real loyal/high-spending customers who mean business.
- Automatic or manual point accumulation: In the case of a grocery store loyalty program, as long as you show your card, the points will be automatically recorded. But with programs such as My Coke Rewards, customers have to manually enter the code that they find under a cap to gain points. Apparently the first approach is more convenient for the customers, but the latter approach can be necessary when automatically accumulation is not possible or cost-effective.
Design Factor Cluster 2: Point Structure
- Point issuance ratio: Simply put, how many points per dollar spent or per mile flown or per transaction? This determines the distribution of “program currency” and will be what consumers use in their mental accounting. While the value of this point currency cannot be determined by point issuance ratio alone, research has shown that 10 points per dollar spent vs. 20 points per dollar spent does make a difference to consumers, even if the end reward ratio makes the eventual payoff exactly the same.
- Point threshold: How many points do I need to reach a reward. This changes the perception of program relevance to consumers. Set too low, the loyalty program will be rewarding too much and can be too costly. Set too high, the program can be considered irrelevant to consumers, as it may take too long to reach a reward. Set in the right zone, point threshold itself can become a fun challenge for customers and can become a motivating force.
- Point tiers: I recently got downgraded from the Delta SkyMiles Silver Medallion membership, because I didn’t fly enough last year. After being used to the perks of higher-tier membership, it takes a little getting used to being back on the ground again. For many consumers, those little perks or even simple status symbols of being in a higher tier does matter. Design your program in such a way that it makes your loyal customers feel special.
Design Factor Cluster 3: Rewards
- Cash value of rewards: How much are your rewards going to be worth? For airlines, that can be a few hundred dollars for a free flight. For a coffee shop, it may be $1 or $2 for a free cup of coffee. This of course will tie in with the point issuance ratio I mentioned earlier, and will require an examination of the company’s bottom line to make sure that the loyalty program will be sufficiently motivating and yet profitable for the business.
- Variety of options: In some programs, there is a single reward form such as cash back or free drink. In others, such as with American Express Membership Rewards, the rewards can stack up to a big catalog. The first approach will apparently be easier to manage. But the second approach will make your program relevant/appealing to more customers.
- Reward form: Products or cash? Some programs offer the most generic form of currency: cash. This is perhaps the most expensive to a business because the cash value and the cost of the rewards are the same. But it can be appealing to cash-enticed consumers.
- Brand-related or non-brand related: Do you reward consumers with your own products or someone else’s (e.g., a free movie ticket or an iPod)? Most likely, the cost associated with the former will be lower.
- Aspiration value: 100 cups of coffee or a free spa treatment? A utilitarian reward such as cash appeals to the rational mind. But a luxury reward can make consumers feel pampered.
Did I miss anything? I’d love to hear your own experiences with loyalty program design and best practices or lessons learned. Please be on the watch-out for the second part of the series, where I will talk about some of the recent research findings related to optimal loyalty program design. To receive more great insights on loyalty programs from the Ping! blog, fill out the brief form below, and you’ll receive an email notification when a new article is posted.
Hi Yuping,
Thank you for your kind words regarding your inspiration on Loyalty Programs. As I continue my journey into the world of customer loyalty programs I keep on finding the topic more and more interesting due to the fact that the right program can be of great value for its sponsors and customers. However the design and not at least the analysis behind the program design are the key to success for the program. I would like to share some of my findings.
Before starting any work on programme, answer on question honestly: are our products or service worth it? If your products are inferior or out of date, any investment in a customer loyalty programme will be a waste of time and money.
Customer loyalty programmers do not create quick results. It is a powerful retention marketing tool for building long-term relationship. Discounts are the last thing that creates loyalty among customers. 90 Per cent of the customer loyalty programmers were built on price related benefits. True relationship with customers is based not on financial incentives, but on emotion, trust and partnership.
Loyalty programme benefits
Benefits must have a high perceived value of members mixed with hard and soft benefits, it is necessary to take a value oriented approach which consists of three steps.
Step 1. Focus on needs for target group
Step 2. Small scale pre-study of most interesting benefits by asking small sample.
Step 3. Large scale survey.
The financial concept
A loyalty programme can cover most if not all of its cost by using all possible methods to generate revenue, such as an annual membership fee, sales og loyalty programme merchandise and special products, commission from external partners and credit card,. Because sales are increase through customer retention, the loyalty programme has an effect on bottom-line profits.
Communication
The three areas of communication: with loyalty programme members, with the personnel of the sponsoring company, and with those in the external environment, such as the media.
Internal support is very important, and includes everybody from top management to those at the customer interface. Only if the loyalty programme is supported at every level can it be a success. If a customer is repeatedly treated badly by service or sales staff, then no loyalty programme in the world can turn them into a loyal customer. Therefore all point of sale employees must understand the importance of the customer loyalty programme. The loyalty programme must communicate with those in its external environment to obtain press coverage to increase awareness of it activities.
Customer loyalty efforts as a success factor
An analysis by Professor Hermann Simon, who found that one of their strategic competitive advantages, is their closeness to the customer. This factor combined with excellent products quality and a perception of good value for money, forms the foundation of their market entry barrier for new companies. Customer who joins loyalty programme simply because of a discount will be the first to leave if the competitor next door offers an even better deal. What will make customer s loyalty programme successful are soft benefits. Hard benefits are usually copied first and are often not differentiated among competitors’ programmes. The secrets of successful programmers are that they are well planned in detail; include the customer´s point of view.
Setting up a customer loyalty programme
The first step is always to answer the following questions honestly:
Is my product worth the investment?
If the product does not sell because of a significant quality, distribution, design or price problem, then the customer loyalty programme will not be able to salvage it. Only if the product is already competitive does a customer loyalty programme make sense.
Step 2.
Identify distinctly the loyalty programmer’s goals and target groups. More importantly, the choice of target groups is directly linked to the benefits there loyalty programme must offer, as each target group has its own preferences and demands different benefits.
Step 3.
Finical concept (costs)
Step 4.
Develop a communication platform.
Step 5.
How the programme should be organized and managed. This includes service centre
Step 6.
Set up a data base.
Step 7.
Establish a project team and make research on other loyalty programmes (compare with other programs)
Step 8.
Implementation (six to twelve months)
The loyalty programme´s target groups
Each target group has its own preferences and specific value-driving factors. Two questions need to be answered:
Do we want to focus on existing and or on potential customers?
Do we want to target all of the existing/potential customers, or only certain segments?
Advantages of limited and open loyalty programmes
Limited loyalty programme
• Membership fee helps cover costs
• Membership prerequisite helps channel membership/focus on target groups
• Limited access makes membership more valuable
• Clearly defined membership structure makes communication more effective.
• Membership perquisite keeps numbers of members, and thus cost, down.
• Database includes only members with an above average interest in the product.
• Membership payments raise expectations, so the loyalty programme management I constantly forced to improve value.
I general, limited loyalty programmes will be the best approach for companies:
• Trying to reach/reward their top customers
• Preferring a more focused approach
• With smaller budgets
• In clearly segmented markets
• In business to business markets
• In markets with homogeneous customers
Open loyalty programme
• A wider number of customers can be reached.
• Database more complete
• Potential customers and competitors’ customers can be reached more easily.
• Completeness of database could, after further analysis, lead to segmentation and segment-specific communication.
• Large number of members helps to reach critical mass, which makes loyalty programme become more cost effective sooner.
Open loyalty programmes will be the better approach for companies:
• With very little knowledge about current and potential customers
• Following a more general approach
• With long term lager budgets
• In unsegmented markets
• In business to customer markets
• With commodity products.
The value of benefits
What determines the value of a specific benefit? There are three mail factors:
• The fincial value
• The relevance of the individual
• The ease with which a member can use the benefit of accumulates the necessary points to earn rewards.
A three-step approach to identifying the real value drivers after the target groups has been identified.
Step 1. Collection of potential benefits
Step 2. Customer pre-study
Step 3. In-depth customer study
Identifying the right benefits is the most important part of the customer loyalty programme concept. A loyalty programme also has a life cycle am must be constantly improved and further developed.
Pricing for customer loyalty
Rather than simply offering discounts, they should be earned by customers, and given to them as a reward. A win-win situation from which both sides benefits must be created. Several sophisticated pricing strategies are available that do this in an intelligent way.(multi-step discounts, multi-dimensional pricing schemes and so on). Precise analysis is necessary to install these strategies in the right way, but the benefits are huge.
I can recumbent a book: Customer Loyalty Programmes and Clubs by Stephan A. Butscher
Any feedback is most appreciated as I am working on my MBA dissertation: Key success factors for Customer loyalty programs in retailing
Kind regards,
KIM Skaaning Jorgensen
Wow! Kim, thanks for the great information you posted here. In response to what you said, I want to especially point out two issues you raised:
1. Discount (hard benefits) vs. loyalty (soft benefits) approach: Many companies start a loyalty program with the former rather than latter goal in mind. This explains why so many loyalty programs have shown up during this down economy. It is companies' struggle to gain new customers and stop losing existing customers in the bad economic environment. This is not to say that hard benefits are not helpful. My experience with loyalty programs suggest that people joining loyalty programs are usually very deal oriented and can have sharp short-term responses to discount offers. But as you said, the soft benefits are what wins consumers in the long run.
2. The ability to capture rich data is one of the greatest bonuses (for some perhaps the goal) of a loyalty program. A few years back, a study was done by Professors Leenheer and Bijmolt on retailers' use of loyalty programs. They found that more intensive data analysis leads to superior customer knowledge, but that many retailers do not engage in such practices. This is consistent with what I see in many companies. Many loyalty program providers are relatively small operations. They either do not have the know-how to engage in sophisticated analytics, or they do not yet appreciate the benefits of better understanding customers with loyalty program data.
One other point I would like to add is the potential effect of loyalty programs on consumer habit. Although we usually consider a loyalty program as enhancing loyalty, in some low-involvement product categories, it can be used to shape consumer habit. I'm currently working on a research project related to the loyalty vs. habit issue, and will write more about this later. But I want to point out right now that in some situations where habit is the driving force in purchase decisions, a loyalty program with hard benefits as hooks may be enough to encourage repeated purchases until the consumer becomes a habitual (note: not necessarily loyal) customer. When that happens, the purchase decision becomes an automatic process that is relatively immune to competitive offers.
Amazing article. I have been searching the Internet for such information, but this one is by far the most comprehensive. Thanks Kim for the great information that you added
Thank you!
Fadi, glad you find the post helpful. If you liked Kim’s comments, he also has a guest post on my blog on 10 steps for setting up a loyalty program. You can find the post at: http://www.yupingliu.com/wordpress/2010/04/28/guest-post-10-steps-for-setting-up-a-loyalty-program/
Found the article very useful.
Thank You
Hi Yuping, thanks for very useful artical. where will i get it’s second part?
Sharad, glad you found the article useful. You can find the second part here: http://www.yupingliu.com/wordpress/2010/03/31/loyalty-program-design-fundamentals-part-ii/
thanks for this great article. I am writing my bachelorthesis about loyalty programs and the information you summed up are very helpful.