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Research Focus: Effectiveness of Grocery Retail Loyalty Programs

Posted on September 10, 2019September 10, 2019

Are loyalty programs effective? With the amount of money invested in customer loyalty programs, this is a question that matters greatly to a lot of stakeholders. We may now finally have some scientifically sound answers, at least as it relates to grocery retail loyalty programs. In the largest scale academic study of 358 retail brands across 27 different countries, Professor Bombaij from Tilburg University and his coauthor found some good and some bad. Their research findings are reported in a paper to be published in International Journal of Research in Marketing. In this research focus feature post, I would like to discuss the key findings from the research and what they may mean to your loyalty program management.

Overview of the Research

The two researchers were interested in finding out if loyalty programs really work, what program designs are effective, and if program impact depends on the retail type and on country and cultural differences. They started with the top 15 grocery retail brands in 27 countries (17 in Western Europe and 10 in Eastern Europe). For each brand, they tried to gather information on its sales, loyalty program design (if there is one), and other business characteristics. Combined with country level information, these data allowed the researchers to systematically analyze the impact of different factors on each brand’s sales per square meter. Importantly, they used rigorous statistical methods to make sure that any differences found are real differences due to the loyalty program, not because of some other things mixed in there.

A Closer Look at Starbucks Rewards Program Redesign

Posted on April 3, 2019April 3, 2019

Changes are coming to Starbucks Rewards. On April 16, Starbucks Rewards will be expanding its reward structure to five levels. A few other changes will be made to the program too. Will these changes make this leading loyalty program even better? What might be motivating these changes? How will the changes affect the program and its members? In this post, I attempt to dissect these changes and offer my assessment of the new Starbucks Rewards program design.

What Changes Exactly?

The biggest change to the program is the addition of more reward thresholds. Instead of a single reward threshold of 125 stars, it will feature five levels of rewards ranging from 25 to 400 stars. The new program will also erase the current difference between a Gold member and a base member, allowing both to enjoy the same set of benefits. The table below compares the current vs. the new program structure.

	Current	From April 16, 2019
*Earning Stars*	2 stars per $ spent	2 stars per $ spent (unchanged)
*Reward Levels*	A single level, at 125 stars	Five levels, at 25, 50, 150, 200, and 400 stars
*Reward Items*	A free food or drink item, excluding alcoholic beverages and multi-serve food and beverage items	25 stars: free drink customization (e.g., extra shot, flavor, etc.); 50 stars: a free hot brewed coffee or tea, or a free bakery item; 150 stars: a free handcrafted drink, hot breakfast, or parfait; 200 stars: a free lunch sandwich, protein box, or salad; 400 stars: a free select merchandise (e.g., gift) or at-home coffee.
*Membership Tier Structure*	Green and gold. Gold is qualified by earning 300 stars in a 12-month period.	Single tier
*Base Tier Benefits*	A birthday reward Free in-store refills of hot or iced brewed coffee and tea Early or extended access to some promotions and offers Personalized offers and coupons Can NOT redeem stars for free rewards until after reaching Gold level	Same as before, but now everyone has the same ability to redeem their earned stars for rewards. All members now also receive a monthly double-star day that used to be reserved for Gold members.
Gold Tier Benefits	All Green benefits The ability to redeem every 125 stars earned for a free reward A double-star day as selected by Starbucks A personalized gold card	Not applicable, as there will no longer be a premium tier. Gold members do not lose any benefits. They just have to share them with everyone else.
*Star Expiration*	6 months after the star is earned	6 months after the star is earned (unchanged)

More Complex Reward Thresholds

The new design significantly expands the reward structure of the program from one to five levels. What could be driving this change?

5 Criteria for Assessing Your Loyalty Program Value

Posted on August 8, 2018August 8, 2018

To encourage customers to actively participate in your loyalty program, they need to see value in doing so. From a program management perspective, it is important that you regularly audit the value provided by your program in order to create sustained engagement with your current and potential program members. This is especially critical if you have recently made changes to your program or are about to implement changes. A classic loyalty program article in the Harvard Business Review suggests a really useful framework that lays out five criteria for assessing loyalty program value. I would like to explain these five criteria here and offer an illustration of how several well-known loyalty programs fare on these criteria.

Criterion #1: Cash Value

This first criterion should be a no brainer. It refers to the financial value consumers receive from participating in your program. You can determine your program’s cash value by calculating its reward ratio. That is, how much does a member receive in terms of free rewards for every dollar spent? Take Starbucks Rewards as an example, consumers earn 2 stars for every dollar spent (without promotion). A free reward is issued every 125 stars accumulated, or $62.5 spent. Assuming consumers redeem the free reward for the more expensive items on the menu (say, with an average price of $5), they would receive a cash value of $5 for every $62.5 spent, or 8 cents per dollar spent. That is the reward ratio for the program. To calculate your program’s reward ratio, use this more general formula: reward ratio = (average reward value/average point threshold) x number of points earned per dollar. In the case of Starbucks above, reward value ratio = ($5/125)*2 = $0.08 per dollar (or 8%). This is actually really high compared with typical credit card reward ratios of 1-2%. If you already know the average value per point, you can also directly calculate your reward ratio as average $ value per point*number of points earned per $1. Continue reading “5 Criteria for Assessing Your Loyalty Program Value”