Maximizing Customer Loyalty: Crafting an Effective Loyalty Program

Long the domain of airlines and credit cards, more and more businesses are turning to loyalty programs to drive customer engagement. And we're not just talking about the punch cards at your local coffee shop. Driven by an ever more competitive retail landscape, and facilitated by increasingly sophisticated software and tools, retailers and service providers of all types and sizes are finding out how loyalty can make a difference on their bottom lines.

Examples range from "membership" programs like REI—which offers an end-of-year dividend that is a percentage of annual spend—to Starbucks' point system, with tiers, coupons, gifts and other gamified elements that add to the loyalty experience.

Of course, loyalty shouldn't just be a box to check. An effective loyalty program requires thoughtful design and attentive execution to improve customer experience, increase brand stickiness, and ultimately increase revenue. The naive executive sees a loyalty rollout as a fast, cheap marketing stunt to drive a bit of repeat business and excite shareholders; the wise executive thinks about how you build a program that continues to add value three, five, and ten years down the line.

When we aid clients with the planning and development of their loyalty programs, we advise them to get as far as they can with program design before they start evaluating technology partners, keeping their customers central to the overall program. This post will discuss several of the core considerations we walk through as a part of these strategy sessions.

Rewards

A loyalty program will succeed or fail based on whether customers want to use it. With that in mind, one of the best places to start in conceptualizing yours is thinking through the types of rewards you want to offer. What types of rewards will improve a customer's experience with your brand? What types of rewards will customers be excited to unlock? Not only does thinking through your rewards first center the customer's experience, but it will inform other elements of the program design.

Common reward types include:

• Single-use coupons/discounts

• Ongoing discounts

• Cashback / store credit

• Brand merchandise / swag

• Enhanced service levels

• Exclusive / early access goods

• Affiliate discounts

Many loyalty programs mix and match different reward types to build an offering that may appeal to a wider audience. Just keep in mind that as the diversity of reward types you want to offer increases, so does the complexity of the platform and management effort required to support the program.

A few other minor considerations related to rewards:

• Do you want unused rewards to expire?

• Do you want loyalty members to be able to share or gift earned rewards?

• How will rewards be treated from a business perspective? In some cases, accumulated points or rewards may need to be treated like a liability on the balance sheet, so make sure to loop in your accounting and legal teams.

• Do you sell any products with reserved price minimums or promotion exclusions that need to be excluded from loyalty rewards?

Loyalty Actions

Once you start thinking about the rewards you want to offer, the next logical question is how people earn those rewards. Your core goal in developing a loyalty program is to create a feeling of excitement and urgency for your customers, and the actions you select are the primary method by which you can do that. In general, there are a few broad categories of loyalty actions that companies use to generate rewards. These include:

• Shopping behavior (via purchases or money spent)

  • While rewarding general shopping behavior is always a good idea, don't overlook your ability to create urgency through restricted shopping promotions. Increasing rewards if a member makes a specific purchase or makes a purchase by a certain date can be effective ways to give that little nudge that would-be buyers need.

• Membership milestones

  • Membership milestones can take a couple of shapes. Time-based milestones (such as length of time in the program) are common, as are tier-based ones (such as making X number of purchases or achieving a specific number of points).

• Referrals

• No-purchase necessary behaviors

  • This is a broad, possibly limitless pool of potential activities. Common rewarded behaviors we see are activities such as store visits, completing a survey or profile, signing up for a newsletter, and other gamified interactions.

• Dormancy

  • While this isn't an action per se, you might consider building dormancy-based rewards into your program (such as a coupon being issued after a certain period of time without any purchases). This is a good excuse for a customer touchpoint, and can be an effective way of driving repeat business.

  • If you do implement dormancy rewards, we recommend being analytical in your approach. Some businesses have found that this type of strategy can lead to increased periods of inaction as people wait for the next discount, so be sure you're studying the impact these campaigns have on your customers.

In addition to the what of loyalty actions, make sure you're asking how you want these actions to be rewarded. Do you expect specific rewards to be granted following specific actions? (Issuing a coupon on a member's loyalty anniversary, say.) Or are you envisioning a ledger-based program, where members accumulate points via loyalty actions? Point-based programs open a whole set of new questions, which we'll discuss in just a moment.

When thinking about loyalty actions, don't forget to think about exclusions to your plan as well. Are their certain products, services, or circumstances that you don't want to count towards loyalty progress? If you're running a spend-based program, how do you want to handle gift cards? Many retailers don't assign points on the purchase of gift cards, instead doing so when the gift card is redeemed, to avoid customers exploiting the system to double their points. Similarly, how do discounts and coupons impact point accumulation?

Points & Tiers

While it's certainly possible to have a simple loyalty program that doesn't incorporate points or tiers or anything else fancy, these structures tend to be popular among our clients. This is because they lead to an added gamification of the shopping experience and enable escalating rewards, both of which are successful at driving engagement. So let's talk about how you might apply these practices.

When it comes to assigning points, there are a few routes you can take:

• Assigning points per dollar spent

  • This strategy rewards your biggest spenders and encourages additional or add-on purchases, and tends to be the most popular approach to assigning loyalty points.

  • Many programs utilize a strategy where membership in higher tiers result in multipliers on points earned. This is a clever way to further gamify the system and add the perception of a "reward" tied to tier progression, without actually having to give anything additional away.

• Assigning points per transaction

  • A somewhat simpler approach, this strategy incentivizes repeat purchases without emphasizing total sale amount.

  • This technique may be useful for businesses that thrive on repeat business, but where order amounts are similar enough that the complexity of points per dollar isn't necessary.

• Variable points

  • This strategy encourages specific behaviors or purchases by assigning additional points for specific products or services. For example, a program might offer 2x rewards when if a specific product is included in the cart.

  • This technique can be combined with either of the two above approaches.

Keep in mind that points don't need to be tied only to purchase actions. Many clients choose to offer point boosts for activities such as signing up for a newsletter. Blending these strategies offers more ways to keep customers engaged.

Frequently, points are used in conjunction with tier thresholds as a method of further gamifying the program. Achieving a higher tier might come with an additional set of benefits, such as improved status, improved discounts and coupons, or accelerated point accumulation.

While tiers are often a fun component of a loyalty program, they do significantly increase the implementation complexity. If you're thinking about going this route, make sure you're answering the following questions:

• How many tiers do you want to have? How will you differentiate each one?

  Typically, we recommend building a program around 3 - 4 tiers. Any more and the program will feel too confusing, and any less and the tiers risk feeling unnecessary or superficial. Make sure that each improved tier offers real value to the customer.

• Do you want to offer benefits for being in tiers, or for reaching tiers?

  In other words, are your tier benefits ongoing, one-time, or a mixture of both? Generally, we advise clients to create ongoing benefits to tie to their tiers. Ongoing benefits make the tiers feel more valuable, can incentivize additional shopping/buying behavior, and may motivate customers more than one-off benefits. Examples of effective ongoing tier benefits include: free shipping, no-hassle returns, early access to new products/services, preferential treatment, and more.

• Are tiers based on lifetime behavior, or annual behavior?

  While lifetime-based programs may be easier to implement, they disincentivize engagement once a user reaches a given threshold. On the other hand, annualized programs open up a number of additional questions—is the year based on the calendar, the member join date, or the tier achievement date? Are tier benefits only available in the year in which the benefit is achieved (meaning that benefits earned after 11 months would only be useful for 1 month), or are tier benefits available for the full following year (meaning that users can potential maintain status for up to 24 months)? How does your downgrade mechanic work—are users forced to re-earn status from scratch, or do they drop to the next tier?

Program & User Definition

Once you have the general shape of your program outlined, it's time to start getting into the nittier and grittier points. For starters, are you a multi-brand conglomerate? If not, great, jump to the next paragraph! But if so, you'll need to decide whether you want to create an umbrella program that knits your brands together, or to create separate programs for each one. This decision will likely be determined by your overall brand strategy—do your customers even recognize your separate brands are related? If not, an umbrella program may be confusing, though it has the potential to improve that, if that's your goal. From a functional and technical perspective, there are pros and cons to each approach. Distinct loyalty programs may be easier to conceptualize, but will likely increase your implementation effort. A multi-brand loyalty program, on the other hand, may allow you to streamline your loyalty platform setup, once you get past all the planning and legal wrangling, that is.

This leads to our next question—how are you defining your loyalty members? Is a loyalty user defined by their email address, phone number, or some other identifier? Can a household share a membership? Does a user have to opt in to your loyalty program to start accumulating rewards, or do you automatically tie purchases to a phone number or email so that when they choose to register, their full purchase history is accounted for? Beyond the legal and business considerations, these questions will have technical implications that you'll want to make sure that you've addressed. We recommend bringing all facets of the business—program, technical, and legal—into the discussion as early as possible, to make sure that you don't get too far down a specific path before realizing there's a blocker you hadn't considered.

Fraud Prevention

No one likes to think about their customers as having bad intentions, but unfortunately, when it comes to loyalty, it's a must. If free money is on the table, someone is going to be working to figure out to get as much of it as they can. A few years ago, enterprising individuals found ways to game credit card signup bonuses and balance transfer rules into elaborate and exotic free vacations. Consider the following tips to avoid hurting your own bottom line with excess largesse:

• Don't go crazy with signup rewards

  • If your welcome offer is too generous, users may spawn email addresses in order to receive the benefit multiple times. There are also a couple of strategies you can pursue to combat this:

    • Consider tying a user's account to their phone number, which is harder to spoof.

    • Put relatively short expiration dates on welcome coupons to ensure that users can't generate a number of them, and then slowly use them over time.

• Delay point accumulation

  • Some clever fraudsters have been known to hack loyalty programs by making dummy purchases in order to accumulate points, then refunding or cancelling the orders to keep the points without the spend. One method some businesses use to prevent this is ensuring that points do not get added to a user's ledger until after a customer's refund/return window.

  • However, depending on your refund/return policy, this approach may undermine the utility of the loyalty program. It's worth discussing what makes sense for your business based on your fraud profile.

• Delayed rewards

  • As with the above, consider whether fraud is a significant enough risk that you want to make sure purchases are final before dishing out the rewards.

• Prevent reward sharing

  • Make sure that rewards can only be used by the person who earned them

Selecting a Loyalty Platform

Choosing the right loyalty platform is critical to the success of your loyalty initiative. You'll want to make sure that it offers the features you need to match your vision, with a technical underpinning that won't create an integration nightmare. Make sure you're clear on everything you want to use it for before beginning the search. For example, many loyalty platforms such as Talon.One serve effectively as a source of truth for all coupons and discounts, loyalty related or not. If you're expecting your platform to serve this role, make sure you understand how the platform you select can do so.

If you can't tell by now, we've spent a lot of time thinking about loyalty programs and software, and the article above is just the tip of the iceberg. If you're just starting on your loyalty journey, we'd love to help guide you. Don't hesitate to reach out to speak to one of our loyalty specialists about how Avatria can help you design and implement the perfect program for your customers.