WHITE PAPER
A Simple Framework for Successful Loyalty Program Design
Mickey Neuberger Senior Director, Loyalty Strategy Loyalty Lab, Inc.
January 2008
Introduction As with any marketing discipline, designing a loyalty program is both a science and an art. The science concerns nailing the program economics and mechanics, such as how customers enroll, how members accrue points, and how the benefits/ rewards are structured. The art is the marketer’s opportunity to differentiate the program, aligning it with its brand and customers. For example, the basic program mechanics of Southwest Airlines Rapid Rewards are eight round-trips earns you one free round-trip. However, Rapid Rewards is much broader. Program nomenclature (e.g. “Freedom Awards”), special companion passes, surprise and delight rewards and communications, including free drink coupons and birthday cards, all align with Southwest’s fun and consumer-focused brand.
This analysis provides loyalty program designers with a sense of which customer behaviors they will be able to and will want to influence.
In this article, I focus on the former, the science of designing a loyalty program for primarily transactional businesses (loyalty in subscription or advertising business models needs to be addressed quite differently and therefore requires separate coverage). I will provide a high-level framework to help marketers design programs based on their businesses. Implicit in this discussion is that high-level corporate objectives for the program are twofold. The first is to drive increased revenue via a combination of higher retention rates, greater purchase frequency, and larger average order size. The second is to develop a two-way dialogue between the brand and customer via increased intelligence and relevant content and/or offers.
Prerequisite: Analyze Customer Behavior Aside from the high-level corporate objectives, detailed program design must be deeply rooted in a thorough analysis of consumer spending patterns and behaviors. This analysis provides loyalty program designers with a sense of which customer behaviors they will be able to and will want to influence. For example, if 90% of customers only make one purchase, then the loyalty program’s sole objective may be to drive the second purchase. More specifically, in order to guide program strategy, marketers should understand customer data along the following dimensions: By frequency: How often are customers making repeat purchases? In a 12 month period, what percentage of customers is buying only once? Twice? Three or more times? What percentage of revenue does each of these segments represent? By revenue: How concentrated is revenue in the top customer tier? What percentage of total revenue does the top 10% represent? The top 25%? By engagement: How do customers segment by non-transactional engagement activities, such as posting reviews or to blogs or subscribing to a company newsletter? Which of these activities are indicative of higher member value (in terms of increased revenue and/or decreased costs)? Armed with analysis across these three dimensions, marketers have the critical data they need to design successful loyalty programs.
WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN
©2008 LOYALTY LAB INC.
2
Step 1: Pick a Program Based on Purchase Frequency Using the table below, marketers should match their customer purchase frequency behavior, ranging from low to high frequency, to the corresponding loyalty program objective and design. Overall, the greater the frequency of customer purchases within a year the further out the program threshold should be set. This, in effect, minimizes the erosion of margin while allocating reward funds to drive customers toward higher total customer spend levels. Purchase Frequency Pattern
The greater the frequency of customer purchases the further out the program threshold should be set.
Primary Program Objective
Typical High-Level Program Design
Low Frequency/Specialty Drive Second Purchase Brands
Repeat Purchase Program
“One and done” customer spending patterns (e.g. specialty catalogs)
Bounce back offer triggered after initial purchase Threshold set at total dollar value of 2-3 purchases
Medium Frequency/ Discretionary Spend
Drive Multiple Purchases Frequency Program Cross product/ category bonuses Threshold set at total dollar value of 3-4 purchases
More mainstream products bought 3x a year or more (e.g. electronics, shoes, furnishings ) High Frequency/Core Product or Service
Grab Higher Share of Wallet
“Multiple purchases” spending pattern (e.g. airline, grocery store, CPG)
WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN
Best Customer Program Use sophisticated tiering with significant service benefits to drive customer migration to “elite” level Threshold set at total dollar value of 5+ purchases
©2008 LOYALTY LAB INC.
3
Step 2: Structure Program Based on Revenue Concentration It is common for the top 10% of customers to account for as much as 50% of total revenue. For this reason, it’s important to recognize, thank, and encourage these “best” customers. Therefore, effective loyalty programs usually recognize and reward these customers with an elite tier with increased service benefits (e.g. free shipping, concierge service), special offers (e.g. member-only sales), exclusive rewards (e.g. free tickets to a special event) and higher reward accrual rates (e.g. double points). Successful programs also leverage their evangelist base for referrals, providing low cost new customer acquisitions.
There is usually a very strong correlation between engagement activities and long-term customer value.
Most programs set the threshold for tiers at specific member-spend inflection points where a significant percentage of revenue is clustered within a small percentage of customers. In a three-tier model, the top tier’s baseline member spend threshold should be equivalent to the total annual spend of the top 5-10% of customers. The next best tier should be equivalent to annual spend of the next best 5-10%.
Step 3: Encourage Engagement (If Important) In instances where customers interact with brands in non-transactional ways, such as by posting a product review on the e-commerce channel or clicking on an email, program designers should strongly consider rewarding that behavior. This is because there is usually a very strong correlation between engagement activities and long-term customer value. For example, a customer who refers friends, opts out of print communication, registers for the newsletter, purchases gifts for others, and uses the private label credit card will be more valuable in the long term than another customer who does not perform these actions but spends the equivalent amount. Therefore, designers should measure customer value based on all transactional activities and nontransactional interactions, and then create a funding model that rewards members a percentage of all value-add activities.
Conclusion By using the presented framework, marketers utilize data segmentation analysis to make informed program design decisions. This ensures that loyalty program mechanics are set up to influence both incremental and valuable customer behaviors. With the scientific part of program design fulfilled, marketers can shift focus to the more artistic creative elements, designing programs that embrace their core brand attributes and pique customer interest.
Mickey Neuberger is Senior Director, Loyalty Strategy, of Loyalty Lab, Inc., the leader in on-demand best customer management for consumer brands. Loyalty Lab’s flagship Customer Relationship Manager Suite provides retailers and CPGs with integrated and on-demand loyalty program management, email, incentives, and campaign management. Clients include 1-800-FLOWERS.COM, Anthropologie, New York and Company, RedEnvelope, Smart & Final, Bally Total Fitness and a number of other prominent retail and service companies. For more information, visit http://www.loyaltylab.com. Contact Mickey Neuberger directly at
[email protected].
WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN
©2008 LOYALTY LAB INC.
4
Usage Notice Permission to use this document is granted, provided that: 1. the copyright notice appears in all copies, along with this permission notice 2. use of this document is only for informational and noncommercial or personal use and may not include copying or posting the document on any network computer or broadcasting the document through any medium 3. the document is not modified from its original version It is illegal to reproduce, distribute or broadcast this document in any context without express written permission from Loyalty Lab, Inc. Use for any other purpose is expressly prohibited by law, and may result in severe civil and criminal penalties. Violators will be prosecuted to the maximum extent possible. This document and related graphics might include technical inaccuracies or typographical errors and are subject to change at any time by Loyalty Lab, Inc. Loyalty Lab, Inc. does not guarantee the suitability of the information contained in this document, which is provided “as is” without warranty of any kind. Loyalty Lab, Inc. hereby disclaims all warranties and conditions with regard to this information, including warranties and conditions of merchantability, whether expressed, implied or statutory, fitness for a particular purpose, title and noninfringement. In no event shall Loyalty Lab, Inc. and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this white paper.
WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN
©2008 LOYALTY LAB INC.
5
