Loyalty Program Design Fundamentals Part I
Posted on March 24th, 2010
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.
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