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.
Criterion #2: Aspirational Value
A program’s value goes beyond its financial value of free rewards. Criteria 2~5 involve non-financial values and need to be assessed in a qualitative fashion instead of with a single number as cash value above. Aspirational value refers to the level of psychological motivation offered by the rewards. Offering any consumer the possibility of a pampering experience, whether a spa treatment or a round of golf on the best golf course, the consumer is likely to be excited and will try his or her best to get there. The level of excitement would be much lower for everyday mundane things such as a free gasoline gift card or a free turkey. To increase the aspirational value of your program, you need to go beyond utilitarian rewards and offer things that are hedonic and status oriented. Besides the expensive spa treatment and golf examples mentioned earlier, potentially less expensive but still relatively high aspirational rewards include sweet treats, movie tickets, and VIP status.
Criterion #3: Relevance
No matter how aspirational or financially enticing your rewards are, the average consumer will not be very motivated if they don’t see any hope in ever getting to the reward. For example, the lure of a free flight requiring 25,000 frequent flyer miles will not be very attractive to a consumer who flies barely once a year. It may take the consumer 10 years before he or she will earn a free flight. The program is simply not very relevant to that consumer. The time it takes an average customer to earn a free reward is a good yardstick for measuring relevance. That is, for an average customer with an average spending level, how long will it take for that customer to earn at least one reward? If your product belongs to a frequently purchased product category (e.g., CPG products), the time taken to earn a reward should be shorter than if your product is a less frequently purchased product category (e.g., cars). You program goal also matters. If your program is meant to reward the best of your customers, you should measure relevance for these better customers. But if your program is meant to encourage currently light buyers to move up the scale, relevance to these light buyers would be critical.
Criterion #4: Choice of Redemption Options
Criterion #4 deals with how diverse the options are for redeeming program points. In the case of Starbucks Rewards, the options are as diverse as the menu options. Members do not have the ability to redeem the rewards for things outside Starbucks. In contrast, with American Express Membership Rewards, cardholders can redeem their points for a myriad of travel options, gift cards, shopping currencies at online retailers, among others. As it is typically more expensive to maintain a larger variety of redemption options, it is important to balance option diversity and cost. It is also best to choose congruent rewards that reflect the concept and values of your brand. This helps reinforce the brand association in your program members’ mind.
Criterion #5: Convenience
Finally, a high-value program to consumers should be one that is convenient to use. Do members need to scan their member tag every time they want to earn points, or is it automatically tied to their payment method? Do they need to go out of their way to shop at a specific location or can they earn points from the comfort of a computer or mobile device? Human beings are lazy animals. We like things that are convenient (hence microwave ovens, drive-through windows, etc.), and we are annoyed by things that require too many steps. So the more convenient your program is for people to use, the more valuable it will be. This convenience involves all aspects of your program, including understanding program rules, earning points, checking balance, and reward redemption. Remove barriers in those processes and make them as frictionless as possible.
Loyalty Program Value Comparison
To illustrate the application of the five criteria above, I use the table below to summarize where four popular loyalty programs stand in terms of their values. It is pretty clear that none of the programs excels on all five criteria. After all, it is expensive to be all things to all people. But your program should excel on at least some of the five criteria to have a competitive edge.
| Starbucks Rewards | American Express Membership Rewards | Delta SkyMiles | CVS ExtraCare | |
|---|---|---|---|---|
| Cash Value | High (~8%, based on earlier calculation and assumptions) | Low to moderate (0.5~5%, based on NerdWallet's value estimate of 0.5 to 1 cent per point and different card earning ratios between 1 to 5 points per $1) | High (8.5%~18.7%, based on NerdWallet’s value estimate of 1.7 cents per mile and varying earning ratios from 5 to 11 miles per $1) | Low (2% based on CVS ExtraCare website) |
| Aspirational Value | Moderate | High | High | Low |
| Relevance | High | Moderate to high | Low to moderate | High |
| Choice of Redemption Options | Limited | Very high | High | Limited |
| Convenience | High | Very high | Moderate | Moderate |
If you have any question about the value assessment method described here, please leave a comment or reach out. The Customer Analytics and Strategy Collaboratory at Old Dominion University can help you conduct a full loyalty program audit if you are interested in a more formal analysis of your program. Simply fill out the Contact Yuping form if you are interested.