Elements of a Loyalty Program : Steps in Building your Loyalty Program

Loyalty programs seem to be everywhere these days. According to McKinsey & Company, over 50% of grocers' and nearly 20% of apparel retailers' customers participate in loyalty programs in the United States.¹   National Restaurant Association research found that one in five American restaurants had a loyalty program in 2004, with 20% more planning to start on in 2005.²   But does it make sense for your business to have a loyalty program?

Initial Evaluation

1. Is there some level of frequency to the purchase cycle in your business? One rule of thumb in retail is that your customers should purchase something from you at least four times per year for your business to be a good fit for a loyalty program.
2. Is your operation a higher-margin business? Higher-margin businesses have an easier time creating a program because they have more freedom to offer discounts or pay for the soft benefit programs. Lower margin business can have programs, but they would need to see a higher level of customer frequency to reach the point where funding the reward makes sense.
3. Does your business operate through multiple locations? The more locations that you have to earn and burn loyalty program currency, the more attractive your program is to potential members. That's not to say that a single location loyalty program can't succeed, but your customers will feel inconvenienced with having to go to a specific location to earn points. In addition, in the context of single location loyalty programs, you can't distribute the program costs across multiple locations.

Fee or Free?

Businesses trying to build a profile of their customers as one of their key primary goals may want to plan a fee free program. The positive aspect of this is that more people will join your program if it is free. However, the conversion rate from first customer to loyal customer will be lower (as a percentage) than programs that charge a fee. Businesses that are not as interested in a broad profile of their customers and are more interested in targeting their very best customers may want to offer a fee based program. Customers that pay a fee will "self-select" themselves as loyal, but they will also have higher expectations of the program.

Currency

Most loyalty programs are points based, and this becomes your "currency" when dealing with your program members. One of the most important decisions is deciding on the rate of accumulation (earn rate) for your program members. Is it one point per dollar? Is it ten points per dollar? Just remember that you should make this conversion easy for your program members to understand, as program comprehension is a key to success.

Secondly, the speed to reward should be reasonable for the program to be worthwhile to the customer. If it takes your customer two years to earn enough points for an item they perceive to have $10 worth of value, you are going to have a very tough sell.

Third, shouldn't your most profitable customers, or customers that are taking the actions that you want them to take, get rewarded for their activity? If the technology behind your program is flexible, you could create an accelerated accumulation rate for members once they have spent a certain amount at your business. Creating tiers for your program allows you to recognize the different levels of member loyalty.

If you are faced with a situation where a competing merchant or chain has opened up close to one of your locations, you may give customers extra incentive to come to your location by awarding one time point bonuses or multiple points for each time they come in. Promotions help to maintain excitement about the program for members, giving them additional opportunities to earn.

Rewards

You probably already know what your customers value most, but if you don't, spend the time to research and identify what your customers find to be valuable, aspirational rewards. Ideally, you would like to provide rewards that have a high perceived value, but that are not necessarily the most expensive for you to provide. For example, it is much better for a restaurant to provide a free meal as a reward, instead of providing a branded item of clothing. While both may have a $20 value to the customer, the cost of the meal to the restaurant will be significantly less than purchase price of a retail reward item. You might also want to look for complimentary partners to offset some of the cost of your rewards. Your suppliers, or businesses that are looking to attract your customer demographic, are good places to start.

Rewards themselves fall into two main categories:

1. Hard rewards or benefits - These are physical goods (meals, clothing, electronics) or discounts (percentage off or fixed dollar coupons) that actually cost your business a set amount of money per reward.
2. Soft rewards or benefits - These are rewards that do cost your business some money to operate, but often are considerably cheaper on a per redemption or per use basis to operate. Soft rewards could include members only events for retail stores, priority seating in a restaurant, or a personal shopper to help members in your stores.

You will also find that there are people that accumulate and use their points differently. Some people are savers and try to hoard their points for one large aspirational reward. Examples of these types of rewards include trips, dinner for 6 with the chef or meeting the designer of their favorite clothing line. Others program members will want to get that slow and steady $10 coupon every time they hit 100 points so they can use it for their next visit, so having a breadth of reward options is important.

Redemption

One of the things that we encourage all our customers to do is use real-time redemption for their programs. This real-time redemption could be for in-stock merchandise or goods (for example, clothing in a retail store, a meal in a restaurant). Real-time redemption does several things:

1. It increases satisfaction for the loyalty program member as they receive their reward instantly, directly linking the benefit of the program to the purchase experience/environment.
2. It reduces the merchant cost, as they don't have to staff a call center to take orders.
3. It reduces carrying costs, as the merchant does not have to carry a large catalogue of goods.

On-Going Communication and Promotion

Creating a loyalty program gives you the means to personally communicate with your members, allowing you to find out their needs, wants and preferences. One of the most important things for a program is keeping members up-to-date on their point balance. We always encourage our clients to make use of the point-of-sale receipt messaging for point balances and promotions that the Ernex Promotional Tool Kit provides to reduce these communication costs. You can also look at driving members to your website for balance look-up, on-going communication, notifications, or information about member events. Other options for member communication include permission-based email communication, as well as periodic direct mail.

Analysis and Reporting

After defining the business objectives for your loyalty program, you'll need metrics and reporting to measure program success. Annual program performance reviews allow you to "tweak" operation issues or plan for the coming year. Customer activity can be analyzed to define certain segments to target for promotions or for future tiers. Promotions can also be analyzed for their impact and ROI for your business.

Conclusion

By reviewing and understanding the above items and looking at the impact of each area to your business, you are already putting forth the effort to succeed with your loyalty program. Working actively with your loyalty program vendor on each of these areas and actively monitoring your program are the next steps to ensuring your loyalty program remains healthy for years to come.

• Gift Card Program Best Practices
• Using Promotional Campaigns in your Real-Time Loyalty or Gift Card programs
• Ernex Loyalty Programs
• Ernex Gift Card Programs
• Newsletter Archives