Design a Successful loyalty Program by Guanli118


									Loyalty Program Design
                          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

                          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
 this analysis provides   models needs to be addressed quite differently and therefore requires separate
                          coverage). I will provide a high-level framework to help marketers design programs
       loyalty program    based on their businesses.
                          Implicit in this discussion is that high-level corporate objectives for the program
designers with a sense    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
    of which customer     second is to develop a two-way dialogue between the brand and customer via
                          increased intelligence and relevant content and/or offers.
behaviors they will be
                          Prerequisite: Analyze Customer Behavior
 able to and will want    Aside from the high-level corporate objectives, detailed program design must
                          be deeply rooted in a thorough analysis of consumer spending patterns and
          to influence.   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

                          ƒ 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?
                          ƒ By revenue: How concentrated is revenue in the top customer tier? What
                            percentage of total revenue does the top 10% represent? The top 25%?
                          ƒ 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.
                          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           Primary Program           Typical High-Level
                           Pattern                      Objective                 Program Design
                           Low Frequency/Specialty Drive Second Purchase          Repeat Purchase
                           Brands                                                 Program

                           ƒ “One and done”                                       ƒ Bounce back offer
                             customer spending                                      triggered after initial
       the greater the       patterns (e.g. specialty
                                                                                  ƒ Threshold set at total
frequency of customer                                                               dollar value of 2-3
             purchases     Medium Frequency/
                           Discretionary Spend
                                                        Drive Multiple Purchases Frequency Program

                                                                                  ƒ Cross product/
    the further out the    ƒ More mainstream                                        category bonuses
                             products bought 3x a                                 ƒ Threshold set at total
    program threshold        year or more (e.g.                                     dollar value of 3-4
                             electronics, shoes,                                    purchases
         should be set.      furnishings )
                           High Frequency/Core          Grab Higher Share of      Best Customer Program
                           Product or Service           Wallet
                                                                                  ƒ Use sophisticated
                           ƒ “Multiple purchases”                                   tiering with significant
                             spending pattern (e.g.                                 service benefits to
                             airline, grocery store,                                drive customer
                             CPG)                                                   migration to “elite”
                                                                                  ƒ Threshold set at total
                                                                                    dollar value of 5+
                          Step 2: Structure Program Based on Revenue
                          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.

                          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
there is usually a very   next best tier should be equivalent to annual spend of the next best 5-10%.

    strong correlation    Step 3: Encourage Engagement (If Important)
                          In instances where customers interact with brands in non-transactional ways,
between engagement        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
         activities and   because there is usually a very strong correlation between engagement activities
                          and long-term customer value.
  long-term customer      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
                 value.   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 non-
                          transactional interactions, and then create a funding model that rewards members
                          a percentage of all value-add activities.

                          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.

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