Basics Of Loyalty Programs

Do you know who your best customers are? If yes, why they are your best?

Most companies don’t look at customers as long term advocates. They look at the whole customer experience as that fleeting moment of purchasing and maybe service if there are issues. The truth being, the better customers of a company should become spokes people for that product or service. You want to retain the right type of customers and build loyalty (long term relationships).

Not every customer can be your best customer. You need to build a clear picture of what a good customer looks like and then apply this model against the whole base of customers. The goal should be to retain and grow the relationship between your business and your customers.

It is important to remember that when you are looking at building a relationship with a customer that there are different levels of building loyalty. Most loyalty relationships begin with “frequency” concepts. In simple terms you want increased use, purchasing, shopping, etc. by your total customer base. These frequency programs are simpler in nature than true one-to-one loyalty relationships. Over time loyalty becomes the goal and focus.

THE STAGES OF LOYALTY/FREQUENCY PROGRAMS

Stage I: Prospecting and Acquisition

In this phase, a business seeks to acquire the right customer from the beginning. Marketing research, customer profiles and database marketing analysis can give you a more accurate vision of who are your best and most profitable customers.

And, loyalty tactics can provide the "hook" which will lure prospects to participate in marketing initiatives and purchase your products and services. For example, meaningful awards and special recognition vehicles assist in acquiring new customers with the promise of value vs. margin-eroding price discounts.

Stage II: Activation

Research indicates that the sooner your customer uses, or "activates," their option to purchase, the more loyal the customer will be long term. Loyalty/frequency programs can supply the stimulus to activate.

And, as usage grows, so does your customer's equity in your products and services, which leads to the next phase.

Stage III: Retention and Recapture

Multi-wave direct mail, employee training and incentive programs, telemarketing, marketing research, frequency programs, membership clubs, on-site recognition delivery, customer satisfaction studies and attrition modeling are all loyalty-based management deliverables. In this phase, you need to attempt to continue to build customer equity through awards, recognition, increased knowledge of our customers and ongoing dialogue with your most profitable users.

Through the customer dialogue fostered by loyalty marketing, you can spot customer service problems and react quickly and proactively. You can even predict which customers are most at risk and likely to defect so that we can implement targeted marketing interventions to keep them.

Stage IV: Cross-Sell and Up-Sell

Frequency program statements, affinity programs, award offerings and/or loyalty-generating direct marketing programs supply opportunities to communicate other company products through free samples and other trial offers. This called cross selling.

Likewise, through purchase incentives such as double points, you can stimulate increased purchases and usage. This is called up selling.

Stage V: Advocacy

Having done all of the above, your customers are now shouting your praises and telling all of their friends and family how great your products or services are (this is labeled advocacy). And, you reward them for doing so through special thank you's like extra points and special services.

You have now seen how loyalty impacts all phases of the customer development process. Keep in mind that loyalty works!

KEY QUALIFICATION QUESTIONS FOR LOYALTY MARKETING PROGRAMS

Before you begin any customer/loyalty program it is important to spend time researching and exploring what the desired behavior, and with whom you want to build loyalty.

• What goals do you hope to accomplish with a loyalty program? Can they be qualified? (i.e., decrease defection rates by X%, cross-sell, up-sell, increase frequency of purchase by X, increase average purchase by $X, recapture X% of lost customers, improve customer satisfaction rating by 5 points)

• How many customers are there currently? What is the potential for growth?

• Have your developed a customer profile (or can you)?

• Who are your best customers? How is this determined — by volume, industry, geographic area, products/services purchased?

• How often do customers purchase?

• What is the average dollar amount per transaction?

• What are the margins per order/transaction?

• What do customers currently buy?

• What additional product/service needs do they have?

• Do you currently communicate with customers? If so, how? How frequently? Do you allow for/encourage responses or is it one way only?

• What are total annual sales to these customers?

• What administrative or billing systems are currently in place to track transactions?

WHY LOYALTY?

1. Additional revenue opportunities from:
2. Repeat purchase,
3. Increased purchases, and
4. Purchases of other products and services

• Customer referrals — Loyal customers tend to refer others to buy a company's product/services.

• Less emphasis on price discounting — Loyal customers are less likely to look to the competition if they are satisfied with the value and service covered by their current provider.

• Cost efficiencies — Maintenance of current customers, particularly of the lifetime of the customer relationship, is five to seven times less costly than the acquisition of new customers.

• Enhanced customer information — By examining its more profitable and loyal clients, a company can gain significant information about its account base, including a "best client" profile which can be used to find similar prospects and fine-tune acquisition efforts.

FREQUENCY MARKETING

Definition — “A long-term promotional effort targeted at a client's best customers wherein desired purchase behaviors are encouraged through communications, measurement and rewards.”

Frequency has a simple purpose, to increase the number of times your customers buy and use your products and services. Frequency marketing is not a total loyalty relationship, but is a good beginning to understanding your customers and building a database of information.

Frequency Program Guidelines

• Long-term, multi-phase commitment required
• Organizational and operational issues must be addressed
• Don't use as stand-alone program — use as part of overall strategy
• Integrated sales and marketing efforts are essential

Points-Based Reward Programs

When are points-based programs appropriate?

• Commodity industry – as a way to set your brand or product apart.
• Frequency of Purchase – reinforces increased buying.
• Margin to fund – better to give points than discounts which impacts margin.
• Large customer base (responsive to rewards concept) – a way to reward different levels of customers, and drive them to the next level of behavior.
• Usage/purchase tracking – A great way to build a connection to the actual end-sure/ buyer, especially in a broker/ distributor model.
• As platform for database marketing – One way to start building a picture and database of who buys what from you.

ELEMENTS OF LOYALTY / FREQUENCY SUCCESS

The following are thought starter points to help you to include key areas of thinking if you are building a loyalty program.

Build or Buy?

Before you start crafting a program you need to decide will you build and manage the program in-house, or will you find a partner to do elements of the program or totally outsource the program to a turn key provider. If you are thinking of doing this in house I would recommend you do a Pros and Cons comparison sheet. A short cut on the thinking is, if you have a limited marketing team today (less than 10 people on staff doing nothing else but marketing) you may want to find an outsourced partner. While you can still drive the thinking and direction to the program, you can partner with someone to do the program set up, launch, management, rewards, communications, reporting, etc.

Rules Structure

Start with the end in mind – what and where do you want to take these customers, these developing relationships? What would the perfect state of customer interaction and advocacy look like? Then you can build the program to support this vision. Things to keep in mind while building a rules structure for a loyalty program:

• Existing data, research and information on customers.
• Target(s)/objectives
• Eligibility
• Enrollment process
• Payout(s)
• Behaviors to reward:
• Basic
• Spurts (usage, products, services, upgrades, tenure, area specials)
• Levels, tiers
• Point values
• Award liability
• Exit strategy
• Point expiration strategy

Rules Structure Success Factors

• Easy to understand/easy to participate
• Based on sound ROI
• Tied to desired behavior
• Target responsiveness

Awards/ Rewards

In the early 1990’s I worked on a variety of incentive programs as a program manager (or as we called ourselves, internally project heads). The programs ranged from food manufacturer, to ATM manufacturer, to a copy machine maker to 50 other types of companies (even a candy maker – one of my favorites!) The programs were all different; some drove sales, some focused on wholesalers and inventory loading, others were employee service awards oriented. The one thing all of these companies had in common was the need for rewards that mattered.

Many times the rewards thinking in programs are left as an after thought. This is a misstep because rewards drive behavior change. The reward gains the focus and generates momentum to address “what’s in it for me?” If rewards have no perceived value or no meaning to the individual working hard in the program, the program’s end results are in jeopardy of not being attained.

Poor reward choices mean poor results.

I worked on a long-term program for a larger copy machine manufacturing company. The program numbers were down, the number of units and service contracts being sold were off by 50%. I stepped in and looked at everything that could possibly drive this decrease; first, the number of communications pieces. These increased over time to try and drive change, so there was plenty of communications. I looked at the rules structure, earnings potential, reporting and tracking, which were all at the right pay out and effort levels for the desired change.

This left the rewards side. I reached out and called people in the program and asked basic questions. I developed a written survey for the award-earning base and studied the redemption trends of the past five years (what people were redeeming for). The problem was obvious and the program participants said it the best, “the rewards mean nothing to us, we are young, starting out in life and the rewards feel like a 50-year-olds choice of fun.” Bingo. Rewards were not finalized until the end of program development and 100% decided by the head of the division, who was around 55 years old.

I shared this report with the division head and came to find out he loved travel and wanted to make sure this was an option (main prizes in the past were a series of group travel destinations to exotic destinations). We focused on listening to award earners to hear what they wanted and crafted rewards for 20 to 40 year olds, who wanted merchandise like big screen TVs and individual travel like a short weekend get away or a less exotic spot (and we continued to offer group travel opportunities as well).

This new focus resulted in a 120% lift in sales and the program was successful again.

Whether it’s a loyalty program, a more traditional sales incentive program or any behavior changing effort, it’s necessary to start with rewards and their meaning to program participants. This is not always obvious and requires drilling down on program members, their lifestyles, and their interests. A set of golf clubs to someone that has no interest in golf is a demotivation, so reward options must be based on the structure and demographics of the target group.

Choice, perceived value, lifestyle interests (that change over time) and the impact in a persons life need to be taken into account as a program is being put together. The more personally rewarding the program is, the more likely it will succeed on many levels.

• Points
• Equipment
• Services
• Honor and recognition
• Travel
• Lifestyle
• In-kind (more of what you sell)
• Discounts
• Special Access
• Gift Cards
• Easy Fulfillment

Awards Success Factors:

• Participant feels "special"
• Unique
• Meaningful
• Motivating

Administration

Many times when programs are being developed the thinking around the administration of the program (beyond just the launch) is left to future thinking and planning. The fact is this can become a cost area very quickly if the right level of planning is not given. You will find that a loyalty program can go for years (5, 10, 25 years) and this needs to be in the thinking up front.

• Enrollment process/qualification
• Activity tracking
• Statementing
• Customer service
• Order fulfillment
• Reporting
• Updates
• Accounting procedures

Administration Success Factors

• Seamless to customer
• Real-time data
• Capture and provide actionable data
• Capture customer dialogue
• Provide customer service

Measurement

If you do not measure pre-program, during program, and the value created via the program than you are not suing the data, the transactions to your favor. What gets measures gets done.

• Transactions
• Desired behavior
• Attitude
• ROI
• Promotional response

Measurement Success Factors

• Control groups
• Ongoing
• Scheduled activity reports
• Marketing council review

Communications - Promoting Loyalty – Don’t Leave It To Chance

Having spent the past 20 plus years developing and managing incentive, loyalty and affinity programs, I’ve found a few simple things always hold true. I've we’ve tested and tried a few different ideas and approaches out. Here is the top three learning’s to date:

1. Communications is a continuous effort – there’s no silver bullet. No one email, special mailer, or exhibit is going to gain the right level of activation or ongoing use in the loyalty program. Communications needs to be planned out in advance (with a 12-month view of the member interactions from launch to ongoing). Loyalty rewards programs are not like other member benefits – there is a need to connect, remind and re-communicate.

Why? In many ways a member engagement program using loyalty rewards needs to find the member at the right time, right mindset and right cycle of the industry they are in. If a member is too busy or is focused on other efforts at the moment of the first communication, the next one may catch their attention. In addition, there is a need to change up the message, the focus, and the tone as you cycle through different seasons and different campaigns.

2. Variety is not just the spice of life, it is the key to awareness building. All humans, no matter the industry, the association or the age group really live in their own worlds. We all like to get information, insights and more access, but we want it when, where and how we like it. Something promoted today is forgotten within 24 hours. That is why it’s important to promote your loyalty rewards programs often and in different ways. From newsletter stories and button and banners on your website, to social media like Facebook and Twitter and special emails and deals.

This is not as hard or challenging as it may feel. It is just the simple idea of promoting in small to larger ways, all the time. In many ways the act of becoming active in a rewards program is like an “impulse buy” – meaning you need to catch the member when they are ready AND how they like to hear about new things. It’s almost like the old model of advertising. You need to be everywhere your target audience is. If you just put a promotion at the end of an aisle in a grocery store what kind of traffic will you drive versus marketing the program in different ways, places and media over time?

3. Interest Drives Activation – Rewards Drives Ongoing Use. There are levels of engagement within an engagement effort. At the start, it’s getting them in to the program and ready to go, next is to use in an ongoing manner. Finally, it’s the act of long-term behavior change – to drive the member to pick a reward or rewards they really want and work towards earning these rewards.

Rewards are the big reason people stay active in a program. They see something they desire and over time they work toward it. Rewards range from short term smaller rewards (a $25 gift card) to bigger broader rewards that impact the whole family (taking everyone to a beach resort for a week). The trick is you need to communicate different things over time – not the same message over and over. The drive from signing up to getting active to earning towards bigger rewards means different communications message to different members at different times. Having a platform and partner to help manage and execute this is key to an ever growing and developing member benefit program that drives engagement.

A bonus point – It is a cumulative effect. When doing any type of member benefit program or offering it takes time for member awareness to build, member activation to build and use to build. Nothing happens in one email, one meeting, one newsletter, but every effort builds on the one before it. Associations need to think in terms of one to 12 months to build up the base and get them active. A few points to keep in mind:

• Integrate with branding/positioning
• Consistency
• Frequency
• Components (e.g., welcome kit, newsletter, statement)
• Promotional mapping
• Media: POS, Internet, print, telemarketing, direct mail, broadcast, events, social media
• Interventions/enhancements

Communications Success Factors

• Easy to understand
• Exciting and relevant
• Targeted by segment
• Unique/special
• Invites/creates dialogue

Program Support

• Customer service
• Retail
• Area/field
• Corporate
• Sales

Program Support Success Factors

• Current incentives
• Incentive overlays (enrollment/awareness)
• Training
• Customer retention culture

LOYALTY / FREQUENCY AWARDS/REWARDS

Awards are a critical component of loyalty programs. For your business, awards provide the "carrot" for the continuation, growth and modification of desired behaviors. Loyalty award benefits include:

1. The aspirational value created by holding points to acquire a desired award item
2. The opportunity to earn volume discounts, upgrades and company products and services
3. The recognition and status of being a valued customer

Awards also contribute to the personality of a program by supporting a company's image and distinguishing it from a multitude of other competitive providers. A full-service brokerage client, for example, could demand upscale items both to reinforce its premium, high value positioning and to appeal to its affluent customer base.

Definitions

Awards can include recognition, in-kind, soft and hard awards. They can be delivered via the client, a vendor (such as a third-party service provider) or a partner.

• Recognition items range from simple thank you's and education/information message to special services, such as preferred lines at the counter, express check-ins, automatic upgrades, concierge services or airport meet-and-greets. The purpose of recognition awards is quite simple — to make program participants feel valued and special. Recognition items can be earned as an award, or, more often than not, delivered as an ongoing benefit of participation.

• In-kind awards are company-supplied items, which can include volume discounts and free products and services. The purpose of volume discounts is to give customers the opportunities to earn better deals based upon their loyalty and usage. Examples include free calling minutes for long distance carriers, or interest rate buy-downs for credit card companies. Free products and services allow customers the opportunity to try new things (example, caller ID or voice messaging for telecommunications companies, free phones for cellular providers or mortgage qualification for banks) with the company's hope that overall usage and purchases will increase. Since in-kind awards are usually procured at below market value, they are an increasingly viable source of award options.

• Soft awards are items that create value for the customer at no cost to you. These can include two-for-one offers, cents off and other promotional discounts. They are generally offered as an ongoing benefit, or earned as a low-end award. Often soft awards are bundled into coupon books by external vendors and can be purchased as a hard award (see below) by the client for use as an award item.

• Hard awards involve some cash outlay by the client to another company. These include a limitless selection of debit cards, retail/dining gift certificates, air/car/hotel/cruise/vacation packages, training/personal development, publications, merchandise, etc.

• Partnership marketing may provide access to special services, discounts and free products and services. Partnership marketing can also provide access to new customers through list sharing and mutual communications offers. At the highest levels, it can also help a business become more customers responsive by building operational and service enhancements. Effective partnerships, however, require the development of a solid partner proposal, which answers the question: Why should we do business with your company? Examples of partnership marketing include:

• Promotional discounts — Partners supply offers for use by the client's end-users. Most of the time, these are partner "shell" offers, which are used for a variety of different opportunities. Special discounts (example: exclusive rates) require negotiation.

• Program awards — Partnership negotiation is used to obtain hard awards at greater discounts than standard offerings.

• Co-marketing program agreements — Accrual partnerships, coalition partnerships and affinity marketing opportunities involve investments and multiple levels of partner participation, which must be negotiated.

To illustrate a simple example: Airline A and Car Rental Company B decide to launch a co-marketing arrangement here are the ways they typically work together:

Customers earn airline points by using car rental company, and car rental company receives limited program exclusivity, list sharing and first mention in all airline customer communications. In return, car rental company pays airlines for points issued at 1/2 cent vs. standard 2 cents per mile, contributes car rentals at cost as awards for airline program, provides incentives to airline res agents to book cars, gives airline employees a special rate for business travel, sets up direct mail coop fund, etc.

• Strategic alliances — As companies move into loyalty-based management practices (or simply seek greater economic gains and cost efficiencies), they will often consider joint agreements with other companies. Strategic alliances go beyond marketing and into the operations of a particular company. Again, using a travel industry example, let's suppose that Hotel A and Airline B decide to build a joint reservation center in order to leverage funds and management expertise to provide greater customer care. As components of the business "deal," the agreement may be populated/leveraged with some of the other offers as listed above.

Implications

Typically, your marketing team will use customer research to determine which awards will have the most appeal for program targets. However, each award selection will touch and have implications for all other program components — financials, communication, customer service, fulfillment, rules structures and administration.

If the goal of most loyalty programs is to generate the most desired behavior at the least cost, then awards are a substantial expense. You determine the amount to spend based upon:

1. Award cost
2. Customer profitability
3. Product/service profitability
4. Program communications/administrative costs
5. Accounting practices (e.g., the amount of outstanding liability they have to keep on the books)

• Rules Structures. Most loyalty / frequency programs include more than one type of award. The awards will also vary by program in value based upon the program rules structure, which is based upon the client's return on investment, industry competition and the expected earnings potential of program participants. For example, a fast-food chain's low margins and low end-user individual revenues may dictate that the award values start at $.50; a small business loyalty program with highly profitable products and customers may begin at $500.

• Rules structures may be tiered to capture breakage between and beneath levels or non-tiered for ongoing non-cash rebates redeemable for a wide variety of award items. Different segments may have different rules structures — for example Platinum American Airlines AAdvantage customers may earn (accrue) at the rate of 1.5 vs. 1 point for every mile flown. Also, the tiered award values may be in set increments, or worth more at higher tiers to reward the highest achieving customers on the redemption side.

• Timing is also an issue, since the majority of redemption will not occur for three to four years. It is very difficult to predict what redemption will be at various points in time without substantial history.

• It follows that awards must be flexible in type, scope and value to accommodate end-user preferences, client pro formas, length of validity, multiple rules structures and liability risk.

• The choice of award options also impacts and is impacted by the ease of communication, fulfillment and customer service. For example:

• Are the awards easy to communicate? Or do they have so many restrictions, terms and conditions that they are hopelessly confusing for the customer?

• Are the awards easy to find? Can they be accessed via a card? Point-of-sale? Phone? Fax? Mail? How often are they shipped? What else needs to be done to get them in the hands of the end-user? Up-front negotiation and logo usage approval? Programming a cellular phone award? Attaching a customized letter? Issuing a ticket? It is conceivable that a $10 award could generate 5 to 10+ times its cost in fulfillment and up-front procurement charges.

• How are the returns handled? What happens if merchants don't comply? Who addresses award product benefits? What type of product training are program customer service agents expected to handle, and where do they go when they have questions about a specific award?

REWARDS AND LOYALTY/FREQUENCY PROGRAMS

“If the award has no meaning, it’s not an award!” — Rewards are the most critical element in your loyalty / frequency program. To achieve your company goals, customers must have positive consequences — rewards — that are desirable enough to motivate them to improve their relationship or change behavior. When working on loyalty and frequency programs it is important to remember, you need to look beyond the basic “in-kind” type rewards for your top customers. You need to find rewards that have true perceived value and meaning. A free “base-ball cap” to say thank you to a top customer might have been OK 15 years ago, but in today’s day-and-age it will take more.

Make sure your awards offering in your loyalty / frequency program hold perceived value to a customer/participant. Other wise the behavior you want to encourage will not take place.

• Individual Travel In today’s dynamic and fast paced world individual travel awards offer people the ability to travel when they want and how they want. The excitement and the individual lifestyles of all your employees can be taken into account with individual travel rewards. Most individuals will take the opportunity to do a few smaller trips (3 to 4 day weekend getaways) with individual travel. One trip could be based on an interest or a couples get away, while an other might be family based and focus. That’s the beauty of individual travel, it is in the end whatever the individual wants it to be.

• Merchandise The ability to earn merchandise awards has always been a powerful motivation to behavior change. Whether electronics, of clothing or toys people can become focused and excited when offered a merchandise award.

• Cash Everyone likes cash, or at least they say so. The truth is a bit more interesting. Most people like the idea of having a “special account” that can only be used towards rewards, vs. dollars that they feel guilt if they do not use to pay off the bills or get a pair of new shoes for the kids with. Point and/or Miles allow for guilt free spending. In the end, if your customers want some type of cash reward it is best to give them what they want. The longer-term issue with cash is there is no “trophy value” to cash.

• Gift Cards/ Prepaid Cards Like cash these payment instruments can get lost in the daily bills and transactions, yet they do offer some level of selective choice and brand association.

• Experiences Can you give your customer access to special experiences? New experiences? Desired experiences? The ability to give your members of a loyalty program access to something they would never be able to without the program can build the bond between your product, brand, company and your customers.

This is just a place to start when thinking about a loyalty program. Whether you are a larger consumer goods company, or a small B2B equipment company you can build a new way to talk, interact and say thank you to your customer via a well-planned loyalty program.

Sites I Use To Keep Up On Loyalty Programs:

Loyalty 360 https://loyalty360.org/

Loyalty Research Center https://www.loyaltyresearch.com/

CRM Trends - Loyalty https://www.crmtrends.com/loyalty.html

A complete copy of the white paper: Basics Of Loyalty Programs

David Carrithers Chief Beekeeper, BusinessHive can help any company thinking about putting a loyalty or rewards program together. Carrithers offers a 3rd party, unbiased view of how and who to partner with. Services include:

• Existing Loyalty Program Audit
• New Program Scope & Development
• Rewards Tune-up
• Member Assessment & Feedback
• New Partner Development
• Credit Card/ Affinity Card Partner Development
• RFP Process For Renewal and/or New Partners