The ultimate guide to a successful loyalty program
May 28, 2023
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Post written by
Hannes Bünger
In this article, we explore the various goals that loyalty programs can support and the strategies that can be used to achieve each goal. We'll present different tactics and relevant examples. Hopefully, after reading this article, you'll have a better understanding of how to design a loyalty program that maximizes your company's value.
Challenges
In this article, we explore the various goals that loyalty programs can support and the strategies that can be used for each goal. We'll explain and present different tactics with relevant examples. Hopefully, after reading this article, you'll have a better understanding of how to design a loyalty program that maximizes your business's value. The range of features can sometimes be overwhelming. Additionally, there’s a lot of room for creativity, which makes your options nearly endless. Which of these features are relevant for your business? We need a strategic framework to guide us in our program design and ensure the program has the desired business impact. § Background § Loyalty programs have a long history and are still evolving in today’s business landscape. In this guide, we describe various strategies to design effective loyalty programs that maximize business value. It delves into the different goals that loyalty programs can support and presents strategies and tactics for achieving these goals. By understanding key features and frameworks, companies can create loyalty programs tailored to their unique needs and customer preferences.
Solution
Loyalty programs have been around for over 70 years. One of the most well-known examples is American Airlines' loyalty program, introduced in the 1980s. American Airlines was one of the first companies to introduce a rewards program for its frequent flyers, allowing them to earn miles that could be redeemed for benefits like free flights or class upgrades and introduced tiers like bronze, silver, or gold status for members.
Another significant example is the loyalty program launched by the supermarket chain Tesco in the UK in the 1990s. Tesco introduced the "Clubcard," the first program to use data for true 1-2-1 personalization, paving the way for Tesco's golden years.
A few years ago, Sephora launched the Beauty Insider program, which besides being an earn & burn program, was integrated with an online community offering access to various digital features such as skin color analysis, product reviews, etc. There are many different ways to design a program and a long list of features often used. But the crucial question is which features are relevant for your business?
In many cases, the design of loyalty programs is handed over to a creative agency with the aim of designing a "unique" program that creates a wow-factor and stands out from the competition. What often lacks is a strategic plan for which business goals the program should support and which features support these goals.
First step - define your business goals
Even though the term "loyalty program" suggests that the main purpose of these schemes is to drive customer loyalty. This was the case for the first version of loyalty programs. Today's programs often have other goals like collecting customer data or acting as a profit generator for the business.
Additionally, loyalty must be defined.
Loyalty-driven programs
Loyalty is a complex concept. The word has different meanings and aspects. Loyalty is usually broken down into emotional and behavioral loyalty.
The emotional aspect is perhaps what most think of when they hear the word loyalty. Typical synonyms for this connotation are faithfulness, dedication, commitment, and devotion. In business contexts, emotional loyalty is often defined by aspects like engagement, customer satisfaction, and brand affinity. The idea is that emotional loyalty ultimately leads to behavioral loyalty, but the direct impact aimed for with these programs is driving emotional loyalty.
The loyalty matrix defines how your business drives customer loyalty. Emotionally driven programs aim to influence brand perception, engagement, or enhance the customer experience.
Behavior-driven loyalty programs focus on influencing customer behavior. In some cases, attempts are made to create thresholds for the customer to switch providers.
In marketing terms, behavioral loyalty is measured in terms of frequency & share of purchase, average cart size, number of product categories purchased, etc. Some programs are solely focused on driving behavior and nothing else.
Data-collecting programs
The purpose of some programs is to only collect data. As the importance of data collection and personalization increases, companies need a way to link purchase data to customers and gain consent to use the data. The greater the percentage of sales recorded, the more data can be used to gain customer insights and thereby enable more personalization.
Programs as a standalone business
Some loyalty programs, or at least parts of them, operate more like a profit center. Examples of this are frequent flyer programs that get kickbacks from banks when they sell co-branded credit cards, or partner programs where other retailers pay to issue points. Selling data to a second party is another example of a revenue stream for the program. For some companies, these ventures can be surprisingly profitable.
Three key strategies for an emotionally loyalty-driven program
To create emotional loyalty through a program, features need to be used that deepen the relationship with customers.
For the emotionally driven program, there are three key strategies:
Emotional connection for high-value customers
Enhancing customer experiences
Boosting brand perception
Programs that create an emotional connection to high-value customers are usually the best choice when a large part of the revenue or profit comes from a small group of high-valued customers. Growing and retaining this group is therefore an important business goal. You can see these programs in the airline industry where a small group of business travelers generates a large portion of the profit. In this setup, you often see tiered programs (gold, silver, bronze). Premium customers receive VIP treatment or other status-influencing experiences. How you present the experience is usually particularly important, just like how the wrapping of a gift can influence thoughts about what the packaging contains. This strategy requires high financial margins per customer to fund program costs, as they tend to be extensive.
Programs that enhance the customer experience lock in services and features so that only program members have access to them. It can involve physical or digital services. Sephora has a loyalty program integrated with an online community giving members access to a wide range of digital features including personal skin color analysis, access to rate and review products, personal recommendations, inspiring content, etc.
Programs to enhance brand perception focus on strengthening key aspects of the brand
This usually involves building a story around a specific program feature. For example, when the Swedish insurance company Folksam designed its loyalty program, the focus was on the collective ownership of the company, meaning it is customer-owned. The design follows a classic payout model for members. The communication was based on explaining the benefits one received for being an owner in Folksam. North Face is another example with a program offering members access to various nature events, like mountain climbing or skiing. Members also gain access to chat with various athletes or adventurers. In this way, North Face positions itself as a nature and adventure brand.
Two key strategies for behavior-driven programs
When the main purpose of your loyalty program is to influence customer behavior, you have two options. Either you focus on all customers, or you try to lock in your highest-valued customers.
Basic "earn & burn" programs are a classic tactic to drive behavior.
Other tactics include progressive bonus scales (higher % the more you buy), gamification, extra points for engagement (e.g., download the app, create login, share contact details, recruit other members, or reuse plastic bags), extra points during campaign periods, extra bonus for co-brand cards or program partners, etc.
Today, personal and trigger-based communication is a necessity for a successful earn & burn program. Customer interest is usually quite low. On average, consumers are members of 2-8 programs. In reality, consumers often do not remember all the loyalty programs they have registered for. Personalized communication is needed to trigger behaviors or simply serve as a reminder. The basic earn & burn schemes are the most common programs in retail and grocery sectors.
Both Coop [1] and Stadium [2] use progressive earning systems. The more you buy, the higher the bonus percentage on your purchases.
The locking-in tactics are the other behavior strategy
Although this strategy has existed for at least 50 years, it is becoming increasingly common. The new wave started with Amazon Prime, whose members received free shipping for all orders as well as other benefits. Prime members pay an annual fee for the membership. This type of strategy has not only spread to other e-commerce players but also to traditional retailers and grocery stores.
Tesco currently has an offer that gives Clubcard members 10% off all purchases for a monthly fee of £7.99.
The more traditional locking-in tactic is EDLP stores (Every Day Low Price) that require an annual membership fee to access. Cingular Society has an annual fee for shopping at prices close to wholesale prices.
As customer loyalty declines across all industries, we are likely to see more of this strategy over the coming years. The locking-in strategy works best for products purchased with high frequency.
Three key strategies for collecting customer data through a program
There are three strategies currently used for programs whose sole purpose is to collect data:
Basic bonus system
Discount or service-based method
Personalization-based strategy
The common tactic for all these methods is to collect customer data at the lowest possible cost.
The most common way to collect data is probably through a basic bonus. Key tactics include points, stamp tickets, cash backs, or similar setups. The bonus should be as low as possible to achieve the goals. Other features should be minimized to reduce costs. If this is your strategy, stick to the basics.
The discount or service-based strategy focuses on giving members access to discounts or other services that are cheap to create. It can involve member discounts on best-selling products or access to simple services like digital receipts or access to content (e.g., instruction manuals and other guides).
IKEA Family is a classic example of these programs. Membership gives access to free paper bags and discounts on a few products relevant to most consumers (e.g., fire extinguishers, smoke alarms, etc.), which has resulted in 80-90% of sales covered by the program. Now IKEA has added "earn & burn" features. Points can be redeemed for a variety of products and services.
The net costs for the benefits should ideally be as low as possible. This includes costs for discounts, content, and IT costs. Since these programs don't involve issuing and redeeming points or any other form of bonus, IT costs are potentially lower than for basic bonus systems.
Lowe is a hardware chain whose program gives members access to a range of different services.
The personalization strategy tries to offer personalization as a benefit that customers find valuable enough to join the program. This strategy doesn't include any other tactics like earn & burn or other perks. Swedish examples of this strategy are Akademibokhandeln and Claes Olsson. The Swedish grocery company ICA tried this strategy but after a significant decline in registered sales, reintroduced a basic earn & burn program. So far, many retailers have struggled to gather enough data through this model because customers don't see its value. In the long term, this strategy requires a personal 1-2-1 experience that includes product recommendations, content recommendations, personal discounts, and personal digital services.
Hybrid programs and the right mix of strategies
In reality, many loyalty programs use a mix of these strategies. This is often not due to business goals but rather because programs tend to add features and increase the application of different tactics over time.
A program can, however, have more than one objective and a mix of strategies may therefore be relevant. The trick is to find the right mix of strategies based on the business situation and goals. Depending on your industry and business model, some strategies may be more or less suitable for you.
The most important thing is to start from your goals and evaluate all strategies and tactics in relation to these.
When designing a loyalty program, it's important to consider:
Tailored Strategy: Customize the loyalty program strategy to fit the specific industry and business model. A tailored approach ensures the program is aligned with the unique needs and preferences of your customer base.
Data-Driven Decision Making: Leverage data and customer insights to inform strategic decisions. Analyze customer behavior, preferences, and demographics to optimize the program's effectiveness and enhance personalization.
Long-Term Program Development: Loyalty programs often evolve and expand over time. Continuous evaluation and adaptation are necessary to meet changing customer expectations and market dynamics. Regularly assess the program's performance and make necessary adjustments to ensure its relevance and impact.
By considering these points and starting with clear objectives, businesses can evaluate all strategies relative to their business goals. This holistic approach ensures a well-rounded and successful loyalty program.