In Part 1 of ‘how to design a perfectly fitting loyalty program’, we discussed the different needs from organizational perspective in relation to the business goals, KPI’s and long-term development. A common mistake made by businesses is that they only stick to this side: the goals are covered within the loyalty mechanism, now just add some points or coupons and we’re done. But in that case, businesses typically experience that the program is not used by the customers, frequency is low and low effect are seen on the business goals. Customer loyalty is key in designing your program, so include the needs of your customers to make the usage attractive.
So, in this blog, let’s turn our perspective into an outside-in approach and start highlighting the possibilities for designing an attractive reward mechanism from the customer point of view. What’s in it for the customers? Why should they show a certain kind of behavior? Including an attractive reward structure is key. It’s like raising a child or training a dog, how do we teach them certain behavior? One of the methods that we also like to use within a loyalty approach, is what they call in psychology positive reinforcement: a desirable stimulus to encourage certain kind of behavior. And it is important that this stimulus is repeatedly being offered. As we say in marketing: it’s the power of repetition.
Therefore, choosing the right rewarding structure that fits the needs of your customers and is relevant to your company, will have a large impact on the usage and therefore the effect of the program. Now let’s take a closer look at the variables and options there are in place for designing this reward structure.
2. What rewards to drive customer loyalty | Outside-in
Within the reward setup, we can distinguish different levels and elements, from direct rewards, benefits to promotions and special levels. Here is an outline of the most common practices:
- (Direct) benefits – these are benefits that are directly given to members while doing purchases or taking any other action. Examples are percentages or sum in direct discount or as ‘cash back’, free delivery or second product for free. Direct benefits drive traffic and purchasing behavior. But be aware, that just having direct benefits does not drive loyalty, as after this purchase customers are not triggered to do more shopping. So make sure that these direct benefits are part of a savings-structure or that accumulation is required.
- Promotions – this kind of reward is often seen as sort of ‘sub-program’ and should not be confused with the traffic generating promotions that we often see in marketing approaches. In case of loyalty promotions, there should always be a savings mechanism behind it to drive loyal behavior. To activate this saving, most commonly there are targets set that need to be achieved. For example, if you reach this number of credits, you can redeem it for a discount code or certain product. A promotion can also be a certain gift when you reach a next target: for your next purchase, you get a free gift or coupon.
- Tiers – this is what we know best as ‘levels’ within a program, like bronze, silver and gold members. Through setting up different levels and combining this with special benefits and promotions, you are able to make the most loyal customers even more loyal. It is best to reward your ‘stars’ more than the ‘starters’, because they feel more seen, valued and appreciated. This results in even more loyal behavior. Furthermore, having a level structure gives members a goal to work towards, which drives the intensity and commitment of the member within the program.
- Perks – in many cases, the tiers are also involving some special incentives in the form of non-monetary perks. A well-known practice is the fast-lane access for Flying Blue members with minimum Silver membership or access to a special membership lounge as Gold member. Also think about perks like pre-access to sale or invitations to special (launching) events. These perks should be exclusive, non-copyable and the higher the tier, the bigger the perk.
- Third party rewards – in case you are looking for different ways to reward your customers or even incentivize your sales teams or your complete employee base, using third party rewards is an interesting structure. In this case, behavior is linked to a certain calculation structure and members can save for certain rewards, that are not directly provided by yourself from your own product portfolio, but coming from direct partnerships or through reward management vendor. Think about digital gift cards from other companies or merchandising material. This could also involve an interesting new business model, so ROI on your loyalty efforts can be even higher.
- Badges – in cases that points or credits are not the best ‘savings’ structure for your business, then perhaps badges are. Every badge represents a part of the program and has a gamifying character. It shows how much effort a member has put into a certain part of the program, most commonly measured on percentage base, and what is left to achieve a certain new tier, promotion or benefit.
So far, we haven’t touched the points-structure as reward. Is this a reward? Not directly… It is mainly a manner of calculating your setup for tiers, promotional targets or value for redemption. Points are communicated often, because it makes a program understandable for the members. But if you are not willing to use a point-structure, other calculations are just as effective and it is just the way you present it to the customer. Just be sure that the way you process and present the calculation is attractive enough for the customer to really get engaged within the program.
KICK – principle
The large variety of the elements, mechanism and ideas that are mentioned above and also in Part 1 about designing your perfect loyalty program, can be overwhelming and too much to digest at the moment. One thing to make it a little easier for you to keep in mind, is our ‘KICK’-principle that should be covered during the design stage:
- Keep it simple and understandable. Although you might have a very complete and complex reward mechanism, make sure that it is as understandable as possible for your customers.
Out-of-the-box is perhaps ‘cliché’, but it is relevant here. Doing the same as usual and standard, makes your program.
- Customer loyalty really means customer loyalty. To be able to achieve your business goals, you must understand the needs of your customers and design the program fitting their needs. Otherwise, you have a great program, without any traction. That’s a loss.
- Kitchen process: a thorough program is not developed with just one element, but you need different tools and ingredients to make the best recipe. So, be creative, think about what is possible, why you’re doing it, which flavors are combine perfectly and, most important, for whom you are cooking.
The most extensive programs are matching the KICK-principle and are combinations of the above elements and reward types, including or excluding point structures. In case you are not interested in a point structure, there are still plenty of other options on the pallet available. Perhaps a combination of frequency rewarding with perks, promotions and badges for community involvement? Let’s take a white paper and design your program setup together, with focus on your business goals and the customers’ needs. That’s what customer loyalty should be about!
Next, we’ll discuss the role of personalization and how data is a key driver in this process. Already curious what data can do? Read some first thoughts about it in the 2021 retail trend blog of our CEO Boudewijn Wildeman.