I want a loyalty program. What do I do?

An interviewer once told me he was thinking of creating a loyalty program and wanted to know what he should do.  Loyalty programs can be a valuable tool for driving revenue and fostering customer loyalty as I have written about here.  As I noted in another post, they can help you make smart marketing and merchandising decisions.

However, a loyalty program needs to be grounded by your business needs.  Ask yourself first:

  • What am I trying to achieve? Do I want to improve customer retention, drive revenue or encourage customers to purchase multiple products and services from my company?
  • How will I measure success? What metrics will I use to measure if I am achieving my goal and can I track those metrics on an ongoing basis?
  • Will my program be public or private? Some luxury brands enroll customers in loyalty programs based on their spending habits and reward their best customers without letting them know they are in a loyalty program.
  • Will my program have tiers? Explicit tiers can encourage customers to stretch and reach the next level.
  • How will I reward my customers? It is important that customers value what they receive in return for their loyalty.

There are significant financial considerations to any loyalty program so Finance will need to be involved in the development and design of the loyalty program.  But these questions will begin the dialogue about what the loyalty program should look like.  Once you have it in place, you should monitor the program’s health.

Evaluating a loyalty program

To be most effective, loyalty programs need to continually evolve.  Loyalty programs need to be regularly re-evaluated as customers, products and the competitive environment change.  Stagnation can cause a once valued loyalty program to be seen as old and tired.

To determine the health of your loyalty program, monitor its performance and perception.  The key performance indicators (KPIs) will be tailored to your program, your goals and your business.  However, there are four general metrics which are important for most programs:

1.  The time it takes to earn a loyalty reward

2.  The percentage of loyalty customers who earn a reward

3.  The percentage of loyalty customers that redeem the reward certificate

4.  The percentage of loyalty customers that take advantage of the program

A loyalty reward must be attainable.  If it takes too long to earn a reward, the customers may get bored and give up.  The appropriate time to earn a reward varies by your business and customer behavior.  That said, do not consider this a static number.  It may be that an average of 6 months was appropriate two years ago but 3 months is more appropriate now.

Similarly, if you have a program that requires a particular spending or mileage threshold, the minimum at which a customer receives a reward must be chosen carefully.  If you are a retailer whose median customer spends $250 per year and customers only receive a reward after spending $1,000 annually, very few customers will likely attain the reward.  If you want to encourage increased spending, you can always create tiers.  The basic loyalty membership level could be annual spend of $250 to $499 per year, the silver level could be $500 to $749 per year, the gold level could be $750 to $999 per year and the platinum level could be $1,00 or more per year.  Tiers encourage customers to strive to reach the next level.  Plus, it does not have to be expensive to add additional services for the higher tiers.  For example, you could e-mail platinum level customers in advance of sales or invite them to special in-store promotions.  However, customers must see the value of achieving a higher tier.  It is very easy to see the benefits of tiers when you see fliers with higher tier levels board the plane first or see the shorter check-in line for premier members.

The value that customers see in your loyalty program is evidenced by how many of the customers redeem the certificate.  In addition, if customers do not redeem the certificate then you have lost the revenue that would have been generated by the incremental trip.  Certificate redemption should generate revenue and continued loyalty to your brand.  If not, the loyalty program needs to be re-evaluated.

Finally, customers should be taking advantage of the program.  If not, you should be asking yourself why not.  Do customers not see the program as valuable?  Does my competitor have a better program?