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Loyalty Program Design: What's The Point?


What to Consider When Designing a Loyalty Program


Loyalty programs have been around for centuries. Berry Kemp revealed that Egyptians used the institution of tokens to reward labourers and people in higher places were given extra tokens as a reward. [1] Some institutions have token accumulation strategies in their loyalty program-style campaigns seen in 18th century institutions. Today, we have so many complex programs that use multi-channel and sometimes omni-channel strategies. Every marketer wants a higher frequency rate if they're in the retail industry. Insurers are starting to use sophisticated loyalty programs to decrease their claim rates with some pro-active health and/or driving safety strategies. If you have a retail banking background, you probably know the value of your data. Your data scientist team will likely collaborate with your marketing team to identify credit card transaction behavior and design beautiful, personalized campaigns for your users.


As you can see, we should define loyalty programs from scratch. First, we start with point accumulation strategies. As we evolve, we try to understand consumer behavior based on transactional data. We then explore external data sources like social media, wearables, etc. Consumer behavior is something to think about, but we need to understand human behavior more broadly if we want to execute successful campaigns within our loyalty programs or any marketing campaign we want to design.


The key to being successful in the customer-driven world is understanding the needs/expectation of your customers and what they expect. This article will explore successful teams that strive to meet those expectations by creating a customer-first culture.


Retention Marketing Strategies & Loyalty Programs


Retention marketing is a type of marketing strategy where companies focus on retaining current customers and building long-term relationships. This is done by understanding the needs of the customer and providing them with a personalized experience. A new era of marketing has emerged in the form of behavioral science and it is changing the way companies go about understanding and targeting customers. In this section, I will summarize the common elements of loyalty programs.


Entry Fee: Free or Paid

Decision

Description

Free

No program enrollment fee. Most retailer loyalty programs use free enrollment strategy.

Entry Fee

One-time enrollment fee for the program. It can be done by one-time cash payment or program designer set one-time shopping transactional amount limit for enrollment.

Annual Fee

​Yearly or monthly program enrollment fee. Companies can design their loyalty program as a subscription program. Amazon Prime is one example of this strategy.

Entry Fee + Annual Fee

Sometimes, companies design their enrollment fee strategy by combining the entry fee and annual fee. Most of the time, this strategy can be applied to create more value and decrease program cost.

In recent years, we have seen many paid loyalty programs in various industries. According to McKinsey research, these programs are providing various improvements in metrics. [2]

Paid loyalty programs look tempting, but brands need to evaluate various things before making that decision.

  • Brand's industry dynamics are important when it comes to enrollment fee strategy.

  • Incentive and campaign types are also effecting

  • Most loyalty programs are not creating incremental revenue. Your cost structure and program KPIs should play a role in your decision to offer a paid or free loyalty program.

Response Strategy

Decision

Description

Spend

Reward customers according to their spending amount

Frequency

Reward customers according to their shopping frequency

Recency

Reward customers based on how long it has been since their last purchase (recency).

Engagement

Reward customers according to their product/feature usage.

Today, successful loyalty programs are mixing different response strategies and creating various tactical marketing campaigns within their program. Mixing different response and validity strategies creates program flexibility. However, creating a flexible loyalty program structure is not an easy task. It requires a solid data science, IT, and marketing team to collaborate. In order to do that, the program designer team should set relevant KPIs and define the reporting pipeline from the start. Integration of ETL and BI tools is highly important as well as your CRM system.


Reward Validity

Decision

Description

Time Limited

There is a time limit for redeeming program benefits. It can be part of a singular tactical campaign or applied to the entire program reward mechanism.

Unlimited (Time)

There is no time limit for redeeming program benefits. Generally, it is a risky move financially, but we are seeing this type of reward mechanism in digital products, especially in media (e.g. free updates on books/reports/online courses).

Spend Amount

The user should spend more than the minimum amount within a certain time or without any time bond. It can be a core program strategy or campaign-based strategy. Campaign/Program designers can also apply product/feature/category-based constraints. If it is a program strategy, it usually comes with a user hierarchy.

In the previous section, I mentioned about flexible loyalty program structures. Another aspect of that is the reward validity. Generally, time-limited campaigns are essential for any successful loyalty program or any type of acquisition/activation/retention activity. We see many great examples of Spend Amount constraint in e-commerce and B2B machinery industries.


Other Elements


There are many other elements you should consider while assessing or designing a loyalty program. Below is a table with some common elements, without taking industry-specific conditions into account.

Decision

Category

Card / Payment / Paper Based / App / Web / Web3

Media

Omni-Channel, In-Store, Digital

Channel

Tired, Non-Tired

Segmentation

Time Limited, Referral, Progress Based, and more

Tactical Campaign Constraints

Discount, Points, Bonus Points, Privileges, and more

Benefits

Churn, Frequency, Recency, Average Order Value (AOV), Affinity, NPS, and more

Core Program Metrics



Further Readings & References





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