How to build Reward loyalty program : Everything from design to economics - Part I
#categorymarketing #ecommerce #categorymanagement #productmanagement #customerloyalty #points #reward
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Today’s post is about the reward loyalty program, hope you like it. In case you have an experience in setting up such programs, would love to hear from you.
Let’s start with the basic question, Why loyalty program? These days every large retailer are running some form of loyalty reward program. Almost all mobile app have such programs - gpay, Paytm scratch card..
The basic idea is “Loyal customers, frequent purchase, higher CLV”.
Customers win points when they join the program, or when they make a purchase, or when they refer a friend, or when they have collected stamps in a gamified reward program depending upon your reward mechanism.
Here is the link of an HBR article if you want to read more.
With each additional year of a relationship, customers become less costly to serve. Over time, as the loyalty life cycle plays out, loyal customers even become business builders: buying more, paying premium prices, and bringing in new customers through referrals.
Now, let’s play devil advocate 😈.
From another HBR article,
Loyalty programs — that effectively bribe people into buying more of your products — are lazy.
Subway, the restaurant chain, got rid of its Sub Club cards, which allowed diners to earn a free sandwich after purchasing eight. In Australia, Coles supermarkets phased out a program that rewarded owners of the company’s stock with merchandise discounts ranging from 3% to 7.5%. Online phenomenon eBay quietly pulled the plug on its Anything Points program for U.S. customers. American Airlines and America Online jettisoned their joint customer-loyalty program.
Are reward loyalty programs just another gimmick- a short-term fad that enables economic transaction for a short-term window till the program is running and the customer disappears as soon as rewards disappear.
My Take : For a new product in the market with so many competitors in the market, an effectively designed loyalty program could be helpful to gain initial traction (a hard problem to solve).
The framework of a reward loyalty program
Let’s start with a real-world consulting assignment: A Direct-to-Consumer (D2C) brand which sells health drinks 🧉 in the market was struggling to retain customers. They wanted to develop a strong customer acquisition strategy and they wanted to focus on their loyal customers.
A reward and loyalty program would not only enable them to provide additional benefits to their most loyal customer but also help them to get customer data and analyze the habits of frequent shoppers on their platform.
Step 1: Define the Objective of the loyalty program
What do you want to achieve through the loyalty program? This is the first step to develop an effective loyalty program.
Loyalty programs are designed for many purposes - Marketer also uses these programs to incentivize participants in market research survey besides to drive customer loyalty. HR uses such programs for employee rewards and benefits.
So, how do you get there? Talk to internal stakeholders to understand what is it that they want to get out of the loyalty program. What is the most important metric for them? What is the North star metric for the business?
Although North Star metric might not be the objective of your program, knowing what is your company goal in the long run will put things into perspective. Your objective could be to gain new customers, keep your customer engaged with your business, or improve customer satisfaction by providing additional value to your most loyal customers.
Whatever it is, quantify it #️⃣. In a particular timeframe ⌛.
In the case of the D2C health brand, during the conversation with the business leaders, it came out that they want to build a community of health-conscious people. Although the primary goal was to create awareness about the product, they were aware that customer retention was the key to the success of the product. Their most loyal members (or high users) can get access to elective community content and forum.
Their objective was to improve customer retention by 20-25% by converting users to the most loyal members.
Step 2 : Identify your target customer using RFM analysis
RFM analysis can help you to find out your most loyal customers, who should be awarded additional benefits for their loyalty to your business. It will also indicate to the users who should from one group to another. Not loyal to loyal.
Consider sharing this with your friends and colleague,
Step 3: Reward structure, differentiating points
Tie your reward structure to your customer segment.
(A) Reward benefits or catalog
it’s important to understand how will the program create value for the customers? There are so many loyalty programs. Are you different or just part of the bandwagon?
Starbucks Reward points💯 : Star
Starbucks has been running the stored value card program since 20008 and it is considered one of the successful loyalty programs.
Customers can order and pay through the Starbucks app before reaching the store location. And they can buy a free drink, food or merchandise using the Star earned in the app. From the customer perspective, ability to order and pay without staying in line is a huge incentive for them to become the loyal member of the program.
(B) Triggers <—> actions/benefits and validation rules
You can set automated rules for behavioral trigger and assign benefits to each activity taken by users.
Step 4 : Loyalty Budget, Financial forecast, ROI analysis to check the financial feasibility of the program
Loyalty points are to be assigned a real value. The exchange of points for tangible / Intangible benefits is a cost to the company and the same is accounted in the balance sheet as Loyalty program liabilities and revenue.
In Starbuck annual report,
Deferred Revenues - Our deferred revenue primarily consists of the up-front prepaid royalty from Nestlé, for which we have continuing performance obligations to support the Global Coffee Alliance, and our unredeemed stored value card liability and unredeemed Stars associated with our loyalty program.
The point I am trying to make here is, loyalty programs are complex from financial POV. And most ignored part also. You might want to check a fiasco turned into a lucky chance in “Golden Ticket - The office” before you design the program. What a genius idea from Michael 😂!
It’s very important for retailers to have some idea of redemption value, the timing of redemption, and how many points are likely to be expired or not redeemed by users.
Calculate Program revenue = Additional revenue from members of the program. If it is more than program cost, which can be calculated from redemption value, % breakage (1-URR), admin cost, the program can be considered as successful.
We will discuss the next 3 steps in part II.
Step 5 : Product development (Loyalty as a product feature) or 3rd party integration
Step 6 : Product launch and in-app marketing
Step 6 : Monitoring the success of the program
Also, check Sephora Loyalty Program.
Wish you a whimsical and adventurous day at office 🔥💪 :) Comment in case you have any suggestions or comments for me. 👇