Designing Best-in-Class Loyalty Programs – Getting the Benefits Right

Possibly the most important aspect of a loyalty program is its benefits. Be it lack of vision, lack of creativity, or plain old laziness, many companies take the easy way out and offer cookie-cutter benefits through their loyalty programs. The ones that are best-in-class don’t, offering benefits that not only succeed in satisfying the customer, but in changing the company’s bottom line…

An ever-increasing trend over the past several years, loyalty programs are now more than ever are under a barrage of criticism. And not without good reason – there are hundreds of programs that are guilty of:

  • Jacking up product and service prices to offset program expenses
  • Being stupendously stingy / offering practically nothing worthwhile to the consumer
  • Being extremely complicated to understand and full of rules
  • Sharing customer data without authorization
  • Tracking unbeknownst customers via RFID technology

Further, programs are also criticized for failing to make an impact on the bottom line of companies that offer them, unable to change consumer behavior in such a way as to offset the effort & costs of managing it.

Not all programs are guilty of the above, however. Some (those we consider best-in-class) avoid such pitfalls and excel both at delighting the customer and in creating an impact on the company’s bottom line. At the heart of such successful loyalty programs are well-designed benefits.

Loyalty program benefits are, in their essence, a bribe. In exchange for a set of benefits, a consumer allows the company giving those benefits to track his or her purchasing behavior. While companies may pretend the programs are about giving back to their dear customers, they aren’t. In addition to gaining access to valuable customer information (which can then be data mined and used for taking below-the-line actions on customers), companies hope to increase the satisfaction of their customer base through the programs, which then turns into an increase in retention rates.

To effectively achieve the above, companies need to offer the right set of benefits which will:

  • Convince customers to sign up for the program
  • Convince customers to use their loyalty card in every single purchase
  • Convince customers to come back for more (as in drive up retention rates)

We have identified eight specific aspects of benefits that should be taken to heart by companies that plan on designing or re-designing their loyalty programs, which, if adhered to, will help them achieve the above listed three objectives.

1. Tangible Benefits

The first principle that loyalty programs should adhere to is that they must offer tangible benefits to their members. Of particular importance for value / price driven customers, tangible benefits are those which directly have an impact on the customer’s wallet. Be it a discount on a given product or service, or points that can be converted into internal freebies, successful loyalty programs (and most others as well) all offer some type of tangible benefits to the customer base.

Target’s REDcard program is an example of one which offers a very clear and tangible benefit to its members – a 5% discount on all purchases. Such an incentive appeals to the discount retailer’s mainstream customer base, and is a generous tangible benefit when compared to competitor loyalty program benefits.

2. Intangible Benefits

This type of benefit is one which provides program members with something that money usually can’t buy. As opposed to tangible benefits which have a direct impact on the bottom line of both the cardholder and the company, intangible benefits are non-financial in nature, providing the program member with something they can’t necessarily see or touch. Such benefits also traditionally cost the company less to offer than tangible ones, and allow them to differentiate their program in a way competitors often can’t mimic.

Emirates Airlines’ Skywards program (as well as a few others) provides a simple, yet highly effective intangible benefit to Gold and Silver level program members – priority boarding, along with first and business class passengers. At no cost to the airline, allowing program members to board the airplane first and not have to queue with the masses is an excellent example of an intangible benefit

3. Aspirational Benefits

Aspirational benefits are those which drive program members to stick with it; they make program members always present their loyalty cards when making a purchase, they convince program members to shift & consolidate their share-of-wallet / spend, they create a desire within program members to earn more and more points. Offering tiered benefits is one way this is done (i.e. basic, silver, and gold level benefits with airlines); a more compelling method is to offer benefits that are unique, emotional, and tantalizing.

Possibly the best example of aspirational benefits can be found in the Starwood Preferred Guest program, in its Moments component. Via this feature, program members are able to bid with their points on winning the right to attend a variety of events that they normally never could – from meeting Coldplay backstage before a concert to walking the red carpet at the premiere of Brooklyn’s Finest and attending the after-party, gaining VIP Access to the PGA Championship to experiencing a Pace Car ride at the Honda Indy Toronto IndyCar Series race, Moments motivates members to truly engage with and keep coming back to the program and hotel.

4. Surprise Benefits

These benefits are of the type that are a surprise to program members, given when they’re not expecting it – sometimes random in nature, sometimes tied to special anniversaries (i.e. member’s birthday, member’s 5th year anniversary with the program, etc.). Surprising program members with small freebies is a simple way of keeping the program fun and fresh, and of keeping them engaged.

Panera Bread Bakery’s MyPanera loyalty program is fully designed around the concept of surprise benefits – it begins as soon as a member enrolls, with a surprise gift waiting for them – gifts range from free pastries to free espressos, or free upgrades. Then, upon each visit and swipe of the card, the program member is given a random gift (at least from the perspective of the member it’s random – behind the scenes there is sure to be some logical method for distributing gifts) – these include beverage upgrades, free cookies, $1 discounts on next purchase, invitations to special events, recipe books, etc. Not only does such a strategy ensure members present their card every time they visit the bakery, it also allows the company to control program costs by changing the benefits they provide (both in regards to frequency of giving benefits and type of benefits).

5. Attainable Benefits

Many points-based programs are guilty of not offering their members benefits that are attainable; moreover, they offer benefits that require an average program member wait one or more year to accumulate enough points to be able to obtain the benefit. Airlines, for example, are notorious for this – it takes the average program member well over a year to obtain enough miles to get a free flight (more recently many have realized this mistake and now offer gifts that can be obtained in exchange for a smaller amount of miles – gift cards, magazine subscriptions, etc., are examples of such benefits). A rule of thumb around points-based programs is that they should allow average members to be able to obtain a benefit within six months of engaging with the program. If benefits are not obtainable within a relatively short amount of time, then members do not engage with it, and become disinterested – a study by Maritz found that 70% of customers who left loyalty programs cited the long amount of time it took to obtain a benefit as the reason for leaving.

SJ, the largest train operator in Sweden, offers attainable benefits via its SJ Prio loyalty program, such that members don’t have to wait an extensive amount of time until they have enough points for a free trip. Rather, SJ allows members to use their points to get free snacks, meals, drinks, and even internet service on the train. Members essentially are able to earn enough points on one ride to be able to benefit from those points on the next ride – a great example of keeping members engaged with the program. Harder to obtain rewards (such as free tickets) are also available for those program members that have more patience / are heavy users of the program.

6. Behavior-Changing Benefits

Beyond trying to drive members to consolidate their share-of-wallet or spend more, loyalty programs are an excellent mechanism for incentivizing customers to change their negative behaviors. In particular, programs can be used to convince members to shift their channel usage behaviors, to lower-cost channels. Through conducting an analysis around the difference in cost to service customers via alternative channels, a program can provide added benefits to steer customers to the desired channel (with the added benefit naturally costing less than the difference in cost to service). This type of benefit thus is one that pays for itself, and in so doing, also changes the behavior of customers, something that will keep giving back to the company over the long-term.

Etisalat’s More loyalty program, as an example, gives its members double rewards points if they pay their mobile, landline, ADSL, or IPTV bills online rather than through traditional channels. Such an incentive not only lightens the workload in shops and dealers and thus allows more value-added interactions to take place, but it also shifts the transaction to the lowest cost to service channel. Designed correctly, such benefits can go a long way towards changing customer behavior.

7. Tiered Benefits

Something which most company have gotten right at this point is the concept of tiering their program benefits, such that added benefits are given to program members that reach certain thresholds. This concept has been around for a very long time, with airlines the pioneer around tiering benefits. What is critical is that a disproportionate amount of marketing budget be spent on top spenders – in a recent engagement we found that one customer at the top of the pyramid (top 1% of customers) generates as much profits as 16 of those at the bottom half of the pyramid (bottom 50% of customers). It’s also critical that the added benefits provided to high spenders be less tangible (i.e. discounts) and more emotional / aspirational.

Neiman Marcus’ InCircle program is considered a best practice around the offering of tiered benefits, as they provide a heap of perks to their high spenders. Those spending $10,000 or more with the luxury specialty retail department store become “Circle Three” level members, and thus gain access to a range of benefits – from being able to use a fashion concierge service for getting hold of a must-have item, to securing reservations at the trendiest restaurants, access to a travel and events advisor to invitations for exclusive events,  InCircle proportionally differentiates how it treats program members based on how much they spend, and the tier they are in.

8. Affordable Benefits

Somewhat different than the above listed benefits is that they should be affordable, in that the program must not give away the bank. Completely in regards to program costs, affordability is a critical factor that must be paid attention to in order for the program to succeed. Heaping a world of benefits on program members is easy – it’s about doing so in a manner that ultimately makes sense to the bottom line. A well-designed and tested business case along with pilots to examine the impact of the program on a small-scale should be conducted to ensure the program pays (or almost pays) for itself. An excellent method for keeping costs under control is for companies to have other companies subsidize the benefits of the program.

An example of this can be found at Turkcell, which leverages its market leader position in the telecom industry to obtain discounts from a variety of retailers across Turkey, which it then packages as benefits to its various program members. Via its Professionals Club program, for example, Turkcell provides members with discounts from a host of restaurants, fashion retailers, and flower / gift delivery companies. The program member is delighted with the benefits, which ultimately Turkcell procures for free or close to free (as the discounts are willingly provided by retailers seeking to gain access to Turkcell’s customer base).

We believe companies need to spend more time and energy in making sure they get the benefits aspect of their loyalty programs right. At the very core of loyalty programs, it is ultimately benefits that drive the customer to act in a certain way (shift share-of-wallet, spend more, use less-costly channels, etc.) – companies need to realize this and place the utmost importance on making sure they’ve got the mix of benefits right.

Tags : consulting, customer benefits, Customer Experience, loyalty, loyalty programs, marketing, marketing campaigns, program, rewards, strategy