First step – defining your business objectives

Although the term “loyalty program” indicate that the main purpose of these schemas is to drive customer loyalty. That was the case for the first wave of programs. Today’s program often has other goals as collection of customer data or act as a profit center for the business.

Also, loyalty needs to be defined.

Loyalty driven programs

Loyalty is a complex concept. The word has different meanings and aspects. Typically, loyalty is divided in to emotional and behavioral loyalty.

The emotional aspect is maybe what most people thinks about when they hear the word loyalty. The typical synonyms for this connotation are faithfulness, devotion, commitment and dedication. In the business context emotional loyalty is often defined in aspects such as engagement, customer satisfaction and brand affinity.  The idea is that emotional loyalty in the end leads behavioral loyalty, but the direct effect sought by these programs are to drive emotional loyalty.

The loyalty matrix defines how your business drives customer loyalty. Emotional driven programs aim at effecting brand perception, engagement or improve customer experience.

Behavior loyalty programs focus on effecting customer behavior. In some cases, try to create thresholds for customer to change supplier.

In marketing terms, behavioral loyalty is measured in terms of share of wallet, frequency, average basket size, no. of categories bought from, etc. Some programs are only geared to drive behavior and nothing else.

Data collection driven programs

The purpose of some programs is just to collect data. As the importance of data and personalization increase, business needs a way to link purchase data to customers and get consent for using it. The larger share of sales that is registered, the more data can be used for personalization and to gain customer insights.

Programs as a stand-alone business

Some loyalty programs, or at least parts of them, function more as a profit center. Examples of this are air miles programs, that gets kick-back from banks when they sell co-brand credit cards or partner programs where other retailer pay to issue points. Selling the data to a second party are another example of a program revenue stream. For some businesses these ventures can be surprisingly profitable.

Three key strategies for an emotional loyalty driven program

To drive emotional loyalty through a program you need to use features that dig into the relationship with your customers.

For the emotional driven program there are three key strategies:

• Emotional attachment for high value customers
• Drive customer experience
• Drive brand perception

Programs that drive emotional attachment for high value customers are typically the best choice when most revenue or profit comes from a small group of high value customers. To grow and sustain this group is then a key business objective. You can see these programs in the airline business where a small group of business travelers generate a huge part of the profits. In this setup, you will typically see tiered programs (gold, silver, bronze). Premium customers are given VIP-treatment or other status effecting experience. How you deliver the experience is typically especially important, just like the cover of a present effects the thoughts that goes behind it. This strategy requires high monetary margins per customer to finance the program costs, as they tend to be extensive.

Programs that drive customer experience lock in services and features so only program members have access to them. It can be physical or digital services. Sephora has a loyalty program that is integrated with an online community that give members access to a large range of digital features such as personalized color analysis, access to rate and review for products, personalized recommendations, inspirational content, etc.

Programs that drive brand perception focus on driving key aspect of their brand

This typically includes building a story around tangible program feature. For instance, when Swedish insurance company Folksam designed its loyalty program, the focus was on the collective ownership of the company, meaning it is customer owned. The design was built on a classic members payout model. The communication centered around massaging that explained that you get this because you are an owner of Folksam. North face has a program that give access to nature events such as mountain climbing and skiing. Members also get access to athletes and adventurers e.g. through chats. In this way driving the North face as a nature and adventure brand.

Two key strategies for behavioral driven programs

When the key objective for your loyalty program is to affect customer behavior, you have two options. Either you focus all customers, or you try to lock in the best customers.

Basic earn & burn programs are a classic tactic for driving behavior

Other tactics include progressive bonus scales (higher % you more you buy), gamification, extra points for engagement activities (e.g. download app, create login, share contact details recruit other members or reuse of plastic bags), extra points campaign periods, extra bonus for co-brand cards or program partners, etc.

Today personalized and trigger-based communication is a hygiene factor for a successful earn & burn program. The interest from customers is typically quite low. On average, consumers are a members of 2-8 programs. To be frank, most of the time they don’t remember all the loyalty schemes they signed up to. The personalized messing is needed to nudge and trigger behavior or just simply as a reminder.  The basic earn & burn schemas are the most common programs in retail and FMCG.

Both Coop [1] and Stadium [2] are using progressive earning schemas, the more you buy the higher the bonus as a percentage of you spend.

Customer lock in tactics is the other behavioral strategy

Although this strategy has been around for at least 50 years, it has become more and more common. The new wave started with Amazon’s Prime, whose members got free shipping benefits for all orders as well as other perks. Prime members pay a yearly fee for the membership. This type of strategy has not only spread to other e-com players, but also to traditional retailers and FMCGs.

Tesco are currently running an offer that gives Clubcard members 10% on all purchases for a monthly fee of £7.99

The more traditional lock-in tactic is EDLP (Every Day Low Price) stores that requires a yearly member fee to access. Cingular society claim a yearly fee to shop to prices that are close to wholesale prices.

As customer loyalty is decreasing in all industries, we will probably see more of this strategy being used in the next coming years. The lock-in strategy works best for high frequency purchased products.

Three key strategies for collecting customer data through a program

There are three strategies currently used for programs for which the sole purpose is to collect data:

• Basic bonus systems
• Discount or service-based approach
• Personalization based approach

The common tactic for all these approaches is to collect customer data to as low cost as possible.

Collection of data through a basic bonus is probably the most common of all programs. Key tactics include points, punch-tickets, cash backs or similar setups. The bonus should be as low as needed to reach its objectives. Other features should be minimized to reduce costs. If this is your strategy, stay on track and stick to the basics.

The discount or service-based strategy, focus on giving members access to discounts or other services that are cheap to produce. This can include member discounts on most sold product or access to simple services as digital receipts or access to content (e.g. how to’s & other guides).

IKEA family is probably the most iconic of these programs. Membership gave access to free paper bags and deep discounts on a few products that is relevant for most consumers (e.g. fire extinguishers, fire alarm, etc.), yielding an astonishing 80-90% of sales being covered by the program. Now, IKEA has added earn & burn features. The points can be redeemed for a variety of product and services.

Ideally, the net costs for the benefits should be as low as possible. This includes costs for discounts, content and IT costs. As these programs don’t include issuing and redemption of point or some other form of bonus, the IT costs are potentially lower than for basic bonus systems.

Lowe is a hardware chain who’s program gives members access to a range of services.

The personalization approach tries to do the trick of offer personalization as a benefit that customer feel is valuable enough to join the program for. This strategy doesn’t include any other tactics as earn & burn or other benefits. Examples of this strategy in Sweden include Akademibokhandeln and Claes Olsson. Swedish FMCG ICA, tried this approach, but after a sharp reduction in registered sales reintroduced a basic earn & burn program. So far, we many retailers struggles to get enough data through this model, as customers don’t see the value for them. Long-term, this strategy requires a true 1-2-1 personalized experience that include product recommendations, content recommendations, personalized discounts, and personalized digital services.

Hybrid programs and the right mix of strategies

In reality, many of the loyalty programs use a mix of these strategies. This is often not driven by the business objectives, it’s rather due to the fact that programs have a tendency to add features and increase the application of different tactics over time.

Nevertheless, a program can have more than one objective and mix of strategies can therefore be relevant. The trick is to find the right mix based on the business situation and the objectives. Depending on your industry and business model some strategies could be more fitting or less fitting for you.