Building the ideal loyalty program

By Dan McKone, [email protected]



We are often asked for the “secret sauce” behind a successful loyalty program and whether we can provide a blueprint that can help retailers optimize their approach. In answer, there is no single generic “ideal program” -- the retailer-customer relationship is far too complex to dumb down in this way. The best program for one retailer may be absolutely the wrong plan-of-attack for another, depending on their starting points in terms of:



1. The depth and breadth of the customer relationship;

2. The variation of customer segments addressed;

3. The competitive dynamic;

4. Observable customer behaviors; and

5. The retailer’s own strategic objectives



To illustrate the point at a high level, let’s look at a specialty apparel retailer. It is fairly well established that the typical specialty apparel consumer is a particularly promiscuous shopper relative to customers of other retail categories. To this end, it is a big ask to expect this customer to approximate anything close to the traditional concept of share-based loyalty simply by “points burn”-based motivation. Even if they don’t bother to work out the exchange rate precisely, a penny or two a point in value just doesn’t resonate in the world of 30% off (or more) signs.



By contrast, the concept of status-elevation/preservation can be a useful psychological tool to prompt incremental trips. Ultimately, product and price are going to drive the decision for the apparel shopper and points-based incentives won’t move the needle with a consumer accustomed to seeing striking percent-off discounts. So a better aim for the specialty apparel retailer is try to drive more trips and let the sales take care of themselves -- i.e., if you get enough at-bats, the hits will follow. Therefore, the best programs for specialty apparel leverage the concept of status tiers (think gold and platinum members) where elite customers are exposed to special sales (e.g., VIP nights), special perks (e.g., relaxed return policies) or special treatment (e.g., surprise and delight elements).



When customers are conditioned on the benefits of status at one of their favorite retailers, they can become highly averse to losing this status. As a result, they become susceptible to “earn”-based promotions that help them achieve or maintain higher tiers. As an example, imagine a program where status was linked to trips rather than pure dollar value (even if dollar value initially triggered the program outreach). Consider the potential success of a program where a retailer prompted the decelerating-velocity customer to “buy any item” (at all) this week and receive double trip credits. Or try throwing in elite-qualifying trip credits as a kicker for attending a VIP event.



Mechanisms that place less emphasis on “spend more” and more emphasis on “come and see us more” put more faith in this customer and can build a winning relationship in the apparel sector. What’s more, the accoutrements that come with status can often be calibrated in a way that is less costly than the gross-margin give-away-game of simply offering a blunt points-based-discount on all purchases.



Getting retail loyalty right

When programs fail to generate true loyalty, motivate real changes in behavior or reveal actionable insights, they effectively become weak promotional tools. L.E.K. has found that customer rewards programs rank near the bottom of all promotional types when they are used in this way. Many rewards programs fail because they are either ill defined or are unrealistically tasked to achieve too many goals. Effective rewards programs should focus on one or two clear, repeatable messages, as it is difficult to address all potential program objectives equally well. To increase the effectiveness of your loyalty program, retailers should carefully consider how their rewards programs are configured, re-examine program goals and calibrate revised goals against measured results.



Dan McKone is a VP of L.E.K. Consulting, a global management consulting firm with a focus on retail and consumer products. He can be reached at [email protected] or visit lek.com/industries/retail for additional information.