While it’s clear loyalty programs, including points or prize programs, can be effectively designed to offer rewards that can either modify customer behaviour or gather data and insights needed to improve the customer experience, it does come with a price.
Rewards cost money – and they’re often stored up for later redemption, all of which places financial pressure on the program’s operator. To help avoid your reward offering becoming a financial liability, there are several things you can do. First, recognise that it doesn’t automatically follow that “more is better”. The best way to establish the optimum level of reward is to test the response to different levels of rewards – the results might be surprising.
You can also achieve substantial improvement through the use of internal items that have a higher perceived value than their actual cost. In some circumstances it is possible to sell customers rewards that they have already earned. As long as these items are not regularly stocked the customers have little chance of working out the true cost. By carefully pitching the level of purchase and the number of purchases required in the specified time, incremental sales can be generated. Return business is also ensured because customers want to meet the deadline.
However, venues need to carefully consider both the immediate and long-term effects of making fundamental changes to program structure:
1. Lessons learned, fingers burned?
Plan ahead for the execution of the reward program. Design the terms and conditions and associated technology requirements for the program. Changes to funding levels, earning caps, redemption caps, and point expirations need to be documented in the terms and conditions and clearly communicated to members at the time of program registration. By embracing the worst case scenarios and lessons learned from legacy programs, a sustainable and profitable reward program can be planned.
2. Routinely expire the reward currency
The most important lesson that should be learned from the design of program is the mushrooming liability created by unredeemed reward balances year after year. Venues should ensure that the underlying technology for their program can time stamp each individual reward so that it can be redeemed on a FIFO (First-in, First-out) basis. The technology should also support the accounting-based expiration of reward currency (e.g. n months after issuance) or rules-based expiration for account dormancy. Currency expiration must be communicated clearly and pro-actively to program members to avoid mass defection, as has been evidenced due to recent changes to frequent flyer program.
3. Reduce the percentage of reward funding
This yields by far the most immediate and significant cost savings since funding changes cut across the entire membership base. Without in-depth analysis of product line profitability and customer segmentation, there can be a tendency to over-fund base reward levels at program launch. A good technology will allow you to adjust the reward level for a customer segment, product family or SKU and measure the behavioural impact. When implementing a reduction, key customer segments that are more susceptible to defection can be protected through targeted bonus reward rules.
4. Motivate redemptions for your own-brand products
Consider implementing a limited time offer that encourages redemption for lower cost items. Typically, your own brand carries the lowest cost since it embeds your company’s internal profit margin when compared to rewards provided by external vendors. By having program members redeem for your own product, you not only reduce budget but also have an opportunity to further reinforce brand experience and loyalty.
5. Cap redemptions for high-cost items
You can also minimise your exposure to the highest cost items in your reward catalogue by implementing a cap on redemption. A good technology will allow you to define a redemption cap for a fixed period of time over a rolling time period, for example, implementing a program over the last 12 months or for an individual redemption event. Introducing caps on redemptions mid-program can be risky since members may have been banking rewards toward a redemption that is no longer available to them.
While budget pressures can come unexpectedly to even the most prepared program manager, by embracing difficult scenarios in the design of your program you can empower your venue to make timely changes without the risk of alienating your loyal customers.
For all your loyalty queries please don’t hesitate to give Danny Nixon-Smith a call on 0433 906 809 or danny.ns@dws.net.au
