Effective customer loyalty programmes

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Customers can be fickle when it comes to loyalty and some have long memories. One bad memory can tarnish a loyal relationship because there are so many easy to access alternatives close at hand. Yet, there is also acceptance that when things go wrong, there could be something in it by way of ‘sorry’ and to keep you coming back. So, whilst every business must risk imperfect transactions, they can still build meaningful relationships.

Loyalty programmes attempt to reward customers for repeat purchases and provide clear incentives for patronage. And highly effective programmes, can actually change purchase patterns through propensity and value – which strengthens the relationship.

Assumptions to get clear up front

  1. A significant number of customers want an involving relationship with the brands they buy
  2. A proportion of these buyers are hard core loyal, and almost exclusive in preference and habit
  3. These hard core buyers should be profitable because they offer volume, predictable purchases and they are captive
  4. It should be possible to develop the preferences of these buyers and encourage them up a loyalty ladder
  5. Database management and technology can be used to personalise and enable a dialogue which can be used to attempt to move consumers up a loyalty ladder almost regardless of starting point (some principles are fairly common between sporadic customers and hardened high spenders).

Customer loyalty research analyst – Xavier Dreze (2009)

Dreze found a tendency for consumers to want to amass rewards in order to redeem them for something they saved up for or aspired to. A holiday for example. He showed that there is often a personal connection to the lifestyle or aspiration of a consumer, linked to their purchase. Key however, is that businesses need to establish a one-to-one relationship with the consumer psychologically.

Dreze’s research showed that “loyalty programmes need to be designed to offer differentiated products and services to customers based on their purchasing patterns, potential patterns and profitability. Just basing loyalty on discounts or paying for patronage, is not sustainable”.

Loyalty programme structure becomes important

For loyalty programmes to be intelligent and effective, it is usually important that not all customers are treated the same. EBIT can be enhanced by incentivising high margin, high value customers more so than by rewarding sporadic, low volume, low margin customers. Sales growth can be more significant by encouraging relatively valuable customers, to become ‘Gold’ customers. The table below shows three types of reward structures.

loyalty

Applying psychology to loyalty programmes

Sub-dividing groups of customers can help generate personas which enable you to accurately relate types of communication, level of reward and focus of reward, to customer lifestyle. It also creates a hierarchy. Hierarchy matters if companies want effective loyalty programmes.

Dreze found that “optimal loyalty programme models have two elite tiers utilising status terminology to capture a small (top tier) and medium (bottom tier) proportion of the total consumer population, plus a large non-status tier”. Dreze found that most participants in, let’s call it “Silver”, and non-status tiers, wanted a higher status (“Gold”) to work towards.

Optimal loyalty programmes therefore have at least two tiers using emotive terminology (“Gold”) including a small top tier plus a large non-status tier.

Dreze hypothesis summarised

1. The fewer people granted elite status, the more superior these people feel2. The smaller the size of the second tier, the greater the perception of status among consumers in the elite group

3. The introduction of a third tier below the others, will do nothing to alienate consumers in tiers above

4. Consumers recognise labels and are generally comfortable with bracketing because they can relate to labels and aspire to maintain or move up the ladder. Incentives and rewards just need to relate to that tier

5. For those in the middle, their happiness depends on how many tiers exist above them

6. If the number of tiers above threatens one’s perceived status, the number of tiers below can offer status enhancement

7. When launching a “Platinum” tier, adding or maintaining a subordinate tier will lessen the negative impact of the introduction to some customers

Source: “Feeling superior: The impact of loyalty programme structure on consumer perception of status”, Journal of Consumer Research, 7, no 3, 2009

Perception of status among the host company and consumers can be different

Host companies look for increased sales and profit contribution from their customer loyalty programmes. Consumers however, are interested in interaction and how they feel about shopping and patronage, as well as the incentives and rewards on offer.

A Smartmoney.com article by Kelli Grant from 2008 still holds largely good today. Grant found that consumers tend to respond well to five types of incentive;

  • Immediate rewards – including sign up to which is a valuable recruitment tool and compelling for lapsed or sporadic consumers
  • Targeted deals – including member exclusive deals which can be targeted based on member preferences and shopping habits
  • Souped-up membership cards – members are often participants of multiple loyalty programmes but seldom carry multiple cards. Host companies therefore need to find ways to ensure that their card is prioritised (but nowadays digital cards or apps are increasingly common)
  • Manufacturer rewards – including coupons on packaging that can be redeemed after repeat purchase (particularly common in the retail market. In the fashion market, invitations to new collections are widely used to reward loyalty)
  • Additional reward partnerships – either in the form of associated benefits such as concert tickets, sports tickets … or where consumers can earn points or cash that they can spend freely with a totally different company. For example, LoveToShop which is what First4Loyalty use as the cornerstone for its loyalty programmes

This is a particularly successful incentive strategy. AmazonPrime is a membership programme that for a tiny monthly charge, gives you and your family unlimited FAST shopping delivery, a free two-day and one-day shipping reward, instant videos, streaming without advertisements and movies via Amazon Video at no extra cost. It’s a two tier programme (member and non-member) and uses a reward partnership strategy to build a fixed reward programme that adds ‘stickiness’ to the relationship between customer and Amazon, enhancing their experience and making repeat purchases easy and more gratifying. It’s a psychological winner for Amazon and the customer.

Downsides

AmazonPrime has its critics though. Not least because many have publicly complained at the aggressive personalised marketing which customers experience to encourage them to sign up which is “not in keeping with the Amazon customer experience”. So, execution, tone of voice, frequency of interaction and giving customers the chance to turn off for good a type of message, are all good ideas to manage customer psychology. The trick is to take advice, trial, roll-out, keep listening and be prepared to change and refine in light of your experience as a host company.

 

Conclusion

Psychology is important in customer loyalty marketing programme design, communication and execution. There’s enough evidence out there and tried and failed programmes for host companies to learn invaluable information. Whilst one size doesn’t fit all, many principles hold good for multiple sectors. So, let’s end with an example from a brand most of us know well – Starbucks because it’s a good example of psychology working well and kept simple.

Starbucks have created a 4-tier loyalty programme entirely built around lifestyle in the USA and they have adapted it for the UK market. Rewards start when you register and membership is free. Tier 1 – free birthday beverage. It makes customers feel special all year long and extra special for one day. Tier 2 – green: advance to 5 Stars (via purchases) and you get free syrups, free refills, free trial offers… Tier 3 – Gold: collect 30 Stars and you get a Gold card for one year entitling the holder to free drinks every 15 Stars, a personalised card, personalised offers and coupons. Customers love it. The fourth (bottom) reward is for the largest group – non-members based around ‘Welcome’. Psychology that works linked to lifestyle and what customers want. Now, there’s an idea!

About the author

Sharon is Head of First4Loyalty – a customer loyalty and retention specialist who collaborate, design, manage and report on customer loyalty programmes for B2B and B2C companies. Companies have been known to achieve up to 200% sales growth on previous segmented customer spend. For a copy of 2016 white paper “How to plan and what to look for from an intelligent, effective customer loyalty programme”, email sharon@first4loyalty.co.uk.

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