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WHITE PAPER

A Simple Framework
for Successful Loyalty
Program Design

Mickey Neuberger
Senior Director, Loyalty Strategy
Loyalty Lab, Inc.

January 2008

Introduction
As with any marketing discipline, designing a loyalty program is both a science
and an art. The science concerns nailing the program economics and mechanics,
such as how customers enroll, how members accrue points, and how the benefits/
rewards are structured. The art is the marketers opportunity to differentiate the
program, aligning it with its brand and customers.
For example, the basic program mechanics of Southwest Airlines Rapid Rewards
are eight round-trips earns you one free round-trip. However, Rapid Rewards is
much broader. Program nomenclature (e.g. Freedom Awards), special companion
passes, surprise and delight rewards and communications, including free drink
coupons and birthday cards, all align with Southwests fun and consumer-focused
brand.

This analysis provides


loyalty program
designers with a sense
of which customer
behaviors they will be
able to and will want
to influence.

In this article, I focus on the former, the science of designing a loyalty program for
primarily transactional businesses (loyalty in subscription or advertising business
models needs to be addressed quite differently and therefore requires separate
coverage). I will provide a high-level framework to help marketers design programs
based on their businesses.
Implicit in this discussion is that high-level corporate objectives for the program
are twofold. The first is to drive increased revenue via a combination of higher
retention rates, greater purchase frequency, and larger average order size. The
second is to develop a two-way dialogue between the brand and customer via
increased intelligence and relevant content and/or offers.

Prerequisite: Analyze Customer Behavior


Aside from the high-level corporate objectives, detailed program design must
be deeply rooted in a thorough analysis of consumer spending patterns and
behaviors. This analysis provides loyalty program designers with a sense of which
customer behaviors they will be able to and will want to influence. For example,
if 90% of customers only make one purchase, then the loyalty programs sole
objective may be to drive the second purchase. More specifically, in order to guide
program strategy, marketers should understand customer data along the following
dimensions:
By frequency: How often are customers making repeat purchases? In a 12
month period, what percentage of customers is buying only once? Twice?
Three or more times? What percentage of revenue does each of these
segments represent?
By revenue: How concentrated is revenue in the top customer tier? What
percentage of total revenue does the top 10% represent? The top 25%?
By engagement: How do customers segment by non-transactional
engagement activities, such as posting reviews or to blogs or subscribing to a
company newsletter? Which of these activities are indicative of higher member
value (in terms of increased revenue and/or decreased costs)?
Armed with analysis across these three dimensions, marketers have the critical
data they need to design successful loyalty programs.

WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN

2008 LOYALTY LAB INC.

Step 1: Pick a Program Based on Purchase Frequency


Using the table below, marketers should match their customer purchase frequency
behavior, ranging from low to high frequency, to the corresponding loyalty program
objective and design. Overall, the greater the frequency of customer purchases
within a year the further out the program threshold should be set. This, in effect,
minimizes the erosion of margin while allocating reward funds to drive customers
toward higher total customer spend levels.
Purchase Frequency
Pattern

The greater the


frequency of customer
purchases
the further out the
program threshold
should be set.

Primary Program
Objective

Typical High-Level
Program Design

Low Frequency/Specialty Drive Second Purchase


Brands

Repeat Purchase
Program

One and done


customer spending
patterns (e.g. specialty
catalogs)

Bounce back offer


triggered after initial
purchase
Threshold set at total
dollar value of 2-3
purchases

Medium Frequency/
Discretionary Spend

Drive Multiple Purchases Frequency Program


Cross product/
category bonuses
Threshold set at total
dollar value of 3-4
purchases

More mainstream
products bought 3x a
year or more (e.g.
electronics, shoes,
furnishings )
High Frequency/Core
Product or Service

Grab Higher Share of


Wallet

Multiple purchases
spending pattern (e.g.
airline, grocery store,
CPG)

WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN

Best Customer Program


Use sophisticated
tiering with significant
service benefits to
drive customer
migration to elite
level
Threshold set at total
dollar value of 5+
purchases

2008 LOYALTY LAB INC.

Step 2: Structure Program Based on Revenue


Concentration
It is common for the top 10% of customers to account for as much as 50% of total
revenue. For this reason, its important to recognize, thank, and encourage these
best customers. Therefore, effective loyalty programs usually recognize and
reward these customers with an elite tier with increased service benefits (e.g. free
shipping, concierge service), special offers (e.g. member-only sales), exclusive
rewards (e.g. free tickets to a special event) and higher reward accrual rates
(e.g. double points). Successful programs also leverage their evangelist base for
referrals, providing low cost new customer acquisitions.

There is usually a very


strong correlation
between engagement
activities and
long-term customer
value.

Most programs set the threshold for tiers at specific member-spend inflection points
where a significant percentage of revenue is clustered within a small percentage of
customers. In a three-tier model, the top tiers baseline member spend threshold
should be equivalent to the total annual spend of the top 5-10% of customers. The
next best tier should be equivalent to annual spend of the next best 5-10%.

Step 3: Encourage Engagement (If Important)


In instances where customers interact with brands in non-transactional ways,
such as by posting a product review on the e-commerce channel or clicking on an
email, program designers should strongly consider rewarding that behavior. This is
because there is usually a very strong correlation between engagement activities
and long-term customer value.
For example, a customer who refers friends, opts out of print communication,
registers for the newsletter, purchases gifts for others, and uses the private label
credit card will be more valuable in the long term than another customer who does
not perform these actions but spends the equivalent amount. Therefore, designers
should measure customer value based on all transactional activities and nontransactional interactions, and then create a funding model that rewards members
a percentage of all value-add activities.

Conclusion
By using the presented framework, marketers utilize data segmentation analysis
to make informed program design decisions. This ensures that loyalty program
mechanics are set up to influence both incremental and valuable customer
behaviors. With the scientific part of program design fulfilled, marketers can shift
focus to the more artistic creative elements, designing programs that embrace
their core brand attributes and pique customer interest.

Mickey Neuberger is Senior Director, Loyalty Strategy, of Loyalty Lab, Inc., the
leader in on-demand best customer management for consumer brands. Loyalty
Labs flagship Customer Relationship Manager Suite provides retailers and
CPGs with integrated and on-demand loyalty program management, email,
incentives, and campaign management. Clients include 1-800-FLOWERS.COM,
Anthropologie, New York and Company, RedEnvelope, Smart & Final, Bally Total
Fitness and a number of other prominent retail and service companies. For more
information, visit http://www.loyaltylab.com. Contact Mickey Neuberger directly at
mickey@loyaltylab.com.

WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN

2008 LOYALTY LAB INC.

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WHITE PAPER A SIMPLE FRAMEWORK FOR SUCCESSFUL LOYALTY PROGRAM DESIGN

2008 LOYALTY LAB INC.