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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.
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.
Primary Program
Objective
Typical High-Level
Program Design
Repeat Purchase
Program
Medium Frequency/
Discretionary Spend
More mainstream
products bought 3x a
year or more (e.g.
electronics, shoes,
furnishings )
High Frequency/Core
Product or Service
Multiple purchases
spending pattern (e.g.
airline, grocery store,
CPG)
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%.
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.
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