How to lower the loyalty budget without risking loyalty

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By: Wise Marketer Staff |

Posted on December 18, 2006

How to lower the loyalty budget without risking loyalty

Loyalty marketers often find themselves running over budget due to runaway programme success or internal budget cuts, according to loyalty technology provider RewardStream, which recommends six ways of cutting back the loyalty budget without risking the loss of loyal customers.

With the right planning and underlying technology, many levers can be pulled to help alleviate the pressure. Marketers should design a programme with these levers in mind and proactively communicate changes since mid-year manipulation can have a dangerous backlash from participants.

Armed with a properly planned programme and leading-edge technology, programme managers can quickly manipulate many aspects of their reward programme in response to budget pressures. However, marketers need to carefully consider both the immediate and long-term effects of making fundamental changes to programme structure.

Six budget cutting ideas RewardStream has been helping its clients achieve budget goals through the following ideas:

  1. Lessons learned, fingers burned Plan ahead in the execution of your reward programme. Consult with an expert to design the terms and conditions and associated technology requirements for your programme. Changes to funding levels, earning caps, redemption caps, and point expirations need to documented in your terms and conditions and clearly communicated to members at the time of programme registration. By embracing the worst case scenarios and lessons learned from legacy programmes, you can plan a sustainable and profitable reward programme.  
  2. Routinely expire the reward currency The most important lesson that should be learned from the design of early frequent flyer and hospitality programmes is the mushrooming liability created by unredeemed reward balances year after year. Marketers should ensure that the underlying technology for their programme can time stamp each individual unit of reward currency 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. X months after issuance) or rules-based expiration for account dormancy. Currency expiration must be communicated clearly and pro-actively to programme members to avoid mass defection, as has been evidenced due to recent changes to frequent flyer programmes.  
  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 programme 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. Cap the total rewards earned in a programme year Most marketing departments get approval on budgets at the beginning of the programme year. Capping the total rewards that a participant can earn during a programme year can provide protection against budget over-runs. Careful consideration must be given to using this option, since it has the unfortunate side effect of limiting reward earning for your highest volume customers. It is most often implemented when senior executives believe that the programme is an entitlement and is not yielding incremental profitability through lift or retention.  
  5. 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 programme members redeem for your own product, you not only reduce budget but also have an opportunity to further reinforce brand experience and loyalty.  
  6. Cap redemptions for high-cost items You can also minimize 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 redemption cap for a fixed period of time (e.g. a programme year), for a rolling time period (e.g. the last 12 months), or for an individual redemption event. Introducing caps on redemptions mid-programme can be risky since members may have been banking rewards toward a redemption that is no longer available to them.

So, while budget pressures can come unexpectedly to even the most prepared programme manager, by embracing difficult scenarios in the design of your programme you can empower your company to make timely changes without the risk of alienating your loyal customers.

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