How to implement a loyalty program that will work for your business, and not just distribute discounts between your clients.
Editor’s Note: Elena Naumchik, CLMP, an expert in loyalty programs and customer experience management from Russia, prepared this two-part guide for enterprises who want to start a loyalty program for the first time and avoid serious mistakes. It is especially applicable for offline or electronic retail, but can also be applied to the service and financial industries. If you are planning to launch a coalition or multi-partner program, this article will not help you, because such programs operate on different principles.
PART ONE focused on setting business objectives, studying customer needs, and building a value proposition with appropriate mechanics. The complete 7 step approach is outlined below:
- Set program goals that are relevant to current business objectives.
- Study customer needs.
- Devise mechanics that reinforce business goals based on customer needs.
- Build a financial model that accurately reflects potential outcomes and costs.
- Automate program mechanics.
- Provide operational maintenance for the program.
- Communicate everything to the customer, including the terms and conditions of the program.
Step 4. Loyalty program financial model
Prior to technical implementation, you need to understand the economic model of the future program, assert it and set appropriate benchmarks.
P&L of a loyalty program (example)
- Increasing customer LTV due to the growth of average purchase sum and purchase frequency, and/or reducing churn.
- Marketing fees from partners.
- Selling depersonalized analytical information.
Think about sources of funding for the program. Will it be funded from the marketing budget or will financing be a stand-alone budget that must be covered by the incremental revenue sources? Can rewards in the program be fully or partially funded at the expense of partners or suppliers. Assess the required amount of funding and your capabilities.
Calculate all program expenses, both implementation and operating costs. Account for all expenses which will be incremental due to the program.
The largest expense item for business is the cost of rewards (the total cost of all discounts, gifts, etc.). Usually this item of expenditure is set by management of the company as a percentage of program revenue, and the loyalty program manager is responsible for ensuring that the agreed upon level is not exceeded.
In Russia, most businesses would set the total cost of rewards at 3 % or less of loyalty program revenue. If you do not add funds from the marketing budget or from partners, then this 3 % or less is the total budget for all rewards in the program. Consider this limitation when developing program rules.
Individual rewards, discounts and special offers may be far higher than the average, but only because of limited use (segmentation).
For example, you can limit the segment of customers who receive an increased discount. Instead of giving 2 % discount to all customers, you can set a 1% discount for 90 % of customers and 10 % discount for 10% of customers. You can also limit the range of products for which a discount is applied, but increase the discount percentage. For instance, a 20% discount on a favorite product chosen by a customer in advance.
By building a P&L model, you can make a scenario projection of the financial performance of your program for several years ahead without too much difficulty. To control the profitability of your project, remember to set medium-term financial targets and indicators and track them.
Mistake #7. Insufficiently elaborated or uncoordinated financial model.
Do not forget that modern business is committed to maximum efficiency. Any activity that does not demonstrate a financial return in a company becomes an object for optimization. Be ready at any time to present the financial model, projection, and status of achieving your goals and your project will be protected.
Mistake #8. Setting ambitious financial goals for the first year of the program after its start.
Implementing a loyalty program – registering customers, collecting data, setting up and refining rules, etc. – takes time and professional effort. A program that is well developed and sufficiently funded at the implementation stage will later help yield a good economic return. Attempting to launch a loyalty program project in economy mode and with inflated financial expectations will most likely not allow you to receive the necessary support from your customers, and will result in disappointment among management.
To avoid slowing down and reducing efficiency at the first stage, non-financial indicators are often measured. Such as the number of customers who have joined the program, the completeness of profiles, the ratio of points issued to redeemed, and all engagement metrics. These indicators should confirm that the project was launched correctly, is interesting to customers, and is developing at the required pace.
Step 5. Loyalty program automation
The central element of a loyalty program IT-architecture is the program processing – the loyalty program IT-platform or CRM system. This platform allows you to maintain a customer database, including personal and contact information, store purchase history and manage program rules — to design, enter, modify and disable them.
Usually, the platform for a loyalty program is chosen after working out basic design rules that are planned to be implemented and developing the database structure.
To quickly get a system that best meets your goals, prepare functional requirements for the system, describe what it should to be able to do, what data is needed and the specific source, what types of rules must be supported, what system integration requirements exist, and what additional services and capabilities are needed. In particular, consider the following:
- Integration with POS software. The platform will need to be integrated with your POS or other transactional software. This is an obvious, but important point; if the IT-platform developer has not yet had experience in integrating a specific system with your environment, the process may result in additional costs and significantly delay implementation time. A platform provider may try to convince you that integration will be very simple. But the experience of project managers worldwide suggests that it is better not to expect simple integration.
- Customer’s personal account. A platform should include a personal account in which the client will be provided with all information about the status of his rewards account, purchase history, special offers, the ability to change contact details and other features.
- Connecting customers to the program. Be sure to pay attention to the algorithms for collecting contact information and permission to use it. Discuss with your IT-systems providers approaches to controlling the population of contact information fields, data deduplication and data protection.
- Working with segments. If you plan to develop your loyalty platform, you will need to ensure a high degree of automation in working with segments, including dynamic definition of belonging to a segment and differentiation of rules according to segments.
- Types of rewards and marketing campaigns. The IT-solution for loyalty program management should include the possibility of using different types of reward; this will help you at the stage of program development. Of course, your functional requirements should describe the types of loyalty program rules and the possibility of combining them (rule constructor).
- Prioritizing marketing campaigns and card use. There should be no conflict in IT-systems between mass marketing campaigns operating outside the loyalty program and the program rules. The system should provide necessary prioritization mechanisms.
- Communication module. IT-platform should include an integrated communication module, or integrate with your other communication systems to provide the most flexible personalized messaging through any information channels (email, SMS, Viber, push-notifications, information output to the cashier or checkout, to the script of call-center operators and so on) in accordance with the specified rules and algorithms.
- Analytics and reporting. A loyalty platform should provide the ability to generate reports and analytics, as well as the ability to upload data to another analytic system.
- Access rights. Think about how many people will work in the system. Does everyone need the same rights? Usually multiple access options for different roles with different functions should be created. It is necessary to strive to protect personal data of customers and financial interests of the business as much as possible, but at the same time, do it without compromising the system performance.
- In-house or outsource? Systems can be cloud-based or fully hosted on your servers. In terms of functionality, it is not critical; however, usually a company has a certain information security policy and logic of architecture development, which may contain certain requirements or restrictions.
- Program interface. Be sure to consider how easy it will be to learn to work with the system for employees who perform various roles in the loyalty program. How complex will the training be and what detailed instructions will they need?
- Fraud control. Unscrupulous actions are one of the emerging problems of loyalty programs. A system should allow the installation of filters to detect fraudsters – from among staff members or customers – promptly detect suspicious activity on certain cards and perform an algorithm developed for such cases (for example: blocking a card and sending a report to the company’s security service).
To Choose a system, check if a provider has experience in your field, whether the productivity of their solution is sufficient to handle your frequency of purchases and number of customers. Large companies can organize a “reference visit” to one of their clients, where you can ask questions of the managers of that company about how they use the system.
Estimate not only the basic cost of implementing an IT-platform, but also the cost of service maintenance and possible improvements.
The implementation period of a loyalty platform depends on the complexity of the system and the uniqueness of your functional requirements. It is usually three months or more, but there can be exceptions including both faster execution (in the case of standard solutions) and a significant slowdown.
Step 6. Program operational support
Starting a loyalty program is a project unto itself.
Implementation is typically enabled by a multi-functional project team consisting of unit managers of areas who will become the “business customers” of the loyalty program. All functional areas who will be involved with the program should be included. The project team should have a leader, typically the person who will later direct the work of the loyalty unit.
A project has a goal, deadlines and implementation criteria. As a rule, a loyalty program implementation project is completed after the platform integration and configuration, when operational processes are more clearly visible. These include the technological processes of maintaining the program, the roles and responsibilities of the loyalty staff and the employees involved in the functions of the loyalty program have been trained (including front-office or store sales staff). The marketing communications campaign is prepared, necessary identifiers and materials (for example, mobile apps, cards, questionnaires) are released, and a pilot project at a limited number of sites has been completed with complete evaluation of the IT-system.
By the time of launch, the following organizational tasks should be solved:
- functions described;
- unit staff formed;
- necessary changes are included and formalized in the processes (IT, logistics, service);
- all employees involved in new or changed processes are motivated and trained, their knowledge is verified;
- a system for eliminating technical and organizational errors is created.
A loyalty program management function can be part of a marketing, sales department or other business unit. In any case, it is important that the project has a budget and necessary resources.
The implementation of a loyalty program is a complex organizational and technical restructuring of part of a company’s processes. To test its performance and eliminate critical errors, a pilot launch is usually used — running it one or several sites or in a certain region.
Mistake #9. Giving up a pilot study.
Often, in an effort to manage to launch a program for the high season, companies refuse to conduct a pilot project. Meanwhile, such a decision constitutes serious organizational and financial risks and should therefore be taken with caution.
Prepare resources for the evolution of the program.
After launch, you will soon be faced with the task of evolving your loyalty program: analyzing customer purchases and further enriching program rules. Consider in advance who will analyze the data, what new patterns of behavior you may be looking for and how customer segments may be refined. Also consider who will check these findings and design/recommend new rules. If regular staff is not enough, this work can be outsourced. Consulting, analytical companies or IT-solution providers can deliver such services to you.
If you decide to work on your own, note that all segmentation analysis is a very resource-intensive task. Even if you choose a very simple way, working only with socio-demographic segments, you may have dozens of initial segments. If you cross these with purchase data variables you may get hundreds of segments. Many of them should have their set of rules, and both the segments and the rules should change.
No marketer, even the most involved, will be able to work with hundreds of segments every day. In order to maximize efficiency in setting rules for your loyalty program, you need to automate these rules.
Rules, even those defined by statistical data, should be tested on a small sample of members. For example, you can make a limited mailing and assess the reaction of customers. The basic principles of A/B testing should be applied.
Step 7. Communication with customers
Loyalty programs are very demanding regarding the quality of communications, both mass and individual.
Mass communication. Program positioning. Promotion.
First, you need to position the program itself, motivate your customers to join it and maintain their interest.
Consider whether there is one general idea that can be described in a succinct phrase that will reflect the main principle of your program from the customers’ view. This is the core message you would like your customers to remember when they think about your loyalty program, and possibly your whole brand.
If it is possible to find such an idea that combines the principles of the program for all your customers, use it. It will become a central element of positioning in the information and advertising campaign of your program.
Personal rewards and offers should be communicated to clients via personal communication channels (email, SMS, push notifications). Simply placing information in a member’s personal account is sometimes not enough. It is important to coordinate loyalty program communication with a unified communication policy (mailing about common promotions, availability etc. should not interfere with individual offers). It is necessary to agree on the rules of communication coordination with your colleagues from the marketing department and automate their application.
It is important that customers are timely informed about program rules, promotions and current offers.
Clarity and completeness of contact information is one of the main values of the loyalty database. It is necessary to introduce special rewards for completeness of the data in a customer profile (email, phone number, registration via social networks, etc.).
You are up and running! What’s next?
A well-implemented loyalty program is a powerful tool for solving both medium-term and tactical tasks. As the program evolves, you can increase the economic activity of specific customer segments by changing the scope and combination of rules that form the value proposition.
After the implementation of the program, it is important to start measuring the indicators that were set at the prior stages in order to see the differences in time and magnitude. Some business rules may need correction and revised indicators could be applied using the developed toolkit.
One of the important outcomes of a loyalty program is obtaining additional information about customer behavior. This information needs to be analyzed for:
- updating customer segments;
- clarification of programs objectives for customer segments;
- development of new promotions and rules;
- evaluating the effectiveness of individual promotions;
- evaluating the financial effectiveness of the program in general.
A loyalty program provides very interesting and useful data. When the information received from the program is included in the management decision-making system, a company will be able to make a great leap forward and form a powerful competitive offer for many years ahead.
Mistake #10. Not evolving a program and giving up control after launch.
A loyalty program can evolve and develop over decades and benefit a business at every stage. Don’t walk away!
Elena Naumchik is the only Certified Loyalty Marketing Professional™ in Russia and a long-time member of the Customer Strategy Network. She is an active participant in the Russian professional community, founder of a local organization which supports the loyalty, CRM and customer experience movements and operates a private consulting practice for both B2B and B2C brands.