The Loyalty Sweet Spot

What’s the sweet spot of a loyalty program? If you asked a consumer, you may get a far different answer than if you asked a business. The consumer wants: free items (that they would typically buy anyway) rewarding their current behaviors and shopping frequency at the places where they shop most frequently. A business wants to increase spend, increase visit frequency and attract new users, all while keeping the reward threshold at a level that does not end up causing the business to pay out more than they reap from new or more frequent customers with higher spend.

The Loyalty Sweet Spot is a Spectrum to be Balanced

As loyalty programs enter and leave the marketplace, these decisions are shaped by how far the program is on either side of the spectrum of consumer or business “sweetness”.   When a loyalty program is giving away rewards that over-reward, today’s consumers act like sharks smelling blood in the ocean, and businesses will see the program rapidly shift away from their desired sweet spot.
Chipotle’s “Chiptopia” program, that began in July 2016[1] and lasted roughly three months (it remains unclear if this was planned or not), gave out over $20M in rewards in its short life.  For reference, according to Business Insider, Chipotle’s program offered a primary reward (free entrée in this instance) following only $35-$40 in spend compared to, “$90 of likely spend at Domino’s Pizza, $40 at Dunkin’ Donuts, and $62.50 at Starbucks.”
Consumers loved the program, but the business costs associated with the program likely made it impossible to give Chipotle any sort of ROI. Interestingly, Chipotle is once again launching a loyalty program. Chances are, unless the rewards are equally as compelling, consumers will not latch on as strongly and social media feedback will be harsh.

Loyalty Program Design and Measurement

Designing a loyalty program from the business perspective should be done with a view on both ROI and what will be deemed internally successful and sustainable, as well as with a view from the consumer perspective.  We are all consumers and know which loyalty programs offer rewards that meet our requirements to drive additional purchases.
To get that proper view on ROI, it is imperative to thoroughly think through and design your model.  While it may take some work to get pure marketing folks pinned down long enough to methodically discuss all the inputs, outputs, and define the metrics and financials that will define program success, there is no exercise more valuable.  Once the program is launched, frequent check-ins early on to see how the model is responding to actual consumer reaction is vital.  Programs can be tweaked as needed if results are unfavorable; Starbucks did a major loyalty program overhaul and while curmudgeons like myself initially declared that they were done with Starbucks, Starbucks’ loyalty program and offerings remain a gold standard in the market.
When a business unit is designing a loyalty program, ensure that the program meets core loyalty program requirements of driving volume (new and incremental), increasing spend, and guaranteeing ROI.  This same business unit must also think about incorporating facets of the loyalty programs they enjoy and participate in the most as consumers.  By combining these two and building an effective model, a loyalty program will be primed for success.
For further discussion, contact Tim at [email protected].

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