How to build better loyalty programs

Despite all the brains and bucks that go into loyalty programs, they are hard to get right and easy to get wrong if recent experience is anything to go by.

The latest to bomb is Woolworths’ revamped Rewards loyalty program. The scheme, where shoppers accrue “Woolworths dollars” to use in a future shop by purchasing selected items, has apparently left customers underwhelmed.

Not that Coles can laugh after its “My5” debacle only a few years ago, which gave customers a 10% discount on five favourite items.

Pulled from the market faster than a Dawn French punch line, Coles learnt that too much effort for too little reward equals customer inertia.

I’m going to leave the debate about whether loyalty programs are ever worthwhile for another time, as well as why I believe it’s more important to focus on building habits rather than ‘loyalty’.

Instead I’m going to share some of the behavioural principles you’ll need to consider if you are keen on developing a system of rewarding your customers.

Think of this like a pantry list rather than recipe because not everything should be used to cook up an effective program.

Exclusivity

What: Limiting access to a loyalty program or making inclusion subject to strict criteria.

Upside: Member-only benefits can appeal to the ego of your customer and give others something to aspire to. The membership is a form of social currency. At the extreme, you could make your program by invitation only, using scarcity to drive perceived value.

Downside: You limit your market and risk disenfranchising potential customers.

Example: AMEX’s Black Card, by invitation only

Flying start

What: Thanks to completion bias we know people are more likely to persevere with your program if they are given a flying start towards a reward.

Upside: Low cost and high reciprocity factor when your customer feels you are doing something nice for them.

Downside: You take a small hit by advancing them points and it can be taken for granted by the customer if you don’t make it seem like a special thing you are doing just for them.

Example: Stamping a coffee card with two coffees for a new customer so they feel like they are closer to their freebie.

Immediate gratification

What: Discounts and bonus gifts experienced at the time of transaction.

Upside: Customers love benefits they can enjoy now.

Downside: Will the memory of the benefit be enough to bring them back to you?

Example: At IGA where some products are discounted for their Community Benefit Card members. As an everyday low price environment, Aldi doesn’t offer a ‘loyalty program’ as such but they are using immediate gratification to very effectively build a shopping habit.

Intermittent rewards

What: Pokies are addictive in large part because they use intermittent rewards – you are never quite sure when you’ll hit the jackpot. This can work with loyalty programs too by varying the timing of the reward.

Upside: Surprising the customer with their reward makes it more salient, plus it is disconnected from the pain of paying.

Downside: The reward can be so disconnected from the activity that it fails to build a relationship. Customers lose sight of what they are building towards.

Example: Myer One accrues points and then sends a $20 gift voucher to the customer, encouraging them to revisit the store with their ‘free’ money.

Something to lose

What: Thanks to the Endowment Effect we know customers hate to walk away from benefits they have accrued.

Upside: This means that once they have points they will be loath to let them lapse.

Downside: The promise of rewards that pay off way down the track is rarely enough to convince people to engage in the first place. You therefore need to consider having realistic milestones between purchase and reward, and remind your customers regularly of what they have in their rewards ‘bank’.

Example: Watch George Clooney’s “Up in the Air” if you want to see the lengths to which some customers will go to retain airline status points. Insurer RACV tries this with their ‘years of membership benefits’ to retain customers.

Currency or points

What: Dollars are unambiguous whereas points can have assigned meaning.

Upside: Using points rather than dollars can increase the program’s perceived value because the customer feels they are earning more than actually costs the business. On the other hand, dollars are easy to understand, which could be enticing if yours is a generous program.

Downside: If the points are hard to understand or redeem for real value there is a chance the customer will forget all about them. If dollars are not significant your program will look stingy.

Examples: Airline points are so mysterious that customers never really calculate the real cost of spending to accrue them. Discount petrol vouchers use currency (for example, 4c off a litre) but shift the context; $3 off your shop you would be underwhelming but 4 cents off 139 cents/litre seems more generous.

There’s lots to chew on, isn’t there? Remember this is just a sample of principles to consider and your loyalty program needs to be specific to your market, products and customer base.

If you’d like help structuring one that works, get in touch.

Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.