Value Proposition. How to Measure the Attractiveness of a Loyalty Program Among Costumers?

Loyalty programs have evolved over the years from simple stamp cards to sophisticated systems based on analytics, personalization and communication. As a result, the dynamics of working with the program have changed. In the past, the appeal of the program was based on the material reward. The marketers’ job was primarily to refresh the rewards catalog and execute timely shipments. Today, a loyalty program is a seamless composition of benefits that helps meet current company goals and effectively respond to the actions of competitors. It consists of the base mechanics of the loyalty program, special offers available to club members, additional occasional activations and a whole range of emotional benefits. The question arises, however, to what extent this nimble approach to the value proposition to club members translates into the actual attractiveness of the loyalty program.

Companies often focus on the short-term costs of loyalty programs rather than the long-term value they create. To understand the business impact of a loyalty program, it is essential to establish clear methods for the entire organization to measure the activities carried out. This will help the company know whether the proposed benefit mix is valuable to the consumer and profitable for the company at the same time.

The Right Composition of Benefits

The base mechanics are the fixed part of a loyalty program. If a participant in the program completes the task we set before him – purchases another product, uses a service again – he gets a certain benefit – most often points, cashback or moves closer to his next membership status. These different ways of gratification boil down to one thing: the customer collects something in order to collect a reward in the future. From the organizer’s perspective, the mechanism plays the role of the underlying motivation for the consumer to identify during the transaction. The base mechanism first and foremost is simply to build an impression of the speed and quantity of the reward. Usually, the first points are received at the start, and even one transaction is enough to receive the first benefit. In this way, the brand builds the perception of the benefit offered.

Standing at the checkout, we don’t wonder what the actual value of the points that will appear in the account is. In turn, we don’t want to miss the chance to get something “for free” – after all, we are shopping anyway. The base mechanics also influence the initiation of desired behavior. By offering additional points for purchases on a certain day or for buying specific products, club members are motivated to take action and use the loyalty program more actively. The actual value of the “instant reward” usually hovers around 0.5-2% of the transaction amount, yet a customer who does not participate in the program feels a loss.

Club Member Always Has It Better

A complementary element to the base mechanics are special offers. In a mature loyalty program, all promotions and discounts are available exclusively to club members. In this way, the company keeps its promise that the club member always gets better. The challenge is to find offers that will result in an increase in customer value over time on the one hand, and a financial gain on the other – important for the company. Marketers are trying to understand how individual discounts affect the attractiveness and profitability of a loyalty program.

One possible approach is to reduce the price of the high-yield assortment that usually ends up in the shopping cart. Since the customer buys it anyway, why not join the program to have it cheaper? The second look puts a premium on promotions of items that are purchased much less frequently. In this way, discount offers increase the availability of the assortment and serve to boost the value of the shopping cart. Of course, using one approach does not preclude the introduction of the other. It is important to match the type of promotion to a specific group of consumers. Sometimes a few percent discount on everyday products can be more attractive than a much higher discount on premium products, which will not interest the customer at all. The variety of offers makes the program attractive to different groups of consumers.

Dynamics of the Loyalty Program

A good loyalty program, in addition to the fixed gratification part, should offer club members new activations from time to time. Contests, sweepstakes, challenges or other gamification elements are triggers to take certain actions, giving more dynamism to the loyalty program. Nowadays, it is not only clear criteria and rules for participation that count anymore, but also the element of surprise. A loyalty program is also a space for building an emotional bond. Often it is emotions that make us stay with a brand and participate in the program. Supporting social, environmental, or charitable activities allows us to build deeper, non-transactional relationships with customers.

Mechanics and dynamics as components of a loyalty program have different, but no less significant, tasks. The first carries basic information about what actions are expected of the participant, what are rewarded, and is responsible for developing a routine. The second, increases the attractiveness of the program, making it more interesting by offering innovation.

Loyalty Program Value Barometer

Different groups of consumers interact differently with a brand and its loyalty program. At different stages of their journey, customers value different things. For some, the loyalty program is the cornerstone of their daily shopping experience, while others are only interested in individual actions. The team in charge of the loyalty program strives to offer even more and better every day, so that customers want to identify themselves when they shop. However, this involves increasing expenses. The better one works with the program and the larger the base of regular customers becomes, the higher the costs of communication, or the costs of implemented promotions, become. This can generate unnecessary conflicts within the company between loyalty specialists and the finance department. After all, another promotion in a loyalty program at first glance hinders sales margin and profit targets. In the short term, all loyalty benefits mean an additional cost.

If there are no well-defined ways to measure the effects of running a loyalty program, it may seem that the solution is only generating more and more financial needs. Over time, a loyalty program should create incremental value, even if overall costs increase. Companies that can quantify the trade-off between costs and profits know if their marketing efforts are successful. A well-run loyalty program generates up to a dozen percent of additional turnover for the brand.

One of the most common mistakes marketers make is focusing on short-term costs. In practice, this means the difficulty of quantifying the return on investment of a loyalty program. Fortunately, most companies already have the necessary data to be able to measure and optimize such an indicator. Combining the know-how of Loyalty Point specialists with the right arsenal of historical data and current consumer behavior makes it possible to monitor changes in the perception of the program’s appeal. This objective measure makes it possible to understand how, working with all the different elements of gratification, the value of the loyalty program and the willingness to participate in it changes.