How to plan a Loyalty Program Strategically!
When you mention Loyalty Program, the first impression almost everyone will have is points, rewards and promotions.
So will you actually make more money or lose money with a Loyalty Program?
Well that depends on how well thought out your Loyalty Program is.
With a well planned Loyalty Program, you should expect more repeat businesses from your existing customers.
With a poorly planned Loyalty Program, you might be giving rewards to customers without encouraging any repeat businesses.
So for today’s article, we will discuss how to setup a Profitable Loyalty Program for your business.
The whole idea of a Loyalty Program is to spend your marketing dollars on your existing customers to keep them happy and loyal to you. The great thing about rewarding customers is that you don’t really incur the full retail costs of what you’re giving out.
If you’re selling products, the real cost of your rewards is the cost price of your products.
For service businesses, the real cost to you is the time spent to service your customers. You don’t have to pay any cash for the rewards you give, the only real cost to you is probably the products you use during the course of your service.
That said, the value customers receive is the retail value of your products. So depending on your markup, the value customers are receiving is much high than what it actually cost you.
2. Loyalty Points
How many points should you give per dollar spent? There’s no rule to this, the whole idea of creating an exchange rate to make it harder for customers to track their spending. Try to mix it up, so customers their attention on the rewards they are earning rather than the money they are spending.
$1 spent = 3 points
$1 spent = 5 points
$1 spent = 10 points
3. Points to Rewards
This determines the exchange rate from spending to rewards. If you plan this without much though, you might lose money on your Loyalty Program. So if you want $100 spent to equal to $1 worth of reward, here’s the calculation for your costs:
Spending to points: $1 spent = 3 points
$100 Spent: $100 spent = 300 points
Rewards to points: $100 spent = 300 points = $1 reward
Redeeming a $5 Reward: $500 spent = 1,500 point = $5 reward
Cost of Reward: $500 spent = 1,500 point = $5 reward = $2.50 cost
Percentage of Revenue: 0.005%
The above shows a conservative example where the real costs of a reward to you is 0.005% of your revenue. You can play around with the values above to come up with a desirable rate for your business.
4. Reward Tiers
Every reward tier should be planned like a pyramid where the rewards get better and better the more points the customer have.
Your very first reward should be something that doesn’t cost much and can be redeemed almost instantly (E.g. a free drink). This is so that customers can immediately see the benefits of your rewards program the moment they join. For example, you can give them a reward just by completing their bio details (E.g. name, mobile, birthday, etc).
Subsequent reward tiers, try planning it in such a way that there’s a slight discount for the next tier. This is to lure customers to keep their points for a better reward in the next tier. It will lengthen the redemption cycle for your Loyalty program and keep customers wanting for more.
Finally for the last tier, try to give a very attractive reward to inspire and “WOW” customers. Naturally it cost a lot too but will probably take customers a few years to accumulate enough points for it. Best to be something external like a 3D2N Cruise trip, for 2 air tickets to Korea, etc. You can expect very little people to be able to reach this level of reward. But it will serve as a goal for loyal customers to work towards to be it for themselves or their family.
5. Incentives for Actions
As you can see from the previous example, it takes quite a while for a customer to accumulate 1,500 points to redeem his $5 reward. Here is where we can start giving out bonus points for desirable actions and mix it up a bit. For example coming for appointment on time, every 3 visit, sharing on social media, writing testimonials, giving double points on off peak period, etc.
Identify behaviors that you want to customers to take and encourage it with bonus points. If this goes well, you can average out your rewards to be about 3 to 5% of your revenue and get customers behaving the way you want.
Ultimately the whole point of a Loyalty Program is to get customers to take actions you want them to take and stay loyal to you. There is probably not much value for your Loyalty Program if you don’t plan for this.
A well planned Loyalty Program is designed with all the factors mentioned above to strategically motivate customers to take actions desirable for your business.
But no matter how brilliant your plan is, it might still get buried if it is not communicated properly. So to complement your Loyalty program, you need a proper communications strategy to disburse information to your customers too.
Stay tuned for our next article as we share more about your communications strategy.
Our Loyalty System’s is specially designed for Small Brick & Mortar (Offline) Retail Businesses that requires customers to come down to buy or use their services. We have stripped off the complex features to ensure that you and your customers have pleasant experience with your Loyalty Program.
Everything expressed in this article is my personal opinion and might not be applicable for all businesses. Please share with us your ideas and thoughts too so we can grow & learn together!
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