COLLOQUY Corner: The Bonus Is the Thing
During the past few months, we’ve learned a lot about how to motivate customers through a combination of hard and soft benefits. To establish a true value-added relationship with your best customers, you need to both reward them and recognize them for exhibiting profitable behavior.
Within the realm of hard benefits, there’s an essential tactic that you’ll need to master to build strong customer relationships. All relationship marketing and loyalty programs establish a funding rate of earning benefits that corresponds to the cost of delivering those benefits to members. In a very general rule of thumb, you should strive to return a perceived value of 5% of a customer’s spend back to him in the form of rewards. Five percent is about what it takes for a customer to perceive a reward as worth his time.
Smart marketers take funding rates a step further, however. Rather than flat-lining a 5% funding rate across the entire membership (a common practice with cobranded rebate credit cards), they establish a compelling, yet not overly rich, base funding rate—say, 2%—and then use bonusing techniques to drive behavioral change among the most desirable customer segments. Through bonusing, they focus their marketing dollars on those customers who matter the most to the bottom line.
Here’s an example of bonusing. Let’s say you offer a simple punch-card frequency program that awards one free sandwich for every 10 sandwiches purchased. If Tuesdays are particularly slow days, why not invite customers to come eat lunch on Tuesdays and earn two punches instead of one? You’ve just bonused your customers for profitable behavior—a core loyalty marketing best practice.
This concept can be more flexibly applied in programs built around a promotional currency. At COLLOQUY, we consider it a loyalty best practice to design bonus offers around what we like to call the four dimensions of customer behavior. To wit:
Temporal bonuses The temporal dimension is when a customer buys. Ideally, you know down to the minute when a purchase was made; you know your high-volume and your low-volume times and days of the week. You can use temporal bonuses to time-shift customer behavior. Are your soccer moms filling up after practice, right at the dinner rush? Maybe you can convince them to come in before practice, just after the lunch rush. Are your stores empty on Fridays? Bonus ‘em to stop by on Friday nights.
Temporal bonuses offer maximum flexibility. You can bonus members for visiting at specific times and dates, and you can even combine temporal bonuses with frequency objectives, such as “Earn x if you visit y times during z period.” Even better, you can make this offer only to those member segments most in need of behavioral change.
Spatial bonuses The spatial dimension encompasses where the purchase occurred. You should consider the attributes of your physical locations, as they add more depth to the dimension. Some of your locations are old, some new, some have a different layout, some are in urban areas, others are rural. You might operate several brands, and you certainly operate in different geographies, whether your market is local, regional, or national.
Can you use spatial bonuses to drive customers to a new store opening? That’s no doubt a profitable behavior change. If you operate multiple brands, can you get customers to frequent brands in which they have yet to show an interest? Perhaps you can get them to visit downtown locations vacant during the weekend or to visit a dormant location where you want to build traffic. Maybe one of your locations is so busy that you need to move traffic away from it.
Transactional bonuses The transactional dimension encompasses the what of customer purchases. No two transactions are alike. Some customers buy only in the front of the store. Others buy only commodity items and stay away from your high-margin inventory. Some stay in your hotel but won’t eat in the hotel restaurant. Some pay with cash, others use cards, and some still pay with checks. Each of these transactions carries a different pricing and cost structure—hence, each translates into variable profit.
Enter the transactional bonus. Not all customers will purchase additional high-margin goods and services just because you ask them to. Some will, however—especially when you give them a reason to do so. You can bonus customers for paying with specific tenders, using specific aspects of your facility, and purchasing specific merchandise. You can combine transactional bonuses with cross-sell objectives to offer bonuses only if members purchase x ways across y offerings—for example, members can earn double points if they purchase coffee and doughnuts in your bakery. Transactional bonuses can increase the yield from members by accelerating their earning in the program; their increased spend translates into incremental revenue for you.
Personal bonuses The personal dimension encompasses the why of customer behavior. By analyzing all the attributes you’ve managed to collect on the customer, you seek to design offers that appeal to that customer’s wants, needs, and desires. You might know what program tier the customer is in, his age and marital status, how long he’s been a member, his revenue or profitability score, his likelihood to attrite, or even his potential value.
Perhaps he has signed up for an e-mail newsletter addressing interests or desires that you can mine. You can deduce some tendencies from past purchases, and you can even pony up to obtain demographic or psychographics data from third-party sources— although it’s often better to allow a member’s behavior to speak for itself. Member surveys can net even more data about likes, dislikes, and perhaps even intentions.
The value in personal dimension data lies in their usefulness in effecting changes in other dimensions. With the data, you can hone your targeting. Maybe your offer varies by gender—redeem 500 points for a spa treatment for women and a round of golf for men (or vice versa). If a survey tells you that a member purchased a new car less than a year ago, then offers for free car detailing may motivate. Knowing personal attributes allows you to put out the right message.
It all sounds great, of course, but as with any loyalty implementation, the execution can be complex. Since bonuses are based on specific transactional variables, your point-of-sale system and loyalty rules engine must be able to capture the transaction and apply the bonusing rule to eligible members. Manual entry becomes so cumbersome that a minimum level of technology is usually required.
But even at its most basic level, bonusing provides tremendous flexibility in funding your loyalty program. You can introduce bonuses when, where, and how you want, and you can target them to alter specific behavior among targeted segments of your customer base. Bonuses provide members with ways to accelerate their earning, and thus influence their choice of where to shop, what to buy and what tender to use. Most important, you can add and remove bonuses without substantially altering your base funding rate and increasing the overall cost of the program. And your customers love it. What could be better?
Rick Ferguson is the editorial director of COLLOQUY, a provider of loyalty marketing services. E-mail him at [email protected]
