COLLOQUY Corner: The Joy of Tiers
Loyalty marketers understand that not all customers are created equal. A well-designed program segments members based on their actual or potential value and assigns them to various program tiers — the silver and gold levels of traditional loyalty programs. Each membership tier carries incremental benefits, with the top tier reserved for those members who consistently deliver the highest value.
When you launch your program, you may not have enough information to tier the membership base. As you collect transactions and data, you can determine which members may be worthy of top-tier status. The old Pareto 80-20 rule may be a cliche, but like all good cliches it has some basis in truth, so put the top 20% of your members into the top tier, and you’ll be on the right track.
As you tier your membership base, you can proceed one of two ways. The first way is to publicly name and identify the tiers and their special privileges within the published structure of your program. You can issue identification cards that correspond to each tier. The advantage to this approach is that both you and your members can use the tier structure as a scorekeeping mechanism by which both sides understand the value of the relationship.
Alternatively, if the expense or complexity of launching a tiered program appears too vexing, you can tier members behind the scenes, in your database. This method allows you to enjoy the benefits of a tiering strategy without the marketing expense.
And what are those benefits? Tiering allows you to extract maximum marketing advantage from your database. You can alter program rules to change the rate at which members earn benefits based on their tier. When members approach a new tier threshold, you can send them special offers to motivate them to spend enough to reach the higher level of benefits. This makes tiering one of the most versatile tools in your loyalty toolbox.
If you do decide to tier your membership, you’ll achieve maximum benefit by implementing a separate marketing strategy for each tier. Here’s how.
Pamper gold members
We’ve looked at a lot of loyalty program databases, and every one showed us that a small number of customers deliver a disproportionately high value to the sponsor. Those customers at the highest end of the value spectrum — typically your top 2%-5% — should receive special status in your program. While you can call this top tier whatever you want, we’ll use the generic phrase “gold member” (not to be confused with the Austin Powers movie) to describe this group. After all, they’re worth their weight in gold.
The pattern of transactions you observe in your database will determine where you set the threshold for gold membership. You can set seasonal thresholds or set them based on the member’s lifetime value to your bottom line. Gold members typically receive additional hard benefits every time they spend with you. You accomplish this through the use of a bonus that accelerates their rate of earning. Soft benefits are especially important to this segment; gold members are less motivated by hard-dollar rewards than they are by the special treatment and privileges associated with the gold tier.
Give bonuses to silver members
Those members within that top-20% bucket who haven’t yet achieved gold-tier status we classify as silver members. They’re good, high-value members; they simply haven’t performed well enough to warrant full gold status.
Silver-tier strategy is similar to that of your gold tier. But while gold members always earn the accelerated bonus, you might want silver members to earn the bonus only when you want to extend it. This approach allows you to test the upside potential of the silvers. Can they give you more spend? Will they do so in return for an accelerated earning rate? Historically the maximum potential in loyalty programs resides within the silver tier.
While you should also extend soft benefits to the silver tier, they should be less comprehensive than those you give to the golds. Remember, soft benefits must be exclusive, and you should confine them to those member segments most likely to maintain the required spending level.
Reward bronze members
Bronze members typically fall below silver status. Unlike the top two segments, this group is hard to pin down. They may be only occasional visitors to your part of town; some, however, could be locals who visit you infrequently or are otherwise devoting at least a portion of your category spend to your competitors. Those members, if you can identify them, represent targets of opportunity.
The bronze tier represents the bulk of your database, often as much as 60% of total program membership. You typically don’t extend soft benefits to this group, as they have yet to demonstrate a spending pattern that justifies the added privileges. Deliver hard benefits to this tier at your normal funding rate. You can introduce the occasional promotional or partner bonus to determine if they have incremental value to give you. As they respond with increased spend, you can increase the bonuses.
If a member of this segment remains unresponsive to bonuses, then you’re out nothing but the communications cost. If he remains cold after several attempts at enticing him through bonuses, then drop him from active communications and save the money for messages with a greater return on investment.
Ignore lead members
The remainder of members in your database aren’t spending enough to warrant any investment by you in the relationship. We call this group lead members, because overfunding in this segment can drag your loyalty program into the red.
Some programs allow leads to earn hard benefits in the hope that they’ll come back and spend a second or third timeIf they do return, then you may have set those members on the path to greater value. If you aggressively enroll a lot of lead names into your program, you may want to withhold any communications or identity cards until you see them a second time. Some marketers even refuse to enroll first-time visitors into a loyalty program.
Regardless of your strategy, some customers will always bring up the rear in terms of value. Be extremely careful about offering incentives to this group. There’s a reason they don’t buy from you— maybe they only come to town once a year, for instance — and your loyalty program is unlikely to make a substantial impact.
Tiering works because it allows you to allocate your program resources according to value. If every member receives the same level of benefits, then you’ll overfund some segments and underfund others. Tiering allows you to apply different levels of treatment and funding in a dynamic model to deliver the highest degree of reward and recognition to those customers who most deserve it. It’s a core loyalty best practice that will serve both you and your customers well.
Rick Ferguson is the editorial director for COLLOQUY, a provider of loyalty-marketing services.
Copyright COLLOQUY 2007 First rights only
Other articles by Rick Ferguson:
You’re Only As Strong As Your Staff
Dialogue, the Coin of the Realm
The Customer, Not the Payment Type, Is King
The Yin and Yang of Loyalty Marketing
Building Loyalty, Building a Database
