COLLOQUY Corner: The Philosophy of Rewards
We’ve all participated in enough loyalty and incentive programs to know a generic reward when we see one. Anemic discounts or cash-back offers; gift certificates from the usual suspects; toasters, trinkets, and trash providing scant instant gratification, while the impossible-to-obtain balloon rides, luxury getaways, and plasma TVs make us skeptical of ever earning anything of value.
When a loyalty program fails, marketers are wont to blame the strategy of loyalty marketing rather than take a hard look at the value proposition of their particular offering. Often, however, it’s the reward strategy itself that’s too blame. After all, who wants to participate in a program in which you can’t afford the rewards you want and don’t want the rewards you can afford?
During the past five years we’ve witnessed the evolution of enhanced value propositions that seek to leverage consumer desires for new, value-added, emotional, experiential, unique, and compelling rewards. We call it the Wow! Factor, and it has become the differentiator between loyalty programs that make a real impact with consumers and those that just twitch reflexively, like fresh road kill, before finally giving up the ghost.
Most loyalty marketers agree that a successful loyalty program should offer a perceived reward value of 5%. In other words, for every $100 members spend with you, they should earn a reward worth—at least to their minds—$5. For most programs, this is a minimum threshold. Some industries can afford higher funding rates depending on their business model and margin structure.
Note the difference between perceived value and actual cost. If you give back five cents on every dollar a customer spends with you, then the perceived value and the actual cost of the reward are identical—five cents is worth no more or less to your customer than it’s worth to you. But suppose you offer a promotional currency that allows customers to earn five points on every dollar spent, and to redeem those points for something of value later. Not only do the points act as a deferred discount that builds relationship equity, but the reward may also have more perceived value than what it actually costs you to deliver. It’s the classic frequent-flyer program model; A free flight is worth much more to you than what it costs the airline to deliver. The gap between perceived and actual value represents your incremental program profit. And profit, of course, is the ultimate reason to run a loyalty program.
How do you generate the perceived value that infuses your program with the Wow! Factor? Here’s a rundown of the most common methods.
In-kind rewards
The low cost of delivery makes offering your own goods and services as rewards an easy way to generate perceived value. We call these in-kind rewards. You can list a variety of in-kind offers in your rewards catalog: groceries, fuel, merchandise, apparel, or whatever else you sell.
In-kind rewards carry a distinct advantage over cash-back rewards, because the perceived value of the reward is greater than its actual cost. They offer better leverage than rewards that you have to buy from outside vendors specifically for your catalog. Finally, because they protect the integrity of your retail price points, they’re far superior to discounts. The actual cost of delivering an in-kind reward is often so much lower than its perceived value that you may be able to decrease your funding rate while still delivering compelling hard benefits to your members.
Be aware, however, that customers can experience too much of a good thing. In-kind rewards offer great economic leverage, but they can quickly become boring and irrelevant. Even heavy caffeine addicts can drink only so many free cups of coffee a week.
Other people’s money
All loyalty marketers have the opportunity to solicit third-party partners to play in their programs. In return for promotional considerations and access to your membership, they offer you rewards from their own portfolio of goods and services at wholesale. We call this technique Other People’s Money (OPM), and it gives you more leverage than any other aspect of your loyalty program.
The premise is straightforward. Partner A wants access to your members because they’re already his customers or they represent potentially lucrative new business. Partner A would normally have to spend money to acquire customers by marketing through channels filled with people who have no interest in what he’s selling. You, however, have the audience the partner seeks, and they’re already engaged with your loyalty program. If Partner A wants to acquire customers for a fraction of what he normally spends, all he has to do is put some money into your hands. You pass that money on to your members in the form of program value, and you reap the benefits without incurring additional expense.
OPM is an excellent way to stretch the value of your loyalty-program rewards. You give members something to aspire to without paying the full retail price, and you generate more excitement around your program than is possible with just in-kind rewards. Ask a potential partner about his typical cost of acquisition, and then offer him access to your members for less. Chances are, he’ll bite.
Merchandise rewards
If you have the budgetary muscle to afford a full rewards catalog, then offering an array of desirable third-party merchandise rewards can really help your program achieve critical mass. Because merchandise price points cover the entire spectrum from inexpensive to luxury goods, from music CDs to golf clubs to those awe-inspiring plasma TVs, you can include a variety of items in your rewards catalog. Variety is important. Some members will redeem quickly for an inexpensive item, while others will save up for something they’ve dreamed about.
You can also apply the OPM principle to merchandise. A vendor may want you to push his stuff more aggressively than you push his competitor’s stuff. Make him pay for it—ask him to help fund a transactional bonus or to cut you a deal on a reward item. After all, you’re delivering customers to him.
Experiential rewards
Every member in your program has a secret desire. One may want to attend a cooking class. Another may want to celebrate an anniversary at that swank five-star restaurant downtown. Still another may want to get behind the wheel of an Indy racecar. Experiential rewards appeal to a member’s dreams and sense of personal fulfillment. They’re the most powerful rewards in your arsenal—but they’re also the most expensive to fulfill.
Survey your members to learn more about the types of rewards they dream about, and then secure a fulfillment partner to offer them. It may take a member several years of dedicated service to earn that coveted reward, but some will do so. You can help by increasing their velocity of earning with a cobranded or private-label credit card or by awarding the most desirable rewards via a points auction or a sweepstakes. The key here is to listen to your members. Don’t just assume that everyone in your membership base wants to earn a weekend ski package.
Keep in mind that offering Wow! rewards doesn’t have to break your budget. Dinner at a local family restaurant can wow your members just as easily as a free flight to a tropical locale—if their transaction file and survey history tells of their fondness for taking the family out for pizza. Read your database and offer rewards that are both relevant and personalized, and high perceived value will follow as a matter of course. When it comes to loyalty rewards, customers don’t expect the moon. They just want to know that you care.
Rick Ferguson is the editorial director of COLLOQUY, a provider of loyalty marketing services. E-mail him at [email protected]
Other articles in the COLLOQUY Corner series:
The Customer, Not the Payment Type, Is King
The Yin and Yang of Loyalty Marketing
