Loyalty Lab Blog

By Michael Greenberg | Director, Marketing

Tiers in a relationship marketing program run the gamut from a simple base/elite construct to a series of overlapping hidden and published tiers. Today I’ll spend a little time walking through some of the considerations and issues around tiers and their relevance to loyalty marketing.

What Is A Tier?

A tier is more than you think. A tier represents a predefined, stable group of customers with specific benefits and recognition. It has rules for qualification and rules for downward migration. In most cases, tiers are public but they do not have to be. Tiers are often marketed and published so customers know the rules, promoting behavior that reaches the next tier.

Typically if you have tiers, the core tier structure needs to be MECE – mutually exclusive and collectively exhaustive. That is, everyone is in one tier and one tier only. So the most basic tier structure should be hierarchical – there is a base tier and one or more tiers that are “better” than the base tier. Other options include parallel or multiple tier structures versus a single hierarchy.

Its worth noting that dollars spent or points earned don’t have to be the sole way to advance to a higher tier. Tier design is almost an art to itself, balancing the portion of the audience who will qualify and the method used to qualify them. For example, behavior analysis and research may show a natural inflection point in the top 25% of customers, but since this group accounts for (say) 60% of revenue, the cost of a 25% acceleration might be prohibitive. A more realistic design might offer recognition or first access on clearance product, with acceleration reserved for the top 5% of customers.

Why Tiers?

Tiers can be a great tool for lock-in and to drive incremental behavior. They establish a clear picture to end customers of the thresholds for advanced services and benefits. This becomes a powerful motivator when customers are close to qualification for the next tier, especially if there is a time deadline. Assuming your tiers offer a desired benefit, maintaining membership in a tier can be a tremendous motivator of loyalty.

The Problems With Tiers

The downside of tiers is primarily around funding. That is, customers expect an upgrade in benefits with higher tiers, which cost money. When designing a program, this incremental cost becomes a crucial input to the funding model, since most tiers target the highest spenders. So smart tier design (and overall program design) must account for this funding, determining the right balance of incremental expense to drive incremental customer spend and reduced attrition.

Tiers can also be difficult to eliminate. Once in place, you risk customer anger if your tiers are reduced or eliminated. While a better approach is often to swap out benefits, complete elimination must include some sort of financial offer to compensate for the loss of tier benefits.

Types Of Tiers

Elite

Most people understand elite tiers – spend more or do more, get elite status. Elite tiers often increase benefits, increase accrual, have special services and recognize customers as elites. Elite tiers are often used to deal with the desire to avoid rewarding behavior that would have happened anyway. Instead, elite tiers provide recognition and soft benefits that provide differentiated service without substantial incremental expense.

Hidden

Hidden tiers are those not published to the general public. They may be elite or parallel. United Global Services is a (mostly) hidden tier that appears to be both elite (above 1K) and parallel (qualification seems to be based on revenue generation, not miles flown).

A more standard approach is a hidden “super-elite” tier which is invitation only, once someone reaches an extreme behavior threshold.

Parallel

Parallel tiers exist alongside the main tier hierarchy or entail two or more main hierarchies. As a result, customers may belong to multiple tiers simultaneously. Until recently, this would have been handled with segments, but the advent of social and activity-driven tiers (as opposed to spending based tiers) now has sophisticated marketers structuring separate hierarchies to reward active but low-spending customers.

Conclusion

This just scratches the surface, but should give you a basic idea of how tiers work and how to approach design. In practice, the mechanics of tiers can be exceedingly complex, and good forecasting of customer behavior is crucial to determine qualification, benefit, recognition and downgrade elements.

By Jason Hornik

Visa and Gap Inc.
American Express and Levi Strauss & Co.
According to a recent article on DMNews.com, more and more brands are partnering with credit card companies to deliver targeted offers to consumers by using the credit card companies’ customer databases. In April, Visa opened its global processing network for partners to send consumers offers based on their purchasing history. There are now 250 pilot partners in American Express Co.’s inSite program, which messages offers and discounts to members when they search the Web.

The challenge for marketers is to evaluate these partnerships in terms of the risk of not participating if their competitors are leveraging these programs. Brands may not directly target competitors’ customers in Visa’s program, but companies cannot block transactions in their stores or on their e-commerce websites from triggering competitors’ offers. Partnering with credit card companies may prove to be a viable strategy for brands as the importance of delivering real-time, contextual offers to customers continues to increase.  

By Michael Greenberg | Director, Marketing

In every loyalty program, some of the accrued value (or accrual) goes unused and is eventually zeroed out. Understanding and planning for this unused accrual, also known as breakage, is crucial for program design.

Accrual breakage is the percentage of value accrued that expires before redemption and ends up as zero value. That is, how much perceived funding never is actually turned into a reward. It becomes pretty obvious when a company is designing in a lot of accrual breakage using tactics like quarterly expiration (Best Buy) or minimum thresholds for conversion (just about everyone).

Redemption breakage is the percentage of issued rewards that expire worthless. This is only relevant when rewards consist of reward certificates for dollars or percent off, as product rewards do not break. This is impacted by several laws, although most have carved out exclusions or merely added requirements for stating the expiration date.
So the overall breakage rate is Total Breakage = (1 – (1 – Accrual Breakage %) * (1 – Redemption Breakage %)).

This is easier to understand with a simple example. If Accrual Breakage is 50% and Redemption Breakage is 50%, then only 25% of the accrued value is actually realized by customers. That is, for each dollar earned, half is never converted into a reward, and of the remaining $0.50, half is never redeemed, so only $0.25 is actually an expense. So total breakage is 75%.

The accounting for this is far more complicated and a topic for another day.

Let’s look at two basic program designs and how breakage comes into play:

In the first, customers get $50 for every 500 points, where $1 spent = 1 point. Points expire at the end of every calendar year. So the perceived fund rate is 10%.

Right away you can see that anyone who spends less than $500 in a calendar year will never get a reward, so their accrual breakage is 100%. Also, every point between 501 and 999 (and so on) will also break. Depending on the distribution of spending by customer, this design may result in a high breakage rate, driving the actual fund rate down substantially.

In the second, customers earn a point per dollar spent and can use the points in a reward catalog where the lowest reward item is 250 points. Points expire after 12 months of inactivity. In this case, while it is possible for every customer to eventually reach the minimum for a reward item, many customers will cease activity and have their points expire. In addition, some programs will expire points for inactivity even when the customer has more than enough for an item in the catalog.

By understanding the impact a program design has on breakage, along with the tradeoffs between customer satisfaction, ease of implementation and management, available budget and many other factors, a marketer can tweak their design to try and maximize the relationship between incremental profit and actual expense, leading to better ROI in their program.

by Michael Greenberg | CMO

The customer’s perception of a loyalty program’s value is crucial for enrollment, ongoing engagement, and long term retention. One important component is the fund rate, both perceived and actual.

Perceived fund rate is the percentage of sales that is promised to customers in the form of rewards. Most credit card programs are at 1%, many retail programs range from 2-5%, with a few programs as high as 10%. This is how most consumers evaluate a program’s value, although other benefits influence this perception. In reality, no program ever costs this much.

Actual fund rate is the percentage of sales actually paid to consumers in the form of rewards. This is driven entirely by breakage, which is the portion of value accrued that is not redeemed and expires. A good rule of thumb is to assume 50% breakage in your program estimates (although this number can vary widely).

So Actual Fund Rate = (1 – Breakage %) * Perceived Fund Rate. Pretty simple.

Lets look at 2 examples using one customer who spends $100 and another who spends $350.

In the first program, customers receive a $5 reward for every $125 spent, a perceived 4% fund rate. Customer A will never receive a reward, so all $100 of her spending breaks. Customer B will get 2 rewards, with $100 left over that does not get a reward, which also breaks. Assuming Customer B redeems both $5 rewards, the actual fund rate is $10/$450, or 2.2%.

In the second program, customers get a 4% rebate at the end of the year, also a perceived 4% fund rate. Customer A gets a $4 rebate, Customer B gets a $14 rebate. If Customer A does not redeem her rebate and customer B does, the actual fund rate is $14/$450, or 3.1%. However, in this scenario Customer B makes a purchase in the second year (when she redeems her rebate), so while the Year 1 fund rate is 3.1%, Year 2 is actually getting the benefit of the revenue.

You can see from these two examples some of the tradeoffs that must be considered in program design. Both programs have the same perceived fund rate. But their actual fund rates differ, the timing of their redemptions differs, their impact on accounting differs, and the actual redemption rate will differ. This is why it helps to have a professional help with your program design.

Since its clear that breakage has a dramatic impact on program design and economics, we’ll look at breakage in more detail next month.

By Jason Hornik | Senior Director, Product Marketing

Many marketers are asking themselves and other marketers the question, “If I want to increase customer loyalty, how should I be budgeting my dollars for social media?”

A recent answer and benchmark is that U.S. companies that use social media to primarily deepen customer loyalty spend almost twice as much as competitors who use it for brand awareness, customer acquisition and other core marketing purposes, according to national survey results jointly released by COLLOQUY and the Direct Marketing Association (DMA).

Additionally, the survey shows that the amount of social media budget marketers allocated to loyalty objectives increased by 293% over the past 12 months, easily surpassing allocation increases for all other social media-related marketing objectives.

Other key findings of the survey indicate that marketers are continuing to test social media strategies and need to determine the necessary metrics to evaluate success among a consumer audience whose adoption rates are rapidly growing.

You can read more about the survey results here.

By Jason Hornik | Senior Director, Product Marketing

In the recent report, Building Customer Loyalty: Ten Principles for Designing an Effective Customer Reward Program published by Cornell University, the authors dust off the Green Stamps books to examine key drivers for building and managing effective loyalty programs in 2010. Their ten crisply defined principles provide guidance directed to program managers in the hospitality industry, but serve as an evaluation framework for other industries as well.  Scan through the list below to conduct a quick gap analysis for your loyalty or customer experience program or read the full report for details and practical ideas.

1. Foster Consumer Engagement
2. Establish a Two-Way Value Proposition
3. Capitalize on Consumer Data
4. Properly Segment Across and Within Tiers
5. Develop Strategic Partnerships
6. Develop Dynamic Tiers
7. Cater to Consumers’ Desires for Choice and Fairness
8. Avoid Commoditization through Differentiation
9. Avoid the Price Sensitivity Trap
10. Embrace New Technologies

by Michael Greenberg | CMO

Maybe I’m late to this party, but on my trip to LA two weeks ago to see a client, I checked into LAX arriving and leaving, to two different foursquare entries, and both mayorships had been hijacked by a travel-oriented website. Its an obvious tactic that Foursquare will need to address quickly, but shows how fast the market can exploit an opportunity.

In many ways, this is an inflection point, where guerilla marketers are looking for loopholes to exploit. As mobile quickly becomes a channel for customer interaction, with a dizzying array of new applications, services, and devices, its inevitable that the masses are right behind. The huge upswing we’ve seen in mobile marketing enhancement requests are pushing us to add features and functionality plus new partners to extend the customer relationship to the mobile device. Given the potential, it makes perfect sense.

By Jason Hornik | Senior Director, Product Marketing

Increasing customer loyalty is seen by marketing leaders as the top force driving marketing innovation for their companies. According to a recent report by Forrester Research, innovation is one of the key strategic priorities to fuel growth among leaders of today’s organizations. And these worldwide executives view marketing innovation as the most important type of innovation for future success – specifically their company’s ability to rapidly create new offerings for existing customers and to extend into new customer groups.

2,700 CMOs and executive leaders were surveyed about their company’s marketing innovation practices and gaps with results presented by Forrester Research in their report titled, “Define Your Marketing Innovation Strategy.”

A highlighted chart from the report below:

By Jason Hornik | Senior Director, Product Marketing

In an earlier post (Will Facebook “Fans” be Missed?) I touched upon the fact that having Facebook Fans, aka people that like your brand, is not an ultimate measure of success. Rather a relationship of value (for both the fan and the brand) is created by activating your Facebook community through content, messages, offers, and other interactions and applying metrics to evaluate these efforts over time. Recently Augie Ray of Forrester Research posed the question of whether a Facebook fan even has value unless a brand does something to create value with the fan. His post What Is The Value Of A Facebook Fan? Zero! evoked such a lively discussion that he made a second post on the topic What Is The Value Of A Facebook Fan? Part 2. I recommend reading both posts as you assess the value of your fans and your relationships with them, as well as the impact of your go-forward marketing programs.

by Michael Greenberg | CMO

The folks over at Green Giant Fresh have been busy. After their initial promotional period, they’re rolling the program out across their entire distribution base. Coverage in Mashable and The New York Times has increased their profile, which is great for the promotion itself.

We helped put the pieces together and power the website and technology for the program. We see it as the first of many interesting intersections between real world companies and social experiences of all types. This one was a lot of fun for us, and we are excited about doing many more.