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.

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.

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.

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

I’ve been following two trends that make me very excited to be a Loyalty marketer. Developing high-value, enduring relationships with loyal customers/guests/shoppers/members isn’t new. But what were starting to see on forefront of smart marketing is simply awesome.

Trend One – Farm Cash for Fans.

I used to work at a company called MyPoints. It’s an amazing marketing engine that could change the behavior of hundreds of thousands of members by offering points in exchange for purchases, registrations, surveys, etc. Problem was, points are expensive. Basically it costs about ten dollars to reward a member with a ten dollar Starbucks card. And we mailed a lot of Starbucks (and Target, and Red Lobster and Macy’s and Amazon, etc. ) cards.

Last week players of Zynga’s amazingly popular game Farmville were offered Farm Cash for fanning Bing. Twenty Four hours later, 400,000 virtual farmers had taken the bait and signed on. In a flash, Bing surpassed Google in the hyper-followed ranking of “how many fans do you have on Facebook” stat.

And guess how much Farm Cash costs Zynga? A lot less than a $10 Starbucks card I’d guess.

Trend Two – Check In and Earn Points.

I’ve been watching for this one for some time. The very cool fro-yo shop Tasti D-Lite is now offering loyalty points when its members check in on Foursquare. Cool on so many levels: drives engagement, posts to Facebook – and more interestingly begins the process of geo-based permissioning for offers.

I strongly believe that location is the next frontier for right offer at the right time to the right person. However, geo-based targeting really does bump up against the marketing creepy factor. Loyalty programs bridge that gap by establishing a fundamental permission level for members and rewarding that additional permission with some type of gift or reward.

More to come on this one and we’ll make sure that we’re driving what happens next.

Tropicana is the latest CPG brand to launch a loyalty program with the objective of adding value and building direct relationships with their consumers. The program offers incentives through a points-based system for purchases and touts 20,000 reward options from partner brands such as adidas, Harrah’s, Coleman, and TaylorMade.

The loyalty program represents one of the largest marketing investments ever by PepsiCo in the Tropicana brand. Points are awarded by entering under-the-cap codes at the Juicy Rewards Web site:
http://juicyrewards.tropicana.com

Marketing for the launch involves TV spots, product packaging, print and digital executions, as well as social marketing through blogs. Andy Horrow, Tropicana Chief Marketing Officer had this to say about the program:

“I don’t like to think of it as a marketing campaign, but as a platform that supports everything we’re doing. It’s a great way for us to get our customers engaged and our retailers excited.”

This is a bold initiative for the Tropicana brand and they had 10,000 consumers registered in the 3 days prior to the actual launch of their marketing push. We will definitely keep an eye on this program and report back on any roll-out results.

6 months ago I wrote about Hotels.com WelcomeRewards Program: http://www.loyaltylab.com/blog/index.php/2009/07/give-your-members-rewards-they-will-use/

Unfortunately, the days of booking 10 $59 rooms and then redeeming the free night for a $400 room at a 5 star hotel are over.

WelcomeRewards Changes Effective March 9, 2010
- The value of the free night will be valued at the average daily rate paid for the 10 qualifying nights.
- The reward night can be used for a higher priced room than your WelcomeRewards credit value, but member must pay the room rate difference

WelcomeRewards really broke out from the traditional hotel loyalty programs like SPG, Hilton Honors etc. by shifting the value proposition. I never understood how they could afford the associated costs but, as a consumer, loved it. Even with the program changes,WelcomeRewards is very competitive. It’s going to be interesting to see if Hotels.com gives back some of the loyalty it stole from the SPGs of the world.

Shane Koyczan’s slam poetry on YouTube landed him on the center stage of Vancouver’s opening ceremonies. Shane invokes a spirit of Canadian culture that I’m sure makes all Canadians proud of their heritage and should make Americans who have visited Canada appreciative of their national sense of being.

I began my career in Western Canada and felt immediately in-tune with Shane’s words. The Canadians that I worked with and befriended have tremendous respect for each other, for their guests and for a combined sense of working together. I’d contend that this is one of the reasons that coalition rewards programs like AIR MILES have been so successful over the years.

The question in my mind is why Americans (sorry those of us in the United States – Canada is part of North America too) have never (and in my opinion WILL never) embraced this all-for-one; one-for-all life benefit.

For those new to Canadaesque coalition loyalty, approximately two-thirds (Wikipedia) of Canadian HHs participate in the AIR MILES program. Essentially, members earn across a very wide coalition of retail, banking, energy, travel, etc. partners into a common accrual account with which they can redeem from a vast catalog. Sounds great. So why don’t we United Statesians get this?

My hypotheses:

• Too many people. The Canadian market is really at a sweet spot of sufficient critical mass while still small enough to achieve high rates of sustainable awareness.

• Too fragmented. In the United States, our sheer geographic and population size has led to far more commercial entities in each category. In addition to more national players, regional and super-regional players make building the ubiquity of the coalition really difficult.

• Lack of shared experience. Shane notes that Canada too is a nation of immigrants, but Canada, unlike the United States, Shane recognizes how Canadians choose to stand together. Just watch a couple hours of Hockey Night in Canada and you’ll see how an entire nation unites with common focus and pride.
With that said, I expect that we’ll see a grand attempt at launching similar programs in the U.S. over the next few years. Aeroplan’s (AIR MILE’s top competition in Canada) acquisition of Carlson Marketing may have been their attempt to build a beach head of outstanding talent in the U.S. for that investment.

Stay tuned.

Been to the local GameCrazy lately? If you answered no, you probably are not a member of their PowerPlay program, but if you are, you received some surprisingly good news. Movie Gallery, the parent company of GameCrazy, Blockbuster Video, and more, has filed for Chapter 11. However, unlike other prominent retailers who have endured this, one of the first things Movie Gallery did was petition the Court to allow them to keep operating their loyalty programs, and even expand them (PDF link).

This should become standard practice for companies who’s fortunes need adjusting: the first order of business needs to be taking care of your best customers. In the past, retailers like Bombay Company, Circuit City, and more have done precisely the opposite by refusing to honor gift cards or stored value cards; they made an already uncertain customer immediately furious, ensuring that Chapter 11 would quickly become Chapter 7. Now, I don’t have a crystal ball on Movie Gallery’s future, but the very fact that they recognized that they have no hope of recovery without holding on to their best customers is a great sign.

Deep within the document is truly the most remarkable nugget:

We are also introducing new enhancements to our customer programs, including our “True $” discount program, which enables PowerPlay members to rent movies in our Core Collection for $1.

That’s right: they not only are continuing their loyalty program, but expanding it with new options that are designed to generate additional revenue at attractive savings for their best customers. When is the last time you heard about a bank in need of a bailout offering you, a longtime customer, an incentive to keep banking with them instead of raising your fees? Or a car manufacturer, desperate for a sales spurt, contacting customers who purchased in the last 4 years and offering them discounted service on their purchase for the next 4 years if they buy a new car? Kudos, Movie Gallery: your best customers thank you.

Do you know Frank Eliason? You should. He’s also known as Comcast Frank, or, more importantly, ComcastCares on Twitter. Frank singlehandedly put a face on the customer service for Comcast, realizing that the biggest reason why customers defected was that there was a perception of indifference or unresponsiveness. Instead of sitting on a phone tree waiting for a rep, just message @ComcastCares; Frank responds quickly and efficiently. Event better, Frank monitors Twitter for mentions of Comcast,  and offers proactively to intercede on the customer’s frustrated behalf. In short, he completely changed the perception of Comcast from an indifferent behemoth to a proactive advocate.

Frank also writes his own blog. This week, he writes about his experience with a loyalty program on a flight.  Read his trials and tribulations for yourselves: what is supposed to be a program that rewards you for loyalty only succeeded in putting him through so many bureaucratic hoops that it is almost worse than being treated anonymously.

What struck me was the complete lack of addressing the customer by name in the communications the airline used. Instead, they constantly used the Loyalty Number or Error Code; it felt almost Brazil-like. And, as Frank points out, the only warmth in the communication at all came from their ad in the e-mail to have you get a discount at Hertz. First and foremost in a loyalty program, remember its not about the points: it’s about the way to help make a customer into your best customer. Every message, interaction, communication, and customer experience needs to be viewed through the customer lens. No amount of points will make a customer forget being treated as just another number if you truly want their business.