How You Can Use Loyalty Incentives to Create an Effective Added Value Package for Your Customers
6 Incentive Strategies and 6 Success Tips to Create a Powerful Customer Loyalty Program
Written by Stephanie Patchev, PhD
March 17, 2020 | Reading Time: 14 Minutes
You all know the classic elevator pitch: 1 elevator, 20 floors, 20 seconds to seal the deal.
In this short time, we are evaluating what a certain proposal will actually afford or yield. Do we immediately recognize an added value? Is it suitable for our needs and in line with our personal values? Do we feel comfortable that the offer is a fair exchange? (I give you X, and therefore receive Y)?
Your loyalty program is faced with the same scenario: You have 20 seconds or less to make a convincing pitch to your potential new members, and this means:
Your promise of added value must immediately connect with them!
You will convince your customer to invest in your loyalty program when it is indisputably clear to him/her: “This is a truly valuable offer and worth the effort to register and share my valuable personal information. It’s a great deal.”
But how do you make such an effective pitch? In this article, we will guide you through 6 Loyalty Incentivization Mechanisms, which you can skillfully combine to create an effective added value package tailored to your customers. We will also provide you with 6 key tips for success in using added value packages to contribute to your business goals.
6 Incentive Strategies as Building Blocks for an Effective Added Value Promise
- registrations for your program
- building of a strong positive emotional relationship to your brand
- creating additional revenue
- positive product and brand reviews
- social likes
- refer-a-friend activities, etc.
Furthermore, you must do so in a way that is effective and profitable for your business.
Loyalty incentive tools allow you to do exactly that: In exchange for the desired behavior, you offer your customers added value. They then feel appreciated and motivated to continue with their level of interaction with your brand and ideally increase it.
To achieve this, putting together an attractive benefits package is essential. In general, there are 6 typical loyalty program incentivization tools available to you.
1. Additional Services (Privileges)
A loyalty program typically offers its members additional services or privileges. They are a standard incentivization tool for the participation in a customer loyalty program and serve to distinguish members from non-members (“normal” customers). The privileges that program members receive in exchange for their loyalty, result in an experience of special appreciation and preference compared to non-members.
Some Examples of Additional Services:
- Free delivery & returns (e.g. Amazon Prime)
- Exclusive access to pre-sales events (e.g. Adidas’s Creators Club: access to exclusive events)
- Preferential treatment in waiting lines (e.g. Lufthansa’s Miles & More Programm: preferential check-in; e.g. My Starbucks Rewards: members can skip the queue)
- Free wi-fi access (e.g. Marriott Hotels: free wi-fi access in hotel rooms with “member status”)
2. Base Incentivization
The base incentivization can be described as the underlying logic of bonus programs, whereby members can regularly enjoy benefits based on their behavior.
Examples of Base Incentives:
- Collecting loyalty points or another virtual currency for transactions which can then be redeemed for awards (e.g. 1 point per $1 purchased)
- Awarding benefits upon reaching a specific transaction value (e.g. receive a bonus after $200 spent)
- Awarding benefits upon reaching a specific number of transactions (e.g. receive a bonus after 10 purchases)
In contrast to base incentives, promotions are time-limited. Thus, they are not always available to all members but used in a targeted and target group-specific manner.
Examples of Promotions:
- “Double Points on Tuesdays” (limited time promotion)
- “10X Points for purchases made through our app” (channel-specific promotion)
- “100 Bonus Points on your birthday” (personal promotion)
- “Triple Points with the purchase of a specific product” (transactional promotion)
4. Status Level (Tiers)
Particularly within a diversified customer base, it makes sense that not all members are incentivized in the same way. For example, you might want to offer a larger added value package to “top-customers”. To this end, you can divide your members by status level. The underlying principle: if a member fulfills predefined qualification criteria, they will reach a corresponding tier level and receive additional benefits.
Examples of Tier Levels:
- With yearly purchase amounts of $100, $350 or $700, you become a Silver, Gold or Platinum member. Thus, instead of 1 point per $1 spent, you receive 1.5 Points, 2 Points or even 3 Points!
- With 35,000 status miles or 30 flights per year, you receive our frequent flyer status, which includes access to our exclusive lounges, additional free baggage, and 2x Points for purchases in selected airport shops.
5. Surprise & Delight
There is a valuable formula for customer satisfaction:
Satisfaction = Experience - Expectations.
Simply put, a brand experience that exceeds the customer’s expectation, yields a higher level of satisfaction.
The “Surprise & Delight” incentive mechanism takes advantage of this logic: Here, the customer is incentivized with a surprise award or benefit once he reaches an internally predefined but externally undisclosed interaction level with your company. As they are unexpected, these surprise effects have an immense potential to increase customer satisfaction.
Rewards are the products or services that members receive as gifts in exchange for their loyalty (measured by loyalty points collected or specific purchase amounts, for example).
Examples of Rewards:
- Digital and physical products or services: e.g., a free magazine subscription, theater tickets, an upgrade to a premium hotel room, or free music or movie downloads
- Discounts and coupons: e.g., “$10 shopping voucher with any purchase of $150” or “A 10% discount coupon on your next purchase”
- Tickets for Sweepstakes: e.g., “With your next purchase of $50 or more, get a chance to win your dream vacation”
- Donations towards a good cause: e.g., “Donate your loyalty points to children in need”
You now have 6 types of incentives at your disposal: additional services, base incentives, promotions, status level, surprise & delight, and rewards. Our recommendation: Combine your incentivization strategies!
Use a Combination of Several Incentive Mechanisms
Consider the finding of a quantitative study in retail: This study examined the effect of different incentive mechanisms on measurable KPIs, such as increasing sales and reducing the customer churn rate. The comparative benefits offered by the customer loyalty programs were:
- “Attention”: a targeted, personalized communication with members
- “Discounts”: available on all purchases made, redeemable in the form of cash-back
- “Earn & Burn”: points collected for purchases could be redeemed for rewards
- “Additional Services”: members gain access to service privileges (e.g., special easy-access parking places or members-only check-out in the store)
- “Combined Benefits”: a combination of points, awards and additional services, but no discounts
The study showed that the ”Combined Benefits” option elicited the greatest increase in sales as well as the largest reduction in customer churn – even though no direct discounts were given!
Of course, the choice of the appropriate incentivization strategy depends on the unique demands of your industry, your business, your product line and your customer structure.
For example, the aforementioned “combined benefits solution” is superbly suited to high-frequency industries, such as retail, FMCG, or travel and hospitality. In such an all-in-one solution, you could combine the additional services of your benefits program with an “earn & burn” logic consisting of base incentivization and rewards as well as “surprise & delight” elements. In addition, you could utilize promotions and status levels to address your members in a targeted and segment-specific manner.
In industries in which fewer transactions per year occur, a purely privilege and status level based program combined with “surprise & delight” elements can be advantageous.
Whichever strategy you choose to employ, it is crucial that your program’s target customers profit sufficiently; This brings us to our 6 criteria for success!
6 Tips for Success in Formulating Your Incentive Strategies
1. The Customer in Focus
Back to our Elevator Pitch. In choosing your incentive strategies, always keep your customer in focus. The value that you are offering must be clear, attainable and exciting to your target customer. This is the only way that your incentive package will actually motivate the desired behavior.
Here, communication is the key. Through relevant personalized content and messages, you can maintain a positive impression in the mindset of your customers. True to the motto “Do good and talk about it”: Regularly remind your customers of the many advantages that your loyalty program is delivering!
2. Keep the Competition in Sight
Remember: It’s not enough to make your customers happy; you need to make them happier than your competition! So, be sure to keep your eye on the competition as you formulate your incentive strategy. In doing so, you can develop your loyalty benefits promise into an effective competitive advantage – keeping your customers loyal to you and away from the competition.
3. Clarity, Transparency, and Simplicity
We know from neuroscience that complex and unclear rules can result in a psychological state called cognitive dissonance. In the context of the loyalty strategy, this can result in undesirable outcomes, such as inactivity, cancelled memberships, or negative feedback over social media.
However, when the customer can immediately understand which incentive rules apply and which benefits they will receive and when, they feel happy, motivated and positive!
Your incentives are a financial commitment, and it is imperative to develop a smart incentive strategy in which the benefits outweigh the costs. To this end, the customers’ perception of value must translate into a positive change in behavior (e.g., more purchases, word-of-mouth effect and referrals). To further assist you in making your incentives pay off, we will soon provide you with a practical guide to ROI from your customer loyalty program. Sign-up to our newsletter to be amongst the first to get access!
5. Another Goldmine of Incentive Strategies: Data
As you choose your incentive strategy, consider the potential goldmine that comes with its implementation: comprehensive multichannel customer data! Every behavior that you incentivize becomes a valuable data point which you can collect. You can then use this “gold mine” and optimize your marketing activities, your product development, your price strategies or customer service in a data-driven manner.
6. Strategic Planning & Continuous Optimization Process
One final reminder: Naturally THE key success secret in defining your incentivization mechanism lies in the strategic preparation. In short, you must clarify in advance what your goals are and which key tools you plan to employ to reach your goals. (You can read more about this in our comprehensive Strategy Guide)
Another key element is a S.M.A.R.T. goal definition, which allows you to regularly check your target achievement in a data-driven manner and derive optimizations.
“I don’t measure success by how much I win, but by how much I get better each year.”
- Tiger Woods -
The insights gained can reveal ways to improve the added value and relevance of your incentives for your customer for example. This could include adjustments to rewards and additional services or the introduction of new features and technology (such as a new status level logic; a mobile app; or mobile payment) and of course the ongoing target-driven optimization of your promotions and campaigns.
Another development scenario is cooperation with partners for your loyalty program. The reasons for such a partnership could include differentiating from your competitors by providing exclusive rewards to your customers or reaping the financial benefits of sharing your virtual currency with your partner in exchange for compensation.
This brings us to the end of our introductory article on effective incentive strategies for a powerful, state-of-the-art customer loyalty program!
SO – are you ready? Then get in the elevator. 20 floors. 20 seconds to seal the deal.
- Photo by Erik Brolin on Unsplash
- Examples of Additional Services: Amazon Prime, Adidas Creators Club, Lufthansa Miles & More Programm, My Starbucks Rewards, Marriott Hotels
- Quantitative study in retail: https://www.businesswire.com/news/home/20051130005510/en/New-COLLOQUY-Loyalty-Marketing-Research-Settles-Reward
About The authors
Stephanie Patchev, PhD
Content Specialist | Loyalty Prime
Stephanie is truly passionate about outstanding, well-researched content that inspires people. With her background in Neurosciences, she has a deep understanding about the bio-psychological basis of customer behavior and customer loyalty.