What Are The Design Characteristics of An Effective Loyalty Program?
Written by Anja Zschoernig
December 09, 2020 | Reading Time: 20 Minutes
What are the design characteristics of an effective loyalty program? The best loyalty programs look like a well-oiled machine – everything just works as it should, customers are delighted, and the company reaps rewards in the form of loyal, engaged customers and incremental revenue.
Of course, that success doesn’t happen automatically or overnight – it requires careful planning, testing and continuous optimization, as well as a deep understanding of what makes a strong loyalty program design.
Now while every loyalty program design should be unique, of course, that means tailored to your company’s objectives and the characteristics of your customer base, there are a number of “golden” loyalty program design fundamentals that everyone wanting a successful loyalty program should consider!
To lend you a helping hand, we have summarized all the best practices that, once incorporated into your loyalty program design framework, are sure to pave your way towards a highly successful loyalty program!
Everything You Need to Consider For A Top-Notch Loyalty Program Design Framework
Here’s quick snapshot of everything you need to keep in mind in order to create a well-designed loyalty program:
The 12 Loyalty Program Design Fundamentals
- DELIGHT: Create a Loyalty Program Value Proposition That Excites Your Members
- CONVINCE: Make Your Value Proposition Easy to Understand
- MOTIVATE: Make Your Value Proposition a Strong Motivator for Desired Behavior
- PROFIT: Strategize Your Value Proposition & Loyalty Program for ROI
- SERVE: Deliver an Amazing Omnichannel Customer Experience (Program Usability)
- INSPIRE: Develop a Great Loyalty Program Branding
- ENGAGE: Engage Customers with Relevant Communication & Promotions
- PERSONALIZE: Use Data & Technology to Personalize the Program Experience
- DRIVE: Use Your Program & Data Based Promotions to Drive Customer Behavior
- BUILD YOUR DATA: Use the Program to Build a 360° View of Your Customers
- SURPRISE & EXCITE: Innovate & Excite Members with New Features & Surprises
- DIFFERENTIATE: Stay Ahead in the Loyalty Game!
How to Design A Customer Loyalty Program
Before we hop onto the golden loyalty program design fundamentals, let us share one important note! The first step in designing a customer loyalty program should always be the strategic work:
- Clearly articulate your objectives – what are you trying to achieve with your loyalty program, and what will success look like?
- What are your customers doing now versus what you want them to do, and what motivates them?
The answers to these questions will set you on the right path, guiding your decisions about the value proposition, positioning, communications and more.
What Are the Design Characteristics of an Effective Loyalty Program? Consider these 12 Best Practices to be Successful!
Designing a loyalty program is a blend of art and science. It also is a balancing act between competing interests:
- Your program needs to be generous, exciting, and differentiated,
- but it also needs to be financially sound, as well as simple to use and easy to understand for your customers 😊
The good news is that you are not the first one driving down the road of designing a loyalty program, and you don’t have to do it alone! Many companies have developed highly successful loyalty programs over the years, and we have consolidated the most valuable know-how on this into a simple list of 12 loyalty program design fundamentals!
Best Practice #1 Design to DELIGHT: Create a Loyalty Program Value Proposition that Excites Your Members
Your loyalty program value proposition is what should draw customers in like moths to a light. In other words, it is the specific value you provide that initially attracts people to enroll in your program, becomes your promise to consistently uphold, and is what makes them want to come back for more.
Each customer is motivated by different values, and each company’s customer base has a different mix of motivators. So, your program needs to be all about what your customers find valuable.
When you do consumer research, you can get an in-depth understanding of the mix of motivators for your customer base, which is broken down into four forms of value:
#1 Utilitarian Value
This value is very functional – it could be saving money, or it could be saving time. While utilitarian benefits may not be the most exciting, they are often “table stakes,” meaning they are required, but generally not enough to win. They can be easy for a competitor to match, and tend to be transactional – all about “what I get” from the customer’s perspective.
Here’s a concrete example to get a better idea:
Kroger’s Fuel Points Program
Kroger, a large supermarket chain in the U.S. that operates under several different banners, leads with a straightforward value proposition – you earn fuel points based on your spending, which you can then use for discounts on fuel purchases with its partners.
Kroger also uses the shopper data it collects to drive targeted offers and promotions (and in fact is highly sophisticated in its analytics), but the customer-facing value proposition is very functional. The combination of groceries and fuel – which people purchase frequently, is a powerful one.
The other three types of value appeal to emotion rather than just the quid pro quo of a transaction. Emotional loyalty is more powerful than transactional loyalty – it is all about “how I feel” from the customer’s perspective.
#2 Hedonic Value
People like to be entertained, and like to discover and experience new things:
- The best loyalty programs incorporate elements of fun, like trying new products, or getting a surprise upgrade to a suite instead of a standard hotel room.
- Gamification, where members can earn badges or try to climb up a leaderboard, is another great way to build fun and engagement into your program.
Nike offers members several ways to engage and connect with Nike while engaging in their passion for athletics.
- Member-only apps let members track their athletic activities, providing motivation to improve their performance every step of the way.
- Members also get early access to new styles, and receive unanticipated rewards.
- By the way: Nike also does a great job at providing “social” value (see next paragraph) by reinforcing the idea of belonging to a like-minded group of peers (“Where All Athletes Belong”).
#3 Social Value
Belonging to a group and getting recognition are basic human desires. The best loyalty programs do a great job of delivering these, whether through community forums or with tiers that offer status and exclusive benefits.
Sephora’s Beauty Insider
Sephora’s Beauty Insider does an outstanding job of making members feel part of a community that shares a love of beauty products. Members can ask and answer questions about products and techniques, join challenges, post photos and reviews, join groups with specific interests, and share tips and trends.
#4 Inspirational Value
Inspirational value is perhaps the most potent but also the most elusive of the four values. A program has inspirational value when members feel “this company really gets me, shares my values and inspires me to be my best.”
REI (Recreational Equipment Inc)
REI, the outdoor clothing and equipment retailer, is a good example. REI actively supports charitable and community causes and encourages healthy, outdoor activities – actions that have built a fiercely loyal customer base.
Once you understand which combination of these values motivates your customers, you are well on your way to an exciting, highly successful program design!
Best Practice #2 Design to CONVINCE: Make Your Loyalty Program Value Proposition Super Easy To Understand (The Elevator Pitch)
To demonstrate the importance of the second highly important design characteristic of a successful loyalty program, let us start off with a valuable quote:
“People don’t buy the best products. They buy the products they can understand the fastest”
(Donald Miller, Story Brand).
Many loyalty marketers have made the mistake of creating programs that are chock full of features and goodies for members but are too complicated for members to understand.
People these days are bombarded with messages from companies who want their loyalty and money. But always keep in mind that your window for getting a customer’s attention is very short – so make the most of it!
Invest the time for distilling down your value proposition to a crisp, clear understandable message – an “elevator pitch” of no more than 20 seconds. Explain very quickly what is in it for the customer, and why your offering is the best thing since sliced bread.
REI (Recreational Equipment Inc)
REI has developed a crisp, clear way of explaining the benefits of membership in the co-op.
- Starting with an emotional appeal – the “outdoor life you love” – they go on to show with a few words and images what the member gets.
- As a bonus, REI seamlessly blends the tangible benefits (savings) with the emotional benefits of belonging, special access, and aspirational education and travel.
- They also do a great job reinforcing the idea of belonging by giving the utilitarian value of 10% cash-back an emotional twist: At REI members receive a “member dividend” for that special “treat-yourself” moment.
Best Practice #3 Design to MOTIVATE: Make Your Loyalty Program Value Proposition a Strong Motivator for Desired Customer Behavior!
One of the core goals of your loyalty program is to encourage and drive the behaviors from your customers that are valuable to you as the program owner. This could be increase spends overall, increase spends in certain high-margin product groups, referrals, or positive product and brand reviews to name a few.
A customer, on the other hand, will only do something if, in their view, it is worth the time, money and effort they need to put in.
What does that mean for your loyalty program design framework? You need to make your loyalty program’s value proposition (including your benefits, rewards and promotions) highly motivating!
This is if achieved if:
- you use the right combination of loyalty incentive types (these include earning virtual currencies, tier levels with attached benefits, additional benefits, great rewards, surprise & delight elements, gamification as well as loyalty promotions)
- you get the “velocity” of earning the loyalty incentives right.
Consider Attainable vs Aspirational
Now you might ask yourself: what is the right earning velocity? A good rule of thumb is to make your loyalty incentives a mixture of “attainable” and “aspirational”:
- Attainable: there is not too much effort or time required to receive the incentive. Imagine you are part of a loyalty program and it takes more than a year for you to earn a reward that you find valuable. As a customer, that will not really motivate you to do more business with the company offering it.
- Aspirational: more effort and time will be required, but the reward is highly valuable.
In a nutshell that means: if you ensure that your customers get to enjoy the benefits of your loyalty program soon after joining and make them continuously strive for more, that is earning velocity done right!
For example, airlines offer free domestic flights for as little as 10,000 miles/points, but also offer dream vacations for 200,000 or 300,000 miles/points.
Contact our Loyalty Experts!
Best Practice #4 Design to PROFIT: Strategize Your Value Proposition & Loyalty Program for ROI!
Another key goal of your loyalty program is positive financial returns. In this case, there are a couple of loyalty program design fundamentals to consider:
#1 Build Reward Leverage.
Reward leverage is the perceived value of a reward (in the eyes of the customer), divided by your cost for that reward. The higher the leverage, the more profitable the reward is for you.
The classic example is the airline seat. A traveler might see a round trip as worth about $400, but it costs an airline far less to carry the passenger on that trip. The opposite of reward leverage is a cash-back program, such as members get a $5 credit for every $100 they spend. The $5 is perceived, of course, as $5, and the company’s gross cost is $5.
When it comes to your own loyalty program design, look for incentives and rewards that are of high value to your members, but that do not cost you much to deliver. In particular, look for things that you might already be doing that you could also offer as rewards.
#2 Don’t Spend Money You Don’t Have To.
Keep the cost of your base offering low, and only offer higher-cost benefits when you need to. Emphasize data-driven loyalty promotions, benefits and members for your particular business that bring you incremental revenue.
Save your best offers for customers you think will be able and willing to “stretch” to reach a threshold to get an incentive. Test and learn to find out which offers and promotions work best and which members are most responsive before rolling out to your entire base.
#3 Measure, Measure, Measure.
When you designed your program, you (hopefully) developed a set of metrics to determine success. Keep those on your desktop and watch them early and often. If you see them slipping, don’t wait to act. You may need to do some customer research to understand what’s driving the performance, or you may need to test some messaging and offers to see the impact.
#4 Consider Options for Additional Monetization.
Many loyalty marketers have built direct revenue streams into their programs:
- With a paid or subscription based program, a program owner charges an ongoing fee for participation, such as Amazon Prime.
- With marketing partnerships, a program owner charges a partner for currency, such as airlines selling miles to hotel partners, and/or for access to members in marketing communications.
- With data partnerships, program owners monetize the value of member data by charging partners for access to member data sets (which is of course subject to data privacy regulations).
- With program partnerships, a program owner charges other companies to become a fully integrated partner in the loyalty program (multi-partner loyalty programs).
These options may or may not be appropriate for any given program, but they can provide a substantial revenue stream if designed properly.
Best Practice #5 Design to SERVE: Serve Your Members With An Amazing Omnichannel Customer Experience (Program Usability)
When it comes to customer expectations for “what I want, when and how I want it”, the bar keeps getting higher:
- Customers today expect to interact with companies on their terms – in person, on a website while sitting on their sofa, or from their mobile phones while having lunch with friends.
- They want control over their experience, including how their purchase and personal information are used.
- And needless to say, they expect their experience to be a flawless and highly convenient one ALL. THE. TIME.
If you don’t deliver on these expectations, the customers will switch to one of your competitors in the blink of an eye.
So for your loyalty program design, ensure that using it utilizes an amazing omnichannel experience for your members by:
- Making sign up simple and convenient
- Giving your members access to your program across all relevant channels.
- Making it as easy as possible for your members to make use of all the benefits of your program
- Communicating with your members in a way that delights them – across all touchpoints!
- Delivering excellent help to address questions and concerns
- Making it fully transparent about how your members’ data will be used (this one is especially important in countries and regions with strict data privacy laws, such as GDPR in the EU).
Best Practice #6 Design to INSPIRE: Develop a Great Loyalty Program Branding
As marketers, the topic of loyalty program branding is one where our heart light up and where there is a lot of room to both put your creativity to work AND spark emotional excitement with your members.
A great loyalty program branding includes:
- A creative name for your loyalty program itself
- The naming of your virtual currencies if you have any
- The naming of your tier levels (if you use tiers)
- The visual design of your communication and loyalty touchpoints.
Make sure that this branding:
- Fits with both your company brand and expectations of your loyalty program target group
- Yet still conveys its distinct personality and sparks excitement
- Is consistent across all your touchpoints and constantly reminds members of the wonderful benefits your program has to offer.
American Airlines’ AAdvantage program
The branding of American Airlines’ AAdvantage program is clear and consistent.
- With its use of the double AA in the program name and in the names of the award types, it connects to the branding of the parent company while having its own personality.
- The airline logo is stylized for use with the elite tiers, again echoing the airline’s brand but with a unique twist.
- The branding is used across all marketing materials – website, app, membership cards, and even the Citibank AAdvantage card.
Best Practice #7 Design to ENGAGE: Continuously Engage Customers with Relevant Communication & Promotions
“You can plan the best party in the world, but if people don’t know about it, no one will turn up to enjoy it.”
This is true for loyalty programs not only when someone first joins, but also throughout the member journey.
Part of your program design should be a communication strategy that maps out when and how you will communicate with your members. Like most aspects of loyalty program design, this is a blend of art and science – you need to test things out and learn how to determine the right frequency, mix of messages, and mix of channels for your members (and of course, you also need to gain the appropriate permissions and preferences from members).
Overall, your goal for communications is to keep members engaged and aware of you, whether or not they are in a purchase cycle. Be sure that your messages are relevant based on what you know about members, and be creative in coming up with new things to share and new reasons to talk to your members.
Best Practice #8 Design to PERSONALIZE: Use Data & Technology to Personalize the Complete Loyalty Program Experience
Another key to a great loyalty program design is: personalization. Although your program has consistent core elements, you still need to give members choices and options wherever you can, because that’s what makes it specifically personal for them.
Watching your members’ purchases and engagement provides you with a great deal of data about which members respond to which types of messages, offers, promotions, rewards and other incentives.
Take that and run with it!
If you know a member typically buys jeans and sweaters together, present combinations that may appeal to them and develop promotional offers to catch their attention. Ask them whether they are saving up hotel points for a special vacation, and present them with a meter that shows how close they are to having enough for that trip.
Best Practice #9 Design to DRIVE: Use Your Loyalty Program & Data Based Promotions to Drive Customer Behavior Along All Desired Dimensions
Periodic offers and promotions check off many boxes:
- they give you a reason to communicate with the member and get them engaged
- they let you test and learn what works while limiting your costs to a specific target audience or time period
- they help you drive specific customer behaviors based on targeting.
The best loyalty programs have a combination of standard, ongoing program communications and targeted, data-based promotions. Go back to your list of desired behaviors that you developed early on in your program design. Are your members doing what you wanted them to do? If not, develop a catalog of offers and promotions you’d like to test and see what works.
Be creative, and be data-driven!
Best Practice #10 Design to BUILD YOUR DATA GOLD MINE: Use the Program to Build a 360° View of Your Customers
Loyalty programs offer a unique way to learn about your customer base. Members have agreed to share their activity and personal information with you in return for the program’s benefits, which creates a tremendous asset for you, the marketer!
Not only can you see what they are purchasing, but you can see how often they interact with you, what channels they prefer, and what offers they respond to.
You can also use your program as a vehicle to gather additional information:
- you can ask members about their preferences, interests and hobbies,
- you can get feedback on new products
- you can understand your members and their motivations better based on interactions with you
…and much more.
However, don’t overdo it by asking for input every week. Instead, keep the dialogue and engagement in progress with periodic polls and surveys.
Then, use all that data to drive continuous improvement of your program and offerings and to create better and more personalized experiences, products, services, features and benefits for your members and customers in general.
Best Practice #11 Design to SURPRISE & EXCITE: Never Stop Innovating & Exciting Your Members with New Program Features & Surprises
The design you implement for the launch of your loyalty program should be just the first step of an exciting journey! After this, you can:
- Build a roadmap of enhancements as you learn what works well and what doesn’t.
- Develop new features, benefits, and better member experiences like a better interface in the mobile app or website, based on your members’ feedback and data on program usage.
- Always keep your program fresh with new and exciting offers and promotions.
- Consider “surprise and delight” gifts to reward and thank your top members.
- Regularly brainstorm new options for loyalty program innovations – and also get outside inspiration such as from your loyalty platform provider’s customer success & loyalty consulting teams!
And finally, don’t be afraid to learn from your mistakes! Almost every loyalty program that’s been on the market for more than a year has changed and grown over time, and that’s a good thing! A dedicated loyalty program management team always strives to optimize and innovate.
Best Practice #12 Design to DIFFERENTIATE: Keep your Competition & New Trends in Sight to Stay Ahead in the Loyalty Game!
Needless to mention this to you, as a marketer, but for a loyalty program design to be successful it doesn’t only need to be great – it needs to be greater than what your competition has to offer!
If your competitors see you doing something that’s working, they will race to outpace you. And if you see them doing something that’s working, you’ll need to react just as quickly.
Don’t take the easy route and just match what everyone else is doing – that won’t give you a differential advantage. Always be on the lookout for how you can stay ahead. Focus on improving your member experience with evolving and ever-improving features and benefits. Strive to go beyond your immediate competitors and to see if there are trends you should be following (or even pioneering yourself).
To put it simply: focus on being sustainably unique. If your members perceive your program as having increasingly higher value, that’s the perfect way for your loyalty program to become your consistent boost for better business performance.
Ready For Next Steps ?
Are You Interested in Launching Your Own, Successful Loyalty Program?
Contact our Loyalty Experts to schedule a free consulting session. Together we can discover how to get you started!
About The authors
Head of Marketing | Loyalty Prime
With her 10+ years of experience in the loyalty industry as well as in digital product management and marketing, there is no question for Anja: excellently set-up customer loyalty programs, motorized by the right tech stack, make the heart of every data-driven marketer sing! As Loyalty Prime’s Head of Marketing, she loves to inform and inspire about the great possibilities of powerful customer loyalty programs and Loyalty Prime’s award-winning technology!