Will loyalty turn your brand into the next Starbucks? Here is a four-point checklist that outlines what makes a loyalty program successful.
Starbucks is usually held up as the gold standard of loyalty programs. It’s hard to deny that their rewards program is successful, and that Starbucks’ overall performance as a company is strong. But will implementing a loyalty program turn your brand into Starbucks?
Unfortunately, that is the subtext behind a lot of the thought leadership shared by martech vendors and the retention marketing community. And it just isn’t true. Use this checklist to determine if your brand’s loyalty program has the potential to become the next Starbucks rewards.
There are three ways that any marketing program or campaign drives financial impact:
Loyalty programs most often accomplish the first outcome. Really great loyalty programs will consistently accomplish the second, and sometimes the third.
To understand the potential upside of implementing a loyalty program, you need to understand the baseline purchase frequency and spend of your customer base. And these metrics are often heavily influenced by the product you’re selling and its price point relative to your average customer’s disposable income.
Although some personal finance experts would have you think otherwise, the tweet above is not how most people plan their budgets. A consumer may have $3,000 per month set aside for food across all categories, but they’re not going to budget that much for candles (or another niche product category). So the benefit of a loyalty program is going to be greater for a grocer or fast casual restaurant than for a candle shop.
You’re rarely going to convince a customer to skip a meal in order to make one more purchase with your brand. That is the economic momentum your program is up against. This makes loyalty programs more effective for some retailers and categories than others.
Almost every person has an upper limit to what they can spend with your brand or company. This limit is governed by the customer’s disposable income and the slice of that income they have budgeted for your product category.
A lot of retailers with successful loyalty programs sell in multiple product categories and/or sell multiple brands. This makes it easier for customers to allocate a bit more of their share of wallet without giving it much thought.
Sephora’s loyalty program works because the store’s inventory covers almost every beauty use case that exists. A shopper may visit the site because their mascara ran out, see a particularly compelling loyalty offer, and then start thinking about other products they need to restock. A $15 order becomes a $150 order, but it feels like a deal.
If you sell one brand in one category, you may represent the customer’s only purchase in that category for the entire year. Even if a loyalty offer is compelling, there won’t be anything else on the customer’s mental list that will justify building a bigger basket.
Consumable products have a higher purchase frequency. Coffee is a daily habit. Beauty products are replaced when they run out. You need to refill your car’s gas tank or it won’t run. Other types of products may eventually break down, wear out, or go out of style, but that takes years instead of days or months.
The built-in repetition of a consumable product makes them better candidates for loyalty efforts. These products become habits before they run out. When they do run out, it’s a built-in reminder to purchase again. And that repeat purchase is an opportunity for the brand to gently encroach on additional share of wallet.
Consumable products also have shorter purchase cycles, which makes it easier for the retailer to offer loyalty perks that feel meaningful and make financial sense. Take one of the most common loyalty schemes: buy x, get one free. If you were going to make x purchases within a week anyway, the freebie feels attainable and compelling. On the other hand, if it would typically take you a year to make x purchases you’re more likely to forget about the perk or write it off as impossible to achieve.
When you launch a loyalty program, you’re trying to increase a customer’s average purchase frequency. If you only have one physical location, it’s going to take a lot of planning and effort for the average person to stop by and purchase.
Think about your own purchasing behavior here. Imagine there is an amazing pizza place one town over, about a 15 minute drive each way. This place is so amazing that they only do dine-in and pickup orders-no delivery. You might get takeout two or three times a week, but it’s not always going to be from this place, even though it’s your favorite. Why? A 30 minute round trip is a lot to ask, especially at the end of a long workday.
How would a loyalty program influence your behavior in this scenario? It’s not going to make the pizza commute any shorter, or give you 30 bonus minutes to tack on to the end of your day. So what kind of benefit is equivalent to half an hour of your time? Probably not “buy 10 pizzas, get one free”.
Loyalty perks are most compelling when the purchase decision is already relatively low friction. Otherwise you get into the tricky territory of attempting to battle against the pull of convenience. How successful would Starbucks’ existing loyalty program be if they only had the original Seattle location?
There are a few reasons that Starbucks has become synonymous with coffee. The biggest reason? Starbucks sells two of the most addictive and least regulated substances on earth: caffeine and sugar. They often come together, in copious quantities, in the same 24 oz cup. In fact, Starbucks’ biggest innovation may be turning coffee into a desert.
Addiction influences consumer habits better than any loyalty program possibly could. And you don’t need to sell drugs to get users hooked. Look at off-price retailers like TJ Maxx. Their innovation was to launder the “seedy” casino experience through the socially acceptable pastime of bargain hunting. You never know what you’re going to find when you walk through the doors, just like you never know if today will be the day you hit it big at the slots.
If you’re selling something addictive, loyalty programs increase consumers’ switching costs, meaning they’ll be less likely to move on to another dealer…I mean competitor. But a loyalty program won’t create a habit where none exists.
If you want to create a loyalty program that has a meaningful impact to your bottom line, you need to design it to work with consumer behavior. The perks should feel meaningful based on existing customer behavior-you can’t make them jump through hoops. This means that what you sell is the most important factor in your success.
Even if your brand or product checks none of the boxes outlined here, your program can still be successful. This post outlines four loyalty programs that broke the mold in untraditional categories.
Whenever you receive a pitch for loyalty program software, or a team member proposes a loyalty initiative, pay careful attention to the brands are featured in their case studies. A loyalty program will not transform your brand into Starbucks or Sephora if you operate in a completely different category. So be sure to demand examples that come from your product category, featuring brands with a similar size and distribution mix.
And if you want deeper, actionable insights into how your loyalty program is impacting bottom-line revenue, take a free spin through our product.
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