Over the past two weeks I have answered a number of questions related to starting a customer rewards program. The posts have included information regarding customers joining your program, communicating your new program to your customers and how to enroll your customers in your program. If you missed any of those posts be sure to read them so you cover the customer side of your new rewards program because this week we are going to focus on the rewards side.
What kind of rewards should I offer?
There are 4 main components to consider when deciding rewards: customers, costs, competition and business strategy.
- Customers – you should offer something your customers will value. When you are starting a new rewards program, take the time to get suggestions and ideas from your customers. Would your customers like a discount, a free item, the ability to try something they have never had before, a special benefit? There are so many ways to appreciate your customers, take time to learn what will have the biggest impact. Encourage your employees to ask customers or send out an email survey to get specific ideas and rankings.
- Costs - another key consideration is the cost for the rewards. Typical loyalty programs will provide rewards that cost them between 3 – 5% of the revenue spent. This is actual cost, not retail price. So in a buy 10 and get one free, it looks like the reward is 10%, but the actual cost is the price minus the margin. Your budget for rewards will determine the rewards you want to offer. Actual redemption rates on rewards vary greatly from program to program but are typically between 35 – 70%.
- Competition - both direct and indirect will influence your reward choices. The convenience store market is highly competitive with skinny margins on fuel. The industry has several very large players and then many smaller independent operator so in order to compete, the loyalty programs in this industry have been very similar to each other because customers like to get the gas discount and the free coffee. In that industry customers like what they are used to. If your business is in retail, there are an abundant number of options that would help you stand out from the competition and keep your customers engaged. The pressure to copy the competition is not as critical, in fact it is better not to copy the competition so that you can deliver a new rewards experience for your customers. Some of the best ideas for rewards programs may come from totally unrelated industries that have rewards programs you participate in. Take the best ideas and make them work for you.
- Business Strategy - the final answer to what rewards to offer is driven by your strategy for growth. Are 80% of your revenues driven by just a few of your products? Would your margins increase if you could get your customers to buy other items at your store or restaurant? A great example is a coffee shop. The majority of the customers come to buy coffee, but each customer who also buys a muffin delivers a better return for the business. On the flip side of that position, you know your customers love coffee, so that may be the best reward for them. That choice will be driven by where you want your business to go. Most loyalty rewards programs will deliver more visits and increase in the amount spent per visit. If that is a key business strategy, choose a reward structure that is relatively easy to reach and provides real value to your customers.
Now you have to decide if your reward will be a free item or a generous discount on an item. This decision is based on the first two points above – what your customers want and what it costs to give it to them. Clearly free is powerful and if it works for your business, it will be greatly appreciated. In the case of a high end spa, offering a deep discount on facials will make more sense economically and still be very valuable to the members of your rewards program. .
Personally I love going out to eat andI love feeling like a regular at the restaurants I frequent. One of my favorite ideas for a restaurant rewards program is not a free entrée but an invitation to a tasting event for a new seasonal menu. Retail programs like Best Buy have offered special shopping days for members of their loyalty program. I also love the perks I get with airline programs, upgrades and preferred seating are great features that I appreciate.
Whatever the reward is that you decide to offer be sure to take some time to think about it and do your research. Adding new rewards is a great way to reengage your members but realizing that your rewards are not attainable or valuable and having to redo your loyalty program can cause member frustration. The best way to avoid this is clearly communicating what the rewards are to your members and your employees.