How to structure a loyalty program that motivates your customers
One of the most popular customer retention strategies is a loyalty points program. If done right, points are able to influence purchase behaviour and deter customers from going to a competitor. They are a fantastic way to give back to your customers who already give so much to you.
I get a few questions whenever someone is looking to build a loyalty program:
What should my rewards be?
How many points per $ spent?
How many points per action?
How you structure your program has a massive determining factor on whether your program will be a success or not. While there is no exact equation for program success, if you follow these steps you will be able to build a program that makes sense for your business.
1. Start by setting your first reward
There are so many interconnected parts of a loyalty program that it can become difficult to decide where to start when structuring it. I prefer to start with setting the value of the first reward, and use that as the base for the rest of the program.
This is a vital piece because a program member sees value when they turn points into a reward, not from earning the points. The positive feeling of a reward is what becomes truly motivating. The key is to make the first reward large enough. To do that it will need to be worth more than your standard offers (like what you give for collecting emails).
A great starting point is to make your first reward 25% of your average item price.
No one will feel special if they have to earn points to get a reward equal or lesser than what you are giving to every new shopper. As a general rule of thumb your first reward should be at minimum 25% of the average item price on your store, or simply 25% of the value of your most popular item. I have found that 25% is when an offer starts to feel truly meaningful.
In example: If you sell cosmetics and the average price of an item is $45 you would want to set your first reward at $11.25, but people like nice round numbers so we would set the first reward as $10
Remember, a reward that is equal in value to the discounts you run on your store constantly is not motivating. You need to offer more to the people who are willing to join your community, they are the customers who will drive sustainable growth.
Now that you have the dollar value of your first reward, it is time to set how many points will be required to get it.
2. Decide how many points the first reward will be
Deciding how many points are required for that first reward is actually very easy. This is just a cosmetic thing at this point since we have not yet decided how many points you will get per dollar spent.
I like to recommend 100x the dollar value of the reward.
I always recommend setting the point value as something that is visually appealing and easy to understand. I like to take the dollar value of the reward and multiply it by 10. This is an easy conversion to understand, and gives you enough wiggle room to offer other ways to earn points such as sharing content, and celebrating a birthday.
In example: If we use our cosmetics example from before, our first reward was for $10 so if we multiply that by 100 we get a point value for the reward of 1,000.
Now that we have our first reward you will want to also have a few additional rewards to keep people motivated.
3. Fill in the rest of your reward catalog
You can’t just have one reward, as soon as people achieve it there would be no reason to continue on, the desire to continually achieve would be broken.
The biggest thing to remember is that less is more with number of rewards you offer. You do not want your customers to constantly be referring back to see what they can actually get with their points. I always recommend a minimum of 3 rewards but no more than 7, and if you are just getting started, start with just 3.
Set the first half of your rewards at or below your profit per order.
The rewards you offer is a balance between staying profitable on rewards that will be claimed frequently and providing real and motivating value to your best customers. I always think it is a good idea to set the first few rewards at or below your profit per order so that you are still profitable on those orders.
Dollar off rewards are very motivating for early rewards, but experiential ones become much more motivating for the higher tiers. Try to create a good mix and no more than 7 total reward options.
4. Decide how much your reward points are worth?
The value you assign to your points is the most powerful motivator your program has. This is how customers will understand the value your program gives them and is what will keep them engaged.
The best way to understand whether your program will be motivating is to understand how many purchases the average customer will need to make to earn a reward. To have a motivating point value you will need to know your average order value (AOV).
I always recommend the following formula when deciding the value of points:
Minimum reward / (AOV x # of purchases before a reward) = points per dollar
The number of purchases before a reward is the number of times you would like someone to make a purchase before they are eligible for the first reward. While you can reward your customers after any number of purchases, I find 2 or 3 to be the most motivating regardless of your AOV. It is very achievable, yet still pushes all members to become repeat customers.
In example: Our cosmetic company has a first reward worth $10 and the multiplier of the points required is 100. If we assume that the store has a AOV of $70 we can calculate what the value of the points should be. ($10 / ($70 x 3)) x 100 = 4.76
If you get a decimal through the equation you should round to the nearest whole number. If you got 4.76 I would round this up to 5 and you would reward 5 points per dollar spent in your program.
The final step now is to decide how many points you want to give for other actions besides making a purchase.
5. Decide how many points to give for additional actions
Now that we have a currency and a value associated with it, it becomes much easier to understand what other actions are worth to your brand. In the example that we have been carrying through, a point is worth 20 cents (5points/$1 = $0.20).
When we know the dollar value of a point we know exactly how much value we are giving for different actions. The general rule is to give as many points as dollars you would be willing to pay to have an action performed.
Here are a few actions, and the point values I would apply to them.
If you want customers to join your program, you need to give them a reason! Offering points for creating an account makes it an easy decision for customers to join.Giving welcome points is an easy way to establish value. When customers see their points balance grow just for signing up, you show them how rewarding your program will be!
To be motivating your welcome points need to be generous. You want your welcome points in combination with a purchase or two to be enough to cover the amount of points required for your first reward.
Welcome points + (points/$ spent x AOV) = First reward
By accelerating the earning process, you encourage customers to complete a purchase in order to earn and redeem their first reward. This conditions them to associate valuable actions like purchases with an equally beneficial payoff.
Birthday rewards are an easy way to make your brand feel more personal. By recognizing every member on their birthday, you open the doors to building a real relationship with them that they don’t have with other brands they shop with. Making someone feel appreciated on their special day is the best way to do that!
You can use your birthday rewards to increase excitement about your program by rewarding customers with points equal to your lowest reward.
6. Always evolve and learn
If you follow the above steps you will be able to set up a loyalty program that truly motivates your customer. However, what works for your launch is not what will work forever.
Your customers will tell you what they want if you are willing to listen. Discover what is working, what is not, and don’t be afraid to adjust and change.