Loyalty programs can be a highly effective way to build relationships with your current and prospective customers and influence their behavior toward win-win outcomes. But building, launching and operating a loyalty program can be complicated and costly, especially if proper thought and insight into designing the appropriate loyalty program for a particular business doesn’t occur in advance.

Don’t be one of the scores of loyalty program failures whose destruction was inevitable because the proper homework wasn’t done in advance of designing and launching the program. According to The Mallett Group (TMG), here are the five main questions a business must first answer before making the decision to design and launch a loyalty program.

1. Which customer behaviors do you want to influence?

Most companies consider a loyalty program to get their customers to buy from them more frequently. Certainly, a worthy outcome, but there are so many other customer behaviors a company can influence.
Do you want to:

• Reduce customer defection?
  

• Drive more upsell/cross-sell among your products and brands?

• Influence the channel through which the customer buys?
  

• Encourage data sharing?
  

These are just a handful of the more than 15 different customer behaviors The Mallett Group has identified are influenceable via a loyalty program. Identifying the most important customer behaviors will help you design the appropriate loyalty program.

2. Which type of loyalty program is best suited for your company/company sector?

When considering a loyalty program, most people default to a points-based rewards program (earn points for buying stuff and redeem those points for free stuff). And while points-based loyalty programs can be effective, they’re not suited for every type of industry or company.

TMG identifies seven different types of loyalty programs, each of which have a handful of critical success factors that must be present within the company and industry sector to be successful. Ensure you choose a program that best ‘fits’ your company and industry contexts.

3. What is your competitive landscape vis-à-vis loyalty programs?

Do your competitors operate loyalty programs? What value propositions do they offer? Again, a common knee-jerk reaction is to launch a loyalty program type that’s similar to those of your competitors but with slight differentiators. But just because that loyalty program design is appropriate for your competitor doesn’t necessarily mean it’s appropriate for you.

• Are you the market leader or a market challenger?
  

• Are you a scale player or a niche player?
  

• What are your business economics and margins?
  

Answering these questions and others will help define the appropriate loyalty design to best compete.

4. What are the unique assets or strengths your company can bring to a loyalty program to differentiate its value proposition and engage your customers?

When American Airlines launched the first loyalty program of the modern era, they realized they had an asset they could leverage to gain more customers and more of their purchases—an empty seat.
Even in the best of times, airlines fly at 70% load factor (the number of seats occupied on each flight) which means 30% or their seats are empty. So, the leaders at American thought, “why not give away our empty seats to customers who buy a lot of tickets from us?”. That was the asset American brought to its loyalty program.

What’s your company asset that can be leveraged into a strong, unique and customer-resonant loyalty value proposition?

• Do you have a unique financial model that allows you to afford a reward that your competitors can’t?
  

• Do you have a unique technical capability that allows you to engage with customers more frequently or intimately?
  

• Do you have a unique product that customers desire?
  

• Do you have unique access to things that others don’t have?
  

Identifying the unique elements you can deliver in a loyalty program that resonate with customers and the competition can’t duplicate is critical to ensuring success.

5. Can you afford to launch and operate a loyalty program?

There are many obvious—and hidden—costs to operating a loyalty program. Modeling the full accounting of these costs prior to a loyalty program launch is, perhaps, the most critical element in determining if a loyalty program is right for you. TMG has seen countless loyalty programs implode, crushed by the weight of their own costs, because these costs weren’t properly accounted for in the program’s design.

Obvious expenses include the cost of rewards, cost of customer communications and the cost of customer service. Not-so-obvious expenses are contra-revenues—the loss of revenue as a result of operating a loyalty program. For example, if you operate a rewards program, you’ll be giving away an item for free in return for point redemptions. While you may account for the operating cost of the free reward, there’s also a revenue dilution cost because a portion of those customers would have purchased that item were it not for the point redemption opportunity. In TMG’s experience, the revenue dilution costs often can be higher than the operating costs of the reward. These are just a few of the expenses to consider when designing a loyalty program that TMG has helped clients to fully account for in their loyalty program design.

As the old adage goes, ‘failure to plan is a plan to fail’. Doing the proper diligence ahead of deciding to launch a loyalty program can mean the difference between success and failure.

About The Mallett Group

The Mallett Group is a loyalty and payments marketing consultancy founded by and staffed with loyalty marketing veterans. Our Founders and Consultants have all designed and run major loyalty programs across multiple sectors including Travel, Retail, Restaurants and Financial Services to name just a few, both from the client and agency sides. Our clients include sector-leading companies such as Margaritaville, Little Caesars Pizza, Mastercard, Buckle, InterContinental Hotels Group, El Al Airlines and more.