Designing the Right Rewards Program for Retail Customers
POSTED : June 30, 2014
BY : Clay Walton-House

Retail customer engagement and objectives

The first step in developing an effective rewards program is to understand the customer and how they engage within the industry. The retail industry is a highly competitive landscape full of many replaceable products for consumers to choose from. The industry includes both retailers selling commoditized products that are interchangeable to customers, driving high price sensitivity and low brand affinity, as well as retailers offering products that foster emotional connections, driving lower price sensitivity and high brand affinity. Understanding customers and their relationship to the product sold is critical in determining how a retailer can best offer and market its goods to establish the position of preferred retailer in the category.

The primary strategic objective for loyalty marketers in the retail industry is either to drive purchase frequency or to drive purchase volume and share of wallet, depending on the products they sell and the customer’s relationship to those products. This post outlines important considerations for both types of retailers, in order to strengthen the customer-brand relationship and meet marketer objectives with the help of the right rewards program.

Retention Levers

Three primary retention levers are available to loyalty marketers are:

  1. Perceived Value
  2. Affinity
  3. Barriers to Exit.

Each of these levers present varying levels of utility for influencing customer behavior based on the specific business and customer base to which they are applied. Rewards programs themselves seek to manipulate these levers as a means for influencing customer behavior.

Designing the Right Rewards Program for Retail Customers

Affinity and Perceived Value are the retention levers that offer the most utility to loyalty marketers in the retail industry, and they should inform the development of rewards program strategies.

Affinity is the primary lever for retailers who offer products that foster emotional connections and focus on driving purchase volume and share of wallet – retailers like Nordstrom or Apple. These brands and their products tend to be a personal statement for the customer, a reflection of the customer’s own personality and reputation. For these customers, value is not the primary purchase driver.

Conversely, for retailers who sell commoditized products and aim to drive purchase frequency, Perceived Value is the lever of greatest utility. Companies like Walmart or Kroger are constantly managing efficiencies to deliver products at the lowest cost to the consumer. Affinity or emotional engagement are not critical for driving the desired customer behavior of increased purchase frequency.

Rewards Earn Models

Earn Models determine how customers realize value in the form of benefits, rewards, or currency—points, dollars, etc. The dynamics of how customers earn value will not only significantly impact their experience with the program, but implicitly help or hinder a marketer’s control over various retention levers. In addition to having an impact on customer experience, Earn Models are also the primary driver of program costs.

Understanding the different types of Earn Models, and the associated tradeoffs, is imperative for the creation of successful programs that mitigate the risks of low customer engagement and costly operations.

The four primary Earn Models are:

  1. Membership
  2. Threshold
  3. Interval
  4. Stored Value

Depending on the type of retailer, either the Interval or Threshold Earn Model is likely the best fit for this industry. Both of these models motivate customers to consolidate spend with the retailer and to reach higher levels of purchase frequency or purchase volume. The best Earn Model to choose is based on the specific customer behavior the retailer wants to encourage.

If purchase frequency is the primary customer behavior desired, the Interval Earn Model is the best fit. The Interval Earn Model attributes value to program members at defined activity intervals, most often time or purchase frequency.

Starbucks has developed one of the more successful rewards programs among retailers in recent years, and all anchored on a very basic Interval Earn Model. Customers earn a “star” for items purchased, and reach new program tiers based on purchase frequency. Gold rewards members earn a free drink or food item for every 12 items purchased—a very simple interval model to anchor the program and drive repeat purchase. This model works because it effectively incentivizes repeat purchase and is easy for customers to understand.

For retailers selling products where high transaction frequency is key to success, designing a rewards program using the Interval Model is an effective way to increase the lifetime value and Perceived Value of retail customers.

Alternatively, if purchase volume is the primary customer behavior desired, the Threshold Earn Model is the best fit. Similar to the Interval Earn Model, the Threshold Earn Model attributes value when program members reach a pre-set target for a given behavior – often spend, engagement, or tenure. When the customer reaches the defined threshold for that behavior, value is awarded. The key difference between Threshold and Interval models is that Interval models often provide a single reward and/or benefit at a defined interval, and the value does not increase over time.

Members of Nordstrom’s Fashion Rewards program can use their Nordstrom Visa to earn two points for every dollar spent with Nordstrom and an additional one point for every dollar spent elsewhere. For every 2,000 points earned, program members receive a $20 Nordstrom gift card. This example of a Threshold Earn Model is effective because rewards are weighted towards higher-value customers, therefore encouraging greater transaction volumes.

For retailers selling products where high transaction volume or share of wallet is key to success, designing a rewards program using the Threshold Model is an effective way to increase the lifetime value and Affinity of retail customers.

Key Program Design Considerations

In addition to cultivating the most effective retention levers and designing rewards programs using the best fit Earn Models, loyalty marketers in the retail industry should consider the following market and customer dynamics to optimize rewards program design:

  1. Integrate shopping and rewards experiences, and consider using points as currency. Customers want to be able to use the value received in rewards programs for goods and services they desire. Allowing customers to use rewards currency in the standard shopping path provides a seamless experience and gives them choice and control.
  2. Integrate the POS and mobile in advance, and plan your technical roadmap accordingly. A significant portion of retail sales are moving onto mobile platforms (4 out of 5 consumers use smartphones for shopping). Planning for an integrated shopping experience on mobile is no longer optional for leading retailers.
  3. Explore the use of emerging technology to enhance the in-store customer experience. RFID, ibeacon, and Geotracking hold great potential for retailers but also pose a great risk if not implemented in a way that aligns with customer expectations and retains their trust.

In summary, it is imperative that loyalty marketers in the retail industry understand how customers engage with their products in order to design a rewards program that focuses on driving the appropriate retention levers and using the most effective rewards currency. Designing and implementing the right Earn Model is critical in this industry where rewards programs are common practice and brand affinity often yields great loyalty.


About the Author

Clay Walton-House serves as Managing Director of Integrated Loyalty Services at PK. He helps Fortune 500 companies create and implement new customer engagement strategies that accelerate growth and build loyalty. His expertise lies in understanding consumer behavior and translating it into actionable customer insights. Clay has a proven track record of successful program design and optimization, helping uncover ways to build retention and loyalty strategies into a company’s broader business model.

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