😎Real Ones😎: A Simple Loyalty Framework You Can Use Today

Test & learn your way into an effective loyalty program, no new software required

Feb 14, 2021

Why read this?

Learn what your customers want before sinking hundreds of thousands of dollars into loyalty software.
Get step-by-step instructions for standing up a simple loyalty program that you can start using today.

Willy Wonka’s golden tickets: the original “loyalty program”.

What if I told you that you don’t need a complex, points-based loyalty program to increase customer frequency and lifetime value?

Because my last post on loyalty program myth busting was so popular, I thought I’d follow up with a simple loyalty framework that doesn’t require expensive software to execute.

How it works:

Review the list of customer segments below and determine how many from each segment purchased with you in the last 12 months.
Decide which segments you’d like to prioritize.
Review the list of incentives and determine which incentives would have the most appeal to your target segment(s).
Use the test and learn framework to validate the choices you made in steps 1-3.

The Customer Segments:

These segments are based on how many times the customer has purchased with you in their entire lifetime. To be included in the final count, they need to have made a purchase within the last 12 months.

“One and Done”: customers who have only made one purchase with your brand. This is going to be the vast majority of the customer file for most brands. Getting customers to come back for a second purchase in a noisy, competitive retail landscape is a challenging and worthwhile goal

From second purchase to “loyal”: each subsequent purchase increases the odds that a customer will return to your brand. What this means: all else equal, a customer who has purchased twice is more likely to return than a customer who has purchased once. Around 4 or 5 purchases, a customer becomes more likely to return than not—this is “loyalty”. This segment is everyone with 2-4 lifetime purchases.

Winning incremental $$ from loyalists: how do we drive incremental revenue from customers who have already purchased 5+ times without driving them away?

Turning loyalists into evangelists: this is where retention work becomes acquisition work—how can we activate our most passionate customers so they bring more people into the brand?

Prioritizing Your Segments

The first step in prioritizing your segments: find out how many members of each segment purchased with you in the last 12 months, how much they spent, and the average spend per customer.

This is where most of the traditional marketing analytics stack falls flat—Google Analytics doesn’t break down customers this way. Unfortunately, this post won’t go into detail on how to pull this analysis. But you’re resourceful and I believe in you.

When you run the analysis, you’ll probably find that number of lifetime orders is inversely correlated with the size of the audience. I.e. you’ll have a ton of one time customers and a handful of really engaged customers.

It will be much easier to “activate” your frequent purchasers (because they’re already loyal), but the total upside potential is limited by the small audience size.

You’ll see that if you target your program at the larger audience, a relatively small improvement in conversion rate or average order value will have a big impact.

Many loyalty programs are built around the behavior of your most fervent loyalists, but they are unable to resonate with the large audience of casual buyers who could become loyalists. That’s what I wrote about last week.

Making this decision is where strategic thinking ability and judgement come into play. You’ll have to take an informed risk, and you might be wrong! Again, not going into detail on strategy because it’s incredibly case-specific and the name of this newsletter is literally “No Best Practices”.

But again, you’re resourceful and I believe in you.

The Incentives:

Here is a comprehensive list of potential rewards you can offer members of your loyalty program.

You’ll need to decide which rewards will resonate best with your customers based on your unique situation. You can test into this, which I’ll cover in the last section.

Free $$: this is a set dollar promotion that the customer can use with no strings attached. Think: $50 to use on your next order, with no minimum. This is powerful because the next order may essentially be free.
Percent Off: this is a dollar or percent discount the customer can redeem by hitting a certain spend threshold. Think: 20% off your next purchase or $10 off an order of $100 or more. Less compelling than Free $$, but it may be compelling enough.
Exclusive Product: pretty simple: an item only available to loyalty program members. Think: members-only golf club logo gear you can only get at the pro shop. High signal value.
Early Access: product or content that loyalty program members get to buy/see before the general public. Especially powerful when the product is available in limited quantities.
Gift With Purchase: freebies designed specifically to be given away with orders. Think: beauty samples and branded tote bags.
Unique Experiences: chance to meet the founder, tour the factory, sit front row at the fashion show—these are things that can’t be bought by the general public. In today’s world, they can be digital or IRL. It’s all about access.
Sense of Ownership: opportunities for the customer to influence the direction of the brand. Think: members-only Facebook groups where the brand solicits feedback on upcoming launches.
Bragging Rights: this is more of something you can layer on to other incentives. Think about Sephora’s VIB Rouge—for some women, it’s as much about signaling their beauty obsession as it is the perks.

Every loyalty program in existence is essentially some combination of the audience segments and incentives I listed. Loyalty programs really resonate when you use these incentives as a framework to offer something creative and brand-specific.

Testing And Learning:

At this point, you should have one or two target segments and a few hypotheses about the incentives that will appeal to them most. Now you need to design a test to prove yourself right or wrong.

You can formally announce your loyalty program at this point, but my preference is to sneak these tests into your normal email marketing program so you can take a holdout group without worrying about alienating any customers.

If the total number of customers in your segment is at least 150,000 you can test 2-3 incentives at once. If the number is lower, you’ll want to test one incentive at a time to ensure you have a chance of reaching statistical significance.

Because we’ll be communicating these offers over email, you’ll also want to limit the testing to members of the segment who are opted in and have opened an email in the last three to six months. If you include disengaged customers in the test it will dilute your result—this isn’t a reactivation test, it’s a loyalty test.

Here is a sample test plan:

Hypothesis: we will drive incremental purchases and revenue from loyal customers if we provide them $10 off every $100 spent in the month of March.
Audience: all customers with at least 4 lifetime orders who have purchased in the last 12 months, are opted in to email, and have opened an email in the last 6 months
Test split: 50% test (receives the offer), 50% control (does not receive the offer)
Test setup: send an email to the test segment introducing the $10 off $100 offer on 3/1. Send a reminder email on 3/15 and a “last chance”email on 3/31.
Measurement: compare the total spend and profit contribution of the test and control groups after the month of March has elapsed. Make note of how many members of the test group used the offer code, and how often.

After this test has ended, you’ll be able to see if the offer drove a statistically significant lift in sales and profitability. You can read more about good test design here.

Based on the results, you could test different offers, different offer durations, different ways of messaging the offer, and different channel strategies (think—would we drive even more lift by adding paid social promotion along with the emails?)

If you wanted to take it to the next level, you could cluster your entire customer base into segments based on what type of offer they respond to most. This gets into the realm of data science so I won’t cover it in detail here. The program I outlined is more than enough to get you started.

Limitations of Software

You should consider loyalty software when you’ve landed on an inventive that works consistently and profitably, and the target customer segment is large enough that it’s too complex and time consuming for your internal resources to manage.

Software could also help if your customer file is large and you want to run through a lot of testing in a short amount of time. Just don’t sign any long term contracts until you identify an effective offer.

If a given incentive doesn’t land with your customer base, using software to flog the incentive harder will not suddenly change that.

🔥Hot Take🔥: I think a VIP program targeted at the top 1% of customers (in terms of engagement and profit contribution) should be managed manually.

Everyone on your eCommerce and marketing teams should know who these people are, what they like, and why they love your brand. C-level folks should be writing to them regularly. By removing friction, software actually makes this level of intimate understanding more difficult.

Why Don’t You…

A list of things to read, watch, listen to and purchase (no affiliate links).

…Luxuriate in other people’s (business) drama?
…Enjoy a contrarian opinion or 20?
…Write yourself a poem/brand positioning statement?
…Light a sexy candle?

Closing note: if you enjoyed this newsletter and found it valuable, consider sharing it with your network.