Loyalty programs have expanded from their origins in the travel industry to become a widely adopted best practice in hospitality, food & beverage, and even consumer-packaged goods. But greater adoption rates mean simply having a program isn’t enough for a business to stand out. Modern marketers are discovering the benefits of building loyalty programs that cater to known customer behavior.
For some, that means one-size-fits-all rewards for all customers regardless of their lifetime value. For others, loyalty programs are more effective when offering varying levels of rewards. These tiered loyalty programs typically reward customers proportionate to their patronage, focusing their efforts on deeply engaging a few high-value customers while spending less time on lower value segments. Both strategies have their benefits, but many retention marketers struggle to determine which is right for them, and whether or not a change is worth the effort and resources.
Switching to a tiered loyalty program can be a hard decision to make, especially considering the overhead costs. For many businesses, it can mean re-educating customers, transferring existing point balances, updating in-store collateral, employee training and more. Like any customer-facing initiative, it can get expensive quickly, which is why marketers need to be able to recognize a customer base that is likely to respond favorably to a tiered loyalty approach well in advance.
Thankfully, there are observable customer behaviors that can signal to marketers whether or not customers would react favorably to a tiered program. Here are three of them.
By design, tiered programs harmonize with a commercial phenomenon known as the Pareto Principle, in which 80% of a business’s revenue comes from 20% of its customers. It’s by no means an absolute truth, but it is common enough that retention marketers know to look for it when constructing a retention marketing strategy. It’s also an excellent reason for a business to adopt a tiered loyalty program.
Customers that follow the Pareto Principle are divided fairly clearly into high and low value segments. They follow what’s referred to in statistics as a power-law, which, when visualized, looks like this:
By implementing a tiered loyalty program that uses lifetime value as a segmentation metric, marketers receive the insight and clarity required to prioritize high-value customers. Spending the majority of their time developing promotions, communications, and campaigns that target these customers, enables marketers to have a greater positive impact on overall revenue rather than wasting their time on lower-value segments.
Three-Tiered Customer Segments
Beyond an 80/20 revenue distribution, tiered loyalty programs can achieve even bigger results when applied to customer bases that naturally trend towards three-tiered spending groups. According to a research paper by Xavier Dreze and Joseph C. Nunes entitled “Feeling Superior: The Impact of Loyalty Program Structure on Consumers’ Perceptions of Status,” tiered loyalty programs are most effective when they segment customers into three distinct groups. Any more, and feelings of relative inferiority among lower customer tiers start to counteract the benefits of celebrating higher-value customers.
The authors explain that “Gold members are made to feel more elite when a silver class is added, but we find no evidence that the addition of a bronze class below silver further heightens perceptions of status. In addition, while having a second-tier elite class makes those at the top feel super elite, increasing the size of the second tier can dilute those feelings of superiority.” If a business’s customer base can be easily grouped into a three-tiered value structure with minimal statistical outliers, it’s another sign that they’d respond well to a tiered loyalty program.
Human beings are naturally inclined towards hierarchical, comparative organization patterns. They’re a huge part of how we organize information, but they also play a big role in how we derive our own sense of identity. This natural human behavior has been amplified exponentially by the explosive adoption of social media over the last decade. We’re suddenly capable of comparing ourselves to millions of other people. Products that lend themselves well to sharing via social media are also excellent candidates for tiered loyalty programs.
A case study by Smile.io of the Starbucks tiered loyalty program examined and critiqued its design for effectiveness, with special consideration for the “gold card” reward. Earning the card requires that the customer earn 300 stars, the equivalent of spending $150 on Starbucks products. Alex Mceachren, the study’s author, noted how common it was for “gold card” members to share their status on social media using the hashtag #GoldLevel.
Mceachren points out that “Only the elite Starbucks drinkers can achieve this prestigious award and it signals to other Starbucks drinkers that you are part of an elite group. The card gives the customer a status symbol and an exclusive feeling that becomes the strongest motivator in the program.” The program’s success on social media serves as an excellent example of a program taking human social behavioral tendencies into consideration in order to maximize effectiveness.
Retention programs touch every part of the customer journey, and so switching costs can be high. Marketers looking to take full advantage of tiered programs need to be certain that making the change is worth the cost. That said, making the switch to a tiered program has the potential to unlock unprecedented levels of value for businesses and their customers. Keep these three factors in mind when making the choice, and you can be confident your efforts will be met with rewards of your own.