Growing Retention & Share of Customer
Growing Retention & Share of Customer
Tier Status Should Help You Create Better Retention and Growth
At the start of every year, the quest to earn elite status starts over for loyal customers everywhere. Those who are well-versed in their favorite program know whether they qualified or better yet, requalified for their prized status that brings them a different level of service and a better experience.
Established programs have long-standing structures that members memorize and stay up to date with. Programs need to periodically announce new benefits so they stay current and inspire members to requalify year after year. For instance, Delta and Starwood just announced “Crossover Rewards,” whereby the two loyalty programs are offering elite members reciprocal benefits. Members have to link their accounts, and by partnering, each elite program is strengthened.
With newer programs, the road to inspiring members to spend, charge or travel more with your brand or, better yet, advocate for your brand can be complicated and filled with challenging questions.
Before you introduce a new tier, the first question to ask is, “What are my objectives?” It seems like a ridiculous question, but, amazingly, many businesses want to deliver the “first-class experience” and don’t really know why. A typical objective is to protect and grow share of wallet from the highest-spending customers you have. Some companies may be smaller and have limited budgets and resources to deliver an elevated experience. Tiering allows them to focus the resources they do have on members who provide a larger share of revenues and profits to the organization. Or, it might be simply that your competitors have tiers and you need to do the same to stay relevant within your industry.
The next challenge to tackle is measurement. How are you going to demonstrate to colleagues in operations, finance and customer service that the effort is worth it for this smaller group of customers? Outlined below are key topics to explore and define. Developing clear tiering rationale will enable you to avoid frustrating your organization because of low ROI, or alienating your customers with a bad experience.
Study Their Past Behavior
Many companies focus on year over year to understand how their business is trending. For tier status, consider looking at a minimum of three years of data to understand patterns. Travel industry programs focus on business travelers, who are likely to continue behaviors year after year, making the qualification process second nature. However, for another industry, such as specialty retail, the same is probably not true.
Consider the electronics consumer who spends $6,000 on a full home theater setup. Are they going to do that again next year? Probably not. So you’ve put all of this effort into developing an elite status and then they buy a few batteries the next year and don’t even transact enough to enjoy the perks for which they worked so hard to qualify. In this instance, you need to create a way for members to overcome the episodic nature of your business. Models developed to predict the total number of qualified members will take into account qualification and requalification over a number of years. This not only helps you manage the messaging, but also your budget and capacity to deliver the top-tier experience your members desire.
Knowing what your members will do year after year is not only helpful in understanding the natural migration in and out of a tier but will also provide you with a strong grasp of how many members you would expect based on your qualification threshold. And that leads to the next step.
Determine the Qualifying Criteria
Miles or segments flown are the most typical qualifiers for elite status on airlines. But in today’s world, are these the right behaviors to be measuring? These metrics were relevant in the early 1980s when first-class tickets were not exponentially more expensive than economy. But now, a quick search on Delta indicated a fare between New York LaGuardia and Los Angeles costs $525.60 for economy and $1,644.12 for first class, making the first-class ticket over three times the cost of the economy ticket. And yet, the standard rate of miles accrual for first class is 150% of what economy earns.
The key strength of these well-established programs is that most elite members are business travelers and qualify year after year. Keeping up with competitive programs is very crucial in developing the qualification criteria, and those who go against the grain will inevitably gain a lot of attention, both positive and negative. In 2011, Southwest Airlines made waves by offering points based on dollars paid as the base structure of its program. Its “A-List” status is earned through one-way flights or Tier Qualifying Points, which are based on the price paid for the ticket. This was advantageous for the big-spending business travelers but not the bargain hunters who had previously favored Southwest for its positioning as an airline for everyone.
Either way, airlines have metrics that can directionally place value on a flight fairly systematically. For retailers, that is not always so easy. Retailers most often base tier status on spending, which is the easiest to communicate and track. Bloomingdale’s Loyallist program awards “a place at the top of the list” for those who spend $3,500 or more on their Bloomingdale’s card.
The retail industry isn’t yet able to provide many options for qualification. Other earning systems, such as shopping frequency, might end up awarding a tier to someone who comes in and buys 15 packs of gum when you want them to be purchasing bigger-ticket items—not exactly the top customer you want to cultivate. However, for Starbucks, it works because the typical visit does not have a wide range of spend potential.
Once the criteron of points, miles, spend, frequency or some other mechanism is determined, the level of that criterion will be examined next. Often, this is based on a combination of what you can afford to deliver based on benefits being offered and also the natural breaks in customer spend or behavior. This is a very painful line to draw, because regardless of what break you select, members who just miss earning status will call in and demand to be granted it anyway. To combat that issue, most programs exercise both a published threshold and an unpublished threshold, whereby members within a certain range (e.g., within 5% of earning the tier) are granted with tier status anyway.
In conjunction with what the business can deliver is the balance of how elite the status truly is and what members must do to earn that status. What percentage of your member base do you want to have in the tier so that you are able to protect this valuable share?
Identify the Right Benefits
The right benefits will be a combination of what members say they want, what assets you have to work with, how much growth or improved retention you can drive among those who qualify, and what you can afford to deliver based on the number of members qualifying. All of these factors are interdependent and should be evaluated together.
As airline elite tiers have evolved, many of the benefits offered are based on the notion of removing a pain point. The process of flying has become more cumbersome with added fees and necessary security protocol, so elite members are able to bypass much of the additional costs and waiting. Upgrade to first class and get a little more space. Check your bags for free and accelerate your way through security to lessen some of the more painful and costly aspects of flying.
Figuring out what benefits to offer in a tier, however, is not always easy. Retailers have to reach a bit further for benefits they can afford. Unlike the hotel industry, where free room upgrades are utilizing distressed inventory, retailer services such as free shipping from Williams-Sonoma or storing your fur at Saks Fifth Avenue have costs that directly correlate to the number of members using them.
Extras are what the marketing people look for, but they are only the first of many questions to explore when creating a new tier. And, proceed with caution as a mass retailer. You might want to reward your best members with exclusive benefits, but your store employees might have reservations for fear of alienating all of the other customers in the store.
Identifying the right suite of benefits really just involves looking at the assets and partnerships that an organization has. A luxury company might invite top members to an exclusive fashion event that they would not otherwise be able to buy tickets for. Similarly, an insurance company could offer discounts to health clubs or spas. Partner benefits are appealing no matter the industry—they give partners access to a segment of customers that is desirable for them, and rarely have a cost to the brand or program providing those benefits.
All of the mentioned elements are important, but the biggest assumption that an organization has to make—and be comfortable with—is what impact the tier will actually have on behavior. Your study of past behavior is based on what members have done without any tier, so how will this change when you launch the tier? Sometimes, this is difficult to know.
Consider slowing down on the marketplace splash associated with a tier and starting with a test. Market it like a promotion and limit it to a certain group that you think represents the group you’d want to roll out with. Measure their behavior versus that of like members to demonstrate what impact the benefits and other elements of a tier would create. Ensure you communicate important details such as the time frame and that it may be discontinued. That way, if it does not achieve what you want, you have a strong exit strategy.
Applying rigor to a test will ensure it is effective, but there are downsides. Starting with a test still requires building the capability to deliver it to a smaller group of people. This often costs the same as building it for the entire member base. But you can explore qualification criteria, measure a test versus a control, and better understand benefit usage to gain a more accurate view of ROI once you decide to officially make a launch.
For instance, one organization assessed costs for each benefit it wanted to deliver and determined that a single benefit would cost about $8 per member to deliver. It rated as one of the highest in consumer research, which led the company to believe it would have a higher take-rate. After the benefit was introduced, not many members actually used the benefit, even though they loved that it was offered. This was a beautiful thing for the organization, because it took that $8 per member cost down to $1. In this situation, it worked out well. A small, discreet test of a tier can help ensure you don’t have costs if usage of benefits skyrocket with no way to turn back.
Are all of these components absolutely necessary? No. You might have to have them available simply as a way of staying competitive, considering it a cost of doing business. Bringing to life an elite tier is not easy and it is often fraught with significant operational difficulties. However, if you can do it correctly, you will create an even greater layer of stickiness for your best customers, and provide something for all of your customers to aspire to.
Julia Testa brings a wealth of experience rooted in providing account management, planning, strategy and research for her clients. Her efforts have been diverse in both industry and objective, including projects such as launching Premier Silver status on Best Buy’s Reward Zone program, migrating and relaunching Amtrak’s 10-year-old loyalty program, and designing a new solution for The Limited. Additionally, she has worked with brands such as Toys “R” Us, Chase, Wells Fargo, HSBC/Capital One, Fairmont Hotels, The Guthrie Theater and Abbott Nutritionals. Julia was listed as “Waiting in the Wings” as a Rising Star under the age of 35 in Incentive Magazine. She holds a Bachelor of Arts degree in Psychology from the University of Wisconsin - Madison and an MBA in Marketing from the University of Minnesota – Carlson School of Management.
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