The design of the loyalty rewards program is a critical step towards its success. Here is a quick video to help you get started with the program design.

Base data required:

Average Order Value (AOV): The total value of all purchases divided by total number of orders will give you the average order value.

% Payback: This is the percentage of an order that you can give back to customers to gain their loyalty. Typical Payback percentages are between 5 - 10%. Redemption rates are between 10 - 15%. So the actual cost of the program will be 1 - 2% for a kick back of 10%. 

Step 1: Assign points multiplier for purchases

Decide how many points customers will earn for every $1 spent on the site.
Rule of thumb: If AOV < $100, award 10X points for every $1
If AOV > $100, award 1 point for every $1.

Step 2: Figure out the Points earned : Points Value ratio

If you are using 10X as your purchase multiplier, a $100 order will earn 1000 points. And if your have decided the pay back % to be 10%, the customer will be eligible for a $10 reward after spending $100. That implies 1000 points earned = $10 reward.
OR $1 reward requires 100 points
Formula: $1 reward = (Purchase multiplier) / (Pay back %) Points

Step 3: Deciding Rewards

Set the redemption threshold such that customers will be eligible for at least one reward after an average purchase on the site. So, if your AOV is $50 and % kick back = 10%, start your rewards at $5.
Based on the ratio in step 2, decide the points required for a $5 reward. Then create additional rewards in multiples of $5.
$5 = 500 points
$10 = 1000 points
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Step 4: Deciding Activities

All activities that earn points for your customers also benefit your business. The trick is to quantify that benefit so that you decide how many points each activity is worth.

Note: Points awarded for purchases and account creation will account for 80 - 90% of the points awarded through the program. So pay extra attention to these activities and make approximate assumptions for others.

Examples of quantifying the benefit for some activities:

  • If you award a 5% discount for email subscriptions, that implies an average discount of AOV x 5% = $5 = 500 points. 
  • Every 3 reviews increase the page conversion rate by 5%. So the value of each review is 1.6% of AOV ~ 150 points
  • If your customer acquisition cost is $20, you can use that as incentive for the referral activity. Customers will earn 2000 points for referring new customers.
    Tip: Keep the referral reward close to points earned for an average purchase so that customers dont have an incentive to create fake accounts just for the referral reward. 

Step 5: Deciding Tiers

The first question in Tier design is how many tiers should the program have. We recommend keeping the program simple and having just 3 tiers including the default enrollment tier. Once the number of tiers is decided, tier design involves just two components.

Tier Eligibility Requirement

At what point should customers be upgraded to a higher tier? Research shows that three purchases by a customer is habit forming and 6 purchases is loyalty forming. So keep the first upgrade at 3 x AOV x (Purchase multiplier) & the next upgrade at 5 / 6 x AOV x (Purchase multiplier).

Tier Benefit

To encourage customers to purchase more and move up to the higher tiers, there has to be an incremental benefit for members of the higher tier. The benefit can be of two types:

  1. Exclusive offers: By virtue of being a member of a certain tier, a customer can avail rewards that are not available to other tiers.Example: Free shipping, expedited customer service, early access to promotions
  2. Tier points multiplier: Members of a higher tier can be awarded higher points for the same activities performed. This is done by adding a ‘tier multiplier’.Example: The design worksheet uses this option to reward loyal customers. Members of Tier 3 earn 1.5 times the points that Tier 1 members earn for the same activities.

Step 6: Decide expiration settings

Setting an expiry date to points helps limit your outstanding liability and also gives customers to use their points within a given timeframe.
Typically, 12 month expiry is used. If the purchase frequency for your store is more than twice a year, you can set a 6 month expiry schedule.


Download Attachment:

  1. Program Design Recommendation: https://drive.google.com/open?id=1qaL_teqCLutvlE74eXMEEaz0TDReFrgP
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