Spend-Based Loyalty Reward Programs Offer Better Value for Higher Value Customers

Previously, I discussed why the old school 'earn & burn' loyalty rewards programs fail in recent times. I suggest that as customers change with modern times, so too shou ld your loyalty rewards programs in modern times in order to be successful. The discussion was also extended regarding how to use tiers for your modern loyalty rewards programs as a major game changer. We also considered that a great loyalty rewards program is no use if no one can understand it. On that basis, we examined how to create a loyalty rewards program explainer page.

In April 2016, Starbucks changed its rewards program from a visit-based to a spending-based system. This post will illustrate why Starbucks and many more companies are making this huge change. I will compare and contrast the 2 types of rewards structure; the 1) visit-based and 2) spend-based program. The key difference between them is how much it costs you to reward customers and how well you reward customers with a higher customer lifetime value (CLV).

Specifically, in the visit-based program, customers earn points based on a milestone related to visits or items bought, NOT on the dollar value of the purchase. However, this often applies with the condition that customers meet a minimum dollar value. Conversely, a spend-based program awards points based on the dollar value of purchases, regardless of the number of visits made.

The health shakes example below is based on the common consumer practices to repeatedly buy their favorite product and to generally not deviate notably from their average purchase value, ie at least when they must pay out of pocket. Consequently, customer 1 continues to buy his favorite shake valued at $10 while customer 2 buys his favorite valued at $7.

The gross cost of the program to you per customer as a percentage is (Reward value / CLV) x 100. 

VISIT-BASED Reward = $10 off after 9 visits

Example of visit-based loyalty program. Customers are required to buy 9 health shakes in order to get a free $10 shake (or $10 off). This program disregards the dollar value of each shake. Therefore customers may buy 9 of the least expensive shakes and opt for the most expensive when reaping the reward of the 10th free shake. In an attempt to keep the program as simple as possible, management may not have stated a minimum required value per shake because the value of all of the available shakes are within an acceptable amount.  Otherwise, they might specify the type of shake that qualifies, like 'high protein' shakes. This program is likely to require only a card and stamp, the latter of which is used to cancel the ten spaces that represent purchases.

Customer 1: ($10 / $90) x 100 = 11%. Smaller reward to the customer with the higher CLV.

Customer 2: ($10 / $63) x 100 = 15.8%. Bigger reward to the customer with a lower CLV and higher cost to you. Among the 2 customers and you (the seller), the biggest winner is the lower value customer. Customer is motivated to spend as little as possible.

Customer 2: ($7 / $63) x 100 = 11%. The only way to maintain the same 11% is if you can somehow force customers to take a reward that is NOT a fixed dollar amount for all customers but the same value as the customer's usual order - a possibility for only some situations.

SPEND-BASED Reward = $10 shake after $90 spent

[Fixed dollar value (NOT percentage) after a set CLV]

Example of spend-based loyalty program. Customers must spend at least $90 on health shakes in order to get the 10th free. This program focuses on the dollar value of each shake while disregarding the number of shakes each customer buys. Consequently, unlike the visit-based approach (and assuming that shakes range in price from $6 to $10), customers must spend more in order to get the rewards (than in the visitor-based version of this program).

 

Customer 1: ($10 / $90) x 100 = 11%. The cost is fixed. The program encourages customers to spend more.

Customer 2: ($10 / $91) x 100 = 11%. The cost is maintained at 11% percent, thereby preventing you from rewarding disproportionately, ie giving higher rewards to this lower value customer. As illustrated above, customer 2 is now forced to wait until well after the 10th visit to reap rewards.

If you want lower lifetime value customers to spend more and faster, you may need to

• motivate customers to earn points using non-payment means like promoting brand awareness for you through social media.
• motivate customers by sending personalized text messages to their mobile phone. 
• expire the points after a given period. 

SPEND-BASED Reward = 10% Off after $90 spent

BEWARE: If you offer a reward as a fixed percentage rate on a sale valued at any amount, like '10% off of your next purchase', again, you run the risk of exceeding your desired cost (re dollar value), ie if you can not establish a maximum order value. 

Customer 1: ($1.5 / $13.50) x 100 = 11.11%. Although rewards are proportionately distributed according to CLV, customer selecting pricier items raise the costs to an extent that may exceed your desired amount if cash flow is a problem.

Customer 2: ($1.0 / $9.00) x 100 = 11.11%. 

Customer 3: ($0.50 / $4.5) x 100 = 11.11%.

DO:

If you want to keep your program costs at fixed dollar amounts;

• provide the option for customers to redeem rewards by 'buying' specific items with points. This can ensure the costs are fixed to the extent that you want. However, do this sparingly, especially with very high value items as you will again run the risk of giving lower rewards to higher value customers. 
• Example: Special edition 'Power' shake priced at 99 rewards points (ie based on giving 10% discount on sale of $10 shake after earning 90 points). The customer can redeem 90 points and pay the balance in dollars or earn more points otherwise.
• 90 points (minimum spend)
•  9 points (corresponding with $9 payable after the 10% discount).

CONTENT RELATED TO VISIT-BASED AND SPEND-BASED LOYALTY REWARDS PROGRAM

• As consumers change, so too should loyalty rewards programs in order to be successful. Here's how.
• Use these results, along with financial and managerial ratios to establish assumptions for a business plan.
• How using tiered loyalty rewards programs can be a game changer.
• What's the point of having a great loyalty rewards program if no one can understand it? Let's talk how to create a loyalty rewards program explainer page.
• The case of Starbucks' change from a visit-based to spend-based rewards program. In the new spend-based system, customers needed to spend $1 to earn 2 stars and could redeem star points for a free item when they had accumulated 125 stars. Previously, customers received a free item after 12 visits (regardless of the items bought during the 12 visits and without restriction which drink they could select as the reward). In the old visit-based system, lower value customers were earning roughly 4 times more than higher value customers. However, Ultimately, after the new spend-based system, higher value customers earned roughly 50% more than before, lower value customers lost over 60% and Starbucks saved considerably.
• The calculations involved in your point system can easily become hard to understand for the average customers. See how to introduce your program in an attractive and digestible way with explainer pages.
• Measure the success of your loyalty rewards program.
• Incorporate a referral program into your loyalty rewards program. These 2 types of program complement each other. While the loyalty rewards program seeks to retain customers, referral programs seek to acquire new customers.
• Analyze how well your rewards catalog has been curated.
• Gift card programs may be designed to be stand alone or an integrated component of your current referral and or loyalty rewards programs.