3 Keys for Effective Customer Loyalty and Reward Programs

Recently, I had the opportunity to attend a presentation on "Understanding Customer Loyalty and Designing Effective Reward Programs," by Clay Voorhees, assistant professor of marketing at Michigan State University. The informative session discussed how organizations can develop effective reward and loyalty programs to increase customer spending. Here are a few of the key takeaways and examples from that session.

1. When setting up a rewards program, the goal should be to convert "good" customers to "elite" ones. Most loyalty programs are some variation on the "buy x, get 1 free" method, but that isn't necessarily the best way to go. It may not take a good customer to that next level where they're truly loyal to your company. Additionally, these coupon-type rewards programs provide little useful data analytics and often cost more money than they actually bring in. That's why it's so important to evaluate the return on investment of a customer loyalty program. Companies should be monitoring their programs to ensure they're getting the desired output.

2. To develop a successful loyalty program, it's important to reward customers who are consistently loyal to the company - not just when there's a coupon or a good deal. Take Starbucks for example, where customers earn "Stars" through their purchases. As they collect Stars, they can level up. For example, five Stars puts them at the "Green" level, which results in a free treat or drink, a 15 percent off coupon, and free refills while in the store. Hit 30 Stars in one year and you're at the "Gold" level. Here you get all the benefits of the "Green" level plus a free drink or food reward, a personalized Gold Card - so the barista recognizes you're someone special - and exclusive offers just for you. The Starbucks program is all about making the customer feel special, and that translates to loyalty.

3. Successful rewards programs should clearly lay out the path to get to the next level, make customers feel special, and focus on rewarding elite customers. Take Delta Air Lines. Starting in 2015, Delta is revising its SkyMiles program so that miles are earned based on ticket price to better reward the customers who spend the most money. In short, they're looking to reward the frequent business travelers versus the infrequent vacationers. And they, too, have reward tiers. A general member would receive 5 miles per dollar, while a Diamond Medallion member - the crème de la crème -would receive 11 miles per dollar. And there are, of course perks with each level, ranging from faster boarding to seating upgrades to lounge usage, to entice frequent travelers to choose Delta and stick with them.

According to Gregg Thomas, a partner with CFO Advisors, a CFO strategy and advisory company specializing in the restaurant industry, the key is to go beyond reporting the numbers to extrapolating that data in a way that creates the greatest return on investment. "Retail organizations tend to track what people buy and when. But then what? You have this data, what do you do with it? What are the missing pieces, and how do you get to them?"

Plante Moran is the nation's 13th largest CPA and business advisory firm, providing clients with financial, human capital, operations improvement, strategic planning, technology selection and implementation, and family wealth management services. The company has a staff of more than 2,000 professionals in 22 offices worldwide. This article was posted on Plante Moran's website on Aug. 5, 2014. Contact the firm at 248-352-2500 or plantemora