This article originally appeared on Forbes.com.
When Marriott International announced it was buying the Starwood chain of hotels, many members of the Starwood loyalty program took to social media, anxious that Marriott might spoil their beloved perks. The eruption was just one reminder of the intensity with which many consumers cherish rewards programs.
Some old-school rewards programs in the airline, lodging and retailing industries appear to be more valuable than ever, with credit card companies paying record prices for the right to use them. Yet just as there are hundreds of failed or fizzled start-ups for every tech unicorn, most of the thousands of loyalty programs do not generate enduring loyalty. Worse, some also-ran programs end up with all of the cost and little benefit, paying customers extra for behavior that would occur anyway.
Getting loyalty right isn’t just about designing and executing a stellar program. Companies need to consider how the program fits into the broader market mix, how program messaging will align with messaging in other channels, and how it may affect operations or customer service.
Successful rewards programs reach a high return on investment by building loyalty through customers who stay longer, buy more, cost less to serve and recommend the company to others—all combining to increase the customer’s lifetime value. The best programs emphasize some combination of the following traits:
Informed. If a company knows how much each of its customers is worth, and can identify customers with the highest current lifetime value and estimated full potential value, it has a solid base. A/B testing or, better yet, multivariate testing known as experimental design, can determine which mix of rewards features and marketing messages will spur the greatest lift in spending. Such tests uncover the microeconomics of individual customer behavior. Casino and resort firm Caesars has a long history of testing to, say, learn a customer’s gambling stop-loss level, so that the casino can send him or her an offer of show tickets right before reaching the limit; that way, the customer can end the night on a high and might be willing to return to the tables the next day, rather than cutting off gambling for the whole weekend.
Targeted. Campaigns to change customer behaviors work best when they are highly targeted based on location, frequency or other factors. Starbucks collects data on its customers’ demographics, their payments and transactions, their beverage preferences, and more. Using geolocation technology, its mobile application targets users with personalized messages. Loyalty program members might get time-limited coupons, which helps Starbucks raise store use during non-peak periods. Nearly one-fourth of the chain’s in-store purchases in the U.S. now flow through the app.
Experiential. Sophisticated programs provide customers with a better experience, rather than just more points. Recently mobile gaming firms have discovered the power of “free to play” games that provide status tiers based on cumulative in-app purchase amounts that allow more rapid progress, faster cool-downs before the action resets and better daily check-in rewards.
Easy. Rewards programs must be effortless to join or use. Too many companies have an application form that on first blush appears to be simple, but then devolves into a multistep process that turns off potential joiners. Note, though, that customers do need to opt in; if they’re enrolled automatically, they may not be aware of the program and would not change behavior.
Responsive. It’s not sufficient to identify the high-value customers and treat them better. Customers also expect their providers to know when they had a bad experience and to recover from those failures quickly and effectively. Companies thus need a feedback process to measure customers’ perceptions of their interactions, fix problems that arise, and close the loop by following up with the customers in question.
Feedback loops and service recovery are built into new software tools from vendors such as Thanx, which counts restaurant chains among its clients. Tomatina, an Italian restaurant chain in California, gets feedback from about 75 guests every week, and at last count between 20% and 25% took the time to add written comments in the Thanx system. Thanx research has shown that consumers are 7% more likely to return in the next two months after being asked for feedback—regardless of their response.
Companies must get more creative to make the economics work, so that they’re not simply bolting on rewards programs that create a dollar-for-dollar rebate system. For a program to yield an acceptable ROI, it must identify the best potential customers, treat them better, and based on their feedback, make relevant offers that raise their loyalty and lifetime value.
Aaron Cheris, Gerard du Toit and Brian Kmet are partners with Bain & Company’s Customer Strategy & Marketing practice.