10 Strategies for Choosing the Right Loyalty Incentives

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giftsSelecting a loyalty vendor to work with is only half the battle for merchants looking to incentivize repeat visits at their local businesses. The specific rewards or incentives a merchant offers play a large role in determining how enthusiastic customers will be to participate in a loyalty program. From Buy-One-Get-One deals to cash-back, freebies, and one-of-a-kind experiences, merchants can sometimes feel like they have too many choices when it comes to rewarding their most frequent customers.

Although there are no right and wrong answers when it comes to structuring rewards in a loyalty program, there are some overarching guidelines that merchants should follow to ensure their programs remain profitable. Here are 10 tips from experts in the space on how merchants can ensure they aren’t giving away too much (or too little) in their loyalty programs.

1. Consider non-cash rewards. “There are several reasons why non-cash rewards are often desired by merchants. First, for most merchants, especially foodservice operators, the perceived value of a non-cash reward is often greater than the actual cost of the reward (to the merchant). For instance, if a restaurant offers customers a free dessert that would typically sell for $5, the actual food cost is typically only about 30%. So, giving away a free dessert only costs the merchant about $1.50, but the customer feels like they are getting something that is worth $5.” (Robert Greenberg, vPromos)

2. Don’t give away too much. “We recommend that even the lowest redeemable reward is only obtainable after 50 visits (or check-ins, in the case of clubs and studios for health and fitness). We recommend this because most of our clients want members or customers to not only come in regularly, but also refer their friends to come in. Referrals are worth the most points because it means new business, which helps the bottom line. Points should reflect this.” (Sunil Saha, Perkville)

3. Offer prizes at varying price points. “Points-based products are interesting because instead of Buy-One-Get-One-Free, it’s collect 50 points and get a coffee cup, 100 points to get a free burger, or 200 points for a free pizza. Those tend to be more interesting because they allow merchants to get more creative. From the customer perspective, it appeals to different customer types. We have savers and we have spenders. When we’re talking about points, we try to help merchants pick menu items that are small and easily achieved, and also things that are at a more aspirational level.” (Rob Bethge, Perka)

4. Real world incentives can driver future purchases. “Free shipping, samples, and discounts can all be leveraged as rewards and drive future purchase or trial of a new product within the business’ portfolio. Other real-world incentives can be things that drive word-of-mouth and marketing. Swag is huge. People will go above and beyond for a free t-shirt. Branded items help drive awareness in the market and don’t cost much — think keychains, stickers, and other tchotchkes.” (Robyn Hannah, PunchTab)

5. Make customers feel special. Giving everyone the same 20% discount not only devalues your product, but it isn’t sustainable – how are you going to top that next month without discounting your business away? There’s something special about being special. Inviting your customers to join your exclusive loyalty program where they are rewarded for their patronage gives them the feeling that they are getting something special back for shopping at your store. (Jennifer Nelson, Ackroo)

Offer incentives that don’t cannibalize revenue. “When it comes to non-cash rewards, it’s best not to ‘give away’ the items that typically drive revenue. Limiting free rewards to items that are not frequently sold helps protect revenue and operating margins. However, because these rewards are often not the ‘desired’ items, they may not be that motivating, even for free. Said another way: If I don’t eat dessert and I don’t want a dessert, rewarding me with a dessert isn’t much of a reward.” (Robert Greenberg, vPromos)

6. Give away your own products. “When it comes to the large reward itself, it should definitely be a product of the business. If a merchant has to give customers a reward other than something that has to do with their business, they probably need to work on what they are offering customers. No matter what, businesses need to reward loyal customers because the cost of keeping a customer is far less than obtaining a new one.” (Jeremy Tyler, Loyal Checkin)

7. Go virtual. “Incentives don’t have to be physical. Virtual rewards like badges can work as incentives for engaged communities and hyper social fans. Badges are almost free to merchants — outside of the digital creation resources needed — but go a long way in recognizing users and their status in a community. Just look at the success of Foursquare. In the same vein, social rewards and recognition are a powerful incentive. Fans can redeem points for being recognized as the Facebook fan of the week, featured on a merchant’s blog, tweeted to or followed by the merchant. Totally free to the merchant, but personally valuable to the consumer.” (Robyn Hannah, PunchTab)

8. Cash is king. “Cash rewards or discounts allow every customer to select whatever they want. It’s typical for a retailer to set reward values at about 10% to 20% of the spending necessary to earn the reward. Without question, this is the best way for merchants to avoid losing money on their rewards programs. If a merchant is offering a $5 reward (cash discount), they typically will require about $50 in spending for the customer to earn the reward. (Robert Greenberg, vPromos)

9. Focus on continued engagement. “What is most important is that a retailer is offering rewards that create engagement. A simple measure of loyalty program engagement is the number of rewards redeemed. If no rewards are being redeemed, there is no engagement. The best tip is to be sure that whatever is presented as a reward will create continued engagement between the customer and retailer.” (Bill Warelis, LoyaltyMatch)

10. Utilize a tiered rewards system. “The biggest hurdle in the mindset of businesses offering rewards is understanding the difference between couponing and rewarding loyal customers. On our website, we list our recommended rewards based on a tier system — the more loyal the customer, the greater the reward. I’ve seen some companies offering fist-bumps, pats on the back, etc. Businesses should be giving these types of thank yous to everyone for every purchase. If you’re going to offer a rewards program, do it right. Otherwise, don’t do it.” (Brian Mattingly, PunchPoints)

Interviews have been edited for length and clarity.

Stephanie Miles is an associate editor at Street Fight.

Stephanie Miles is a journalist who covers personal finance, technology, and real estate. As Street Fight’s senior editor, she is particularly interested in how local merchants and national brands are utilizing hyperlocal technology to reach consumers. She has written for FHM, the Daily News, Working World, Gawker, Cityfile, and Recessionwire.