Tier your member down
By Ko de Ruyter and Debbie Keeling
This variation on an old Queen song came to mind when we asked ourselves a question that challenges one of the fundamental aspects of loyalty programs. Are those hierarchical program tier structures that group customers in different levels, depending on spending or selling pre-specified amounts, really the most effective design feature? Tiers foster feelings of status, depict various degrees of member loyalty, motivate people to keep their status and can easily be extended.
For instance, Sephora, added a new tier, VIP Rouge, to their program for those fashionistas who easily spend more than $1,000 a year on cosmetics. Too easy! Maybe.
- Is there really a one-size fits all solution to designing loyalty programs?
- Is it just a matter of adding on new levels?
We already know the answer to the latter question. Research has shown that simply having three tiers (with an exclusive top level) is the most effective structure. So Sephora’s program addition may be not be the best idea. Why did they not just have a simple linear structure in which all members enjoy the same benefits? Free of the status hassle and the predictably irrational behaviour that some members display to maintain their tier level, which could be a source of program liability. So, we pondered different brand concepts. Would symbolic or ‘boutique’ brands (i.e., those that people buy to express themselves and signal their status, such as Chanel and Sephora) require the aspiration of a gold or even VIP Rouge level? In contrast, could more functional brands that address more practical and functional needs (e.g., Nivea) possibly do without the costly hassle of administering tiers.
In three studies (across products, services and industries) it was found that the fit between tier-structured programs and symbolic brands is a strong driver of customer loyalty among members. Interestingly, the names of the tiers (whether these are called bronze, silver, gold or Blue, Vert or Rouge), or of the very program for that matter, do not make a difference. Most importantly, the sheer match between the aspirational tier structure and a symbolic brand is a stronger driver of loyalty then hard or soft program benefits, which are traditionally touted as reasons for customers to join. Finally, when it comes to functional brands or industries (e.g., think of companies in the IT space), program members are indifferent; tiered and non-tiered programs go equally well with these.
The most important take-away is that in designing and proposing programs you should carefully evaluate your brand concept. End-customers of our clients who market a symbolic brand expect the loyalty program to reinforce prestige, distinctiveness and sophistication as value propositions. Alternatively, as a result of the higher costs of administering tiered programs, a non-tiered or linear solution is probably a better offering for the more functional brands. The economies of scale of a one-size-fits-all may not be your best option. Share these insights internally with your team in case they automatically revert to tier their members down.