I’m starting a fairly long series of tips for retention and loyalty program managers on the corporate blog over at Loyalty Lab. The first discussed program fund rates and is a good starting point for someone thinking about putting a program together.
With a day to think about it, I underemphasized the impact of program design on fund rate. The art of design in this case is finding a balance between perceived fund rate (what the customer sees as the fund rate) with the actual fund rate (the resultant rate after breakage) while still meeting program objectives and staying fair to the customer.
A lot has to do with whether a redemption is a good thing or a bad thing.
In retail, you have to assess how much incremental revenue a redemption will generate, either through incremental spend during the visit (i.e. customers typically spend $50 when redeeming a $5 reward) or through incremental visits (i.e. overall member frequency increases by 0.75 visits/year when they reach a minimum spending threshold). For many retailers, generating visits is so expensive that they want redemption, since that generates a visit. In this case they want a low breakage rate.
In airlines, a redemption is pure cost, albeit low (the incremental cost of filling another seat is very low, so as long as they leverage existing capacity effectively, costs are not high). The main benefit to the airline is share of travel wallet, so there is little benefit on the back end other than keeping customers happy and maintaining positive brand image in the social sphere. Breakage here is a good thing, since it keeps costs down.
Other industries have similar considerations.
I’ve always visualized this as a multi-dimensional optimization problem, meaning the real challenge is framing the problem properly. That’s why we’ve always spent a good amount of time understanding the behaviors that matter, the revenue generation possible, and the sources of cost in order to drive towards a set of solution options to consider.
I listened to an Invisible Hand podcast today with Douglas Hubbard on How to Measure Anything, and was struck by the similarities between his methodology and how we have to approach modeling of client businesses in relation to customer loyalty. Topic for another day…