Read part 1 of of my series on loyalty marketing.

In my previous post on loyalty marketing, I talked about the different types of loyalty programs, and how to identify which type of program your company should pursue. Once that happens, do you slap up generic version of a program that tackles your needs and call it a day? Absolutely not. Now that you’ve identified a program type to target, you need to determine a version that your users will respond, that will fit your brand, is profitable over the long term, and is future proof. Let’s tackle user response first.

Understand Reasons Why
Your can’t expect your users to change their behavior until you understand why their behavior is the way it is. Let’s say most of your users use your product regularly, but not every time they have the problem you solve. In order to create a successful program, you need to figure out why they don’t use you the times they don’t. The only way to do that is to talk to them. Take random people in the segment you’re trying to change and arrange a phone call. Reward them for it. In 20 minutes, with targeted questions, you can learn all you need to know about the time they’re not using you. A standard question to learn this is “Tell me about the last time you did X and didn’t use us.” Keep doing these calls until you start hearing the same types of responses over and over. In my experience, things settle around four or five reasons. For loyal, but infrequent users, it works very much the same. Talk to users, but this time ask “Why don’t you use X for [new use case]?”

Understand the People Behind the Reasons, and Pick a Reason
These phone calls don’t give you any statistical representation around how popular these reasons are for the broader audience that isn’t using you every time. So, now that you have your reasons, you can survey the broader group, asking them, “When you do X and don’t use Y, which reason best describes why?” and make the answer multiple choice with the responses you received over the phone. With a good enough response, you can now stack rank the reasons why people aren’t loyal to you. Some may be product changes you need to make. Some may not be helped. But, more than likely, you can address most of them with an incentive. You can go further down the phone calls + survey rabbit hole until you have full personas of users. Knowing the reasons why users aren’t loyal and what types of users you have can make you say, “I want to target this reason for this persona.” The same philosophy applies to incentivizing use cases. Our survey question is the same question you ask over the phone, except now it’s multiple choice. The goal again is to be able to say “I want to target this use case for this persona.”

Testing the Program
Now, you’re ready to build a program. At this point, it’s mostly a creative exercise leveraging psychology. Invent a bunch of a programs that might incentive these users, narrow down the ones that are most likely to incentivize users and be profitable, and test. Email is a great way to test different programs because you don’t have to build much and can book keep manually to get enough data without users knowing it’s not a real thing. It is also not a bad idea to run your users through these program ideas over the phone or in person, but remember that what they say and what they’ll do may be very different. Still, talking to them can prevent some gotchas.

Once you have a program, you need to test in a live way. Depending on what type of program you build, you may be constricted. For example, Yummy Rummy at GrubHub was considered a sweepstakes, so we could not legally have a control group. A control group is always the best way to test. Sweepstakes laws are at the state level in the U.S., so if you have two states that perform very similarly, that may work. If you don’t, you need to measure pre and post data. Pre and post data is not ideal for a few reasons. The main one is that loyalty programs typically take time to change behavior, and if you turn them off, it will take time for behavior to change in reaction to that as well. You don’t want to be running the program for a over a year, and not be sure if your pre data is still relevant. What typically happens in these scenarios is that programs are pulsed, like the McDonald’s Monopoly game being available for a limited time yearly. There is too much money being spent on a loyalty program typically to not know for sure if it is working or not.

Long Term Success
One other dirty little secret about loyalty programs is that they tend to ebb in effectiveness over time. Humans are motivated by variable rewards, and if your program is static, your users may become used to it, and it may not create long-term behavior change. That is why I recommend creating a variable program. At GrubHub, we made Yummy Rummy available every three orders instead of every order, and the reward could be anything from a free drink to free food for a year. Furthermore, if you lost, you got a consolation prize that was something random from the internet. But, I don’t think that is even enough. You should strive to think of your program as constantly evolving to stay interesting to your users. This will make your program stay effective for longer as well as give you the flexibility to tweak elements to make it more interesting to you as the business. I have seen many companies stuck with a program they no longer think is effective, but too afraid to shelve it because of potential user backlash.

The other advantage of creating a living, evolving program is that, if the original incarnation is effective, you can change it to move users further up your user lifecycle. For example, let’s say you’re trying to incentivize platform use in your original incarnation of your program. You might be very successful at that, and then find an opportunity to take those same users and get them to use the platform more by incentivizing use cases. Now, you can do that by evolving the same program instead of starting from scratch. Or, you might have taken loyal users and gotten them to use you for more use cases. Now, you can adapt that same program to build a moat around them. This all boils down to what a holistic loyalty program should look like in three steps for most internet businesses:
1) Build loyal users in one use case
2) Increase frequency by incentivizing use cases
3) Build moat around those users

This happens to be how most marketplaces or social networks grow into behemoths. They nail an initial use case, build a loyal user base for that, gradually expand use cases, and then work to keep those users locked into their platform.

There seems to be a lot of confusion about loyalty marketing and how loyalty programs work. To an outside consumer, I guess the confusion is understandable. Most loyalty programs are branded as a value to the customer, a reward for their dedication. Most loyalty programs’ primary goals are not to add more value to consumers (though when they’re done well they do that too); their goal is to create more value for the company. I’ll break down how to think about loyalty if you are a business that is wondering if a loyalty program makes sense for you.

The first thing to understand is that every business has a loyalty problem; it just might not be the loyalty problem they’re expecting. To make this clearer, I’ll split consumers into four areas. Depending on where most of your company’s consumers fit is where you’ll spend your effort in thinking of a loyalty programs. The first thing to do is split all of your consumers into loyal and non-loyal and frequent and non-frequent. Loyal is defined by doesn’t use a close competitor as well as you for what your product/service does. Frequency is a bit more nuanced. Your product/service should have a target frequency you’re setting. For Pinterest, that might be daily. For GrubHub, that might be once or twice a week. You then can build a 2×2 matrix like the one below.

Each of these four buckets requires a loyalty program targeting different actions by consumers. Just to be absolutely clear, let’s go through that exercise for each segment.

Frequent, Loyal
Action: Keep consumers doing what they’re currently doing

Frequent, Non-Loyal
Action: Get consumers to migrate usage of competitors to you

Infrequent, Loyal
Action: Get consumers to use product/service more

Infrequent, Non-Loyal
Action: Determine if product issue can increase frequency. If not, ignore.

Now, we should talk about these strategies in a bit more detail. I’ll skip infrequent, non-loyal since it’s a combination of two other strategies, and probably implies a product or market problem.

Infrequent, Loyal Strategy: Incentivize Use Cases
In this segment, consumers use your product loyally, but not enough to your liking. This implies that there are not enough use cases for your product in the eyes of the consumer. That could be because these use cases do not exist, or because the consumer doesn’t perceive them to be relevant. If the use cases do not exist in your product/service, you need to build them into your product. Take, for example, Homejoy expanding into all sorts of home services after starting with house cleaning. If the use cases do exist in your product/service, but consumers aren’t using them, you need to invest in awareness or incentivizing a trial of them. For Pinterest, this might be upselling someone who uses the service for recipes to try planning a vacation with the service, or a web Pinner to try the mobile app. For GrubHub, this might be giving a discount for a pizza orderer to order sushi, or a web orderer to try their first mobile order, or a delivery user to try their first pickup order.

These opportunities might not exist or be worth the effort. When I worked at Apartments.com, we knew people would only look for apartments once a year or less. There was not much we could do influence that. What we could do was stretch our product to be useful for not just the apartment search, but also services you need once you find an apartment e.g. moving. Beyond that, there wasn’t much opportunity we could tackle, meaning we’d probably have to spend money to acquire those same users whenever they looked for an apartment again.

Frequent, Non-Loyal Strategy: Incentivize Platform Use
In this segment, consumers are very active, but don’t always use your product/service over a competitor. This is the most common type of loyalty segment because it’s easy to understand the upside. You can typically measure how much activity occurs off your platform. Here, you need to invest in an incentive to move those uses onto your platform. This typically takes the form or rewards points or punch cards.

Frequent, Loyal Strategy: Build Moat
In this segment, consumer are very active and don’t use anyone else for your product/service. These are your best customers. So, a loyalty strategy shifts from trying to increase how often someone use the platform to doing all you can to make sure these consumers don’t decrease their use of your platform or are wooed away by a competitor. This is by definition a money losing strategy to decrease risk instead of a money making strategy in the first two segments. Moat strategies can take many different forms and are frequently misunderstood. Some start out looking like the same strategy as frequent, non-loyal. One common one is to increase switching costs. One example of that is Facebook shutting off friend access to competing apps.

Many other moat building strategies get much more creative. They rely on looking at every possible risk to your consumers doing less of what they’re doing today and trying to address it. One of the most ambitious is Google’s launch of Android. Google makes most of its money from web advertising. They saw consumer attention shifting from an open, web platform they increasingly controlled via their browser Chrome to closed platforms on mobile owned by competitors Microsoft and Apple. So, they acquired and put hundreds of millions of dollars behind their own, open operating system in Android, which they charge no money for, but powers most smartphones all over the world. This is all so they could continue to control how people searched and saw ads in a mobile world.

So, we can go back to that 2×2 with our strategies now.

Now that you understand the segments and their corresponding strategies, you need to identify where the opportunity is for your product or service. The easiest way to do that is to run a survey to determine loyalty, and mine your user data for frequency. Then, see where the highest percentage of your users are.

This post covered how to identify which segment to focus on and the appropriate strategy to pursue. My next post will talk about making that strategy and implementation successful.

Read part 2 of of my series on loyalty marketing.