Experts Agree – It’s Easy to be an Amateur Incentive/Loyalty Guru

At least this amateur guru thinks so. (Warning – this is a longish post with some math in it.)

Chatterfly – Loyalty Programs for the Local Merchant

I ran across a post by Robert Scoble (read his bio on google+ here) a community builder around tech startups.  The post is about a company called Chatterfly.  They are introducing a new “technology” that allows local small businesses to set up loyalty programs simply and easily on the web. You can view the below video here or for email/RSS subscribers you may need to click through to see it.  

Login- a few keystrokes and clicks later you have a loyalty program.

The program allows the merchant to track checkins, updates to statuses, purchases, etc. and then reward those behaviors with points redeemable for whatever the merchant decides and of course, for merchandise from an award catalog.

Full transparency – I’ve never used the service so I’ll be a bit ignorant on the specifics of the business model but it looks to be based on making money through the sale of merchandise items for points, or, and this is a total guess… taking a cut of any deal offered to customers.  There isn’t a lot of info on their site about this so I’m guessing. 

The pitch is they can bring the big company frequency/loyalty program to the small company on Main Street, USA.  That, I’m all for.  I also like that they reward loyalty behaviors other than just purchases (ie: checkins, recommendations, etc.)

An Aside:  Warning – their terms and conditions state THEY can use any information you collect through the service.  Meaning – they get your customer list and can use it how they want.  I’m sure there isn’t some diabolical intent here but the bottom line is they own your customers names and details too.  Someone may find that info valuable at some point and the merchants’ customers may be getting offers from someone else in the future.

Living in a House VS Building A House

Enough about what they do.  What I really wanted to get into is a discussion around how amateur evaluations of loyalty and incentive programs sound great – but aren’t.  It’s kinda like saying “because I live in a house I can build a house.”  Really… let’s see how that works out for you.  Just because you’re a member of a loyalty program doesn’t mean you know how they work. 

At one point in the video (actually more than once) Scoble uses airline frequent flyer programs as the model for Chatterfly – saying something to the effect, and I’m paraphrasing not quoting - “the airlines use these programs successfully to drive loyalty therefore they should work for the local merchant.” 

Not sure if I buy that.  And here’s why (and why you need to have someone evaluate these types of marketing programs)…

Airline Frequent Flyer Program Value

• Airline frequency programs are based on ticket purchases – and a vast majority of people in airline loyalty programs do NOT spend their OWN money on tickets.  They spend their company’s money.  In other words – you’re not investing YOUR OWN cash.
• Airline frequent flyer programs seem simple – one mile for each dollar spent.  However, miles and dollars are not equally valued.  A flight to LA from NY may be $700 and a flight from LA to SF may be $500 – the airlines have a variable starting point for their award calculation – and, as anyone who’s ever paid for a ticket out of their own pocket you know there is some serious calculus behind what an airline charges for a ticket.  It’s not the same as the price for a Grande Latte – which is the same no matter when you buy it and where you might buy it (regional cost of living equations aside.)

The math doesn’t work… let’s review

• For purposes of discussion we’ll assume the average ticket cost is $500 and the average “award ticket” can be earned at 25,000 miles (this too varies considerably between airlines and programs.)
• So… a dollar spent = a mile earned and therefore:  $500 ticket = 500 miles.
• 25,000 miles divided by 500 miles = 50 tickets
• Out of pocket for the traveler = $25,000
• Award value = $500 (one ticket “free” at normal average ticket prices)
• Award value as a percentage of purchases to earn the award = Approximately 2%
• So the math says the airlines are giving away about 2% of their revenue in awards. (We could go on too about the value of an airline seat and how it has a specific shelf life – an empty seat =$0 so any amount is better than $0 – not the same with tangible goods.)
• Now let’s get into the real “value” of an airline ticket.  As most of us know – an airline ticket isn’t just an airline ticket – it’s a portal to a destination.  A destination where we’ll spend a week or at least few days, enjoying the sights, the sounds, the food, the fun, the surf the sand, etc.  In other words, we don’t look at the ticket in isolation.  The ticket gives us the ability to have a much larger award – a vacation or something that feels like a vacation.  The ticket value is not $500 – it is an “experience” as MasterCard would remind us – that is priceless.

Loyalty programs for airlines are hugely successful for those two BIG reasons

1.  It isn’t your money
2. The award to you get is much more than the award offer from the sponsor.

The Amateur Evaluation

So let’s apply the same ideas and thoughts to a local merchant.  Let’s just say a restaurant.

If we use the same math as above – you’re looking at about 2% of spend as a reward.  I know it can vary but the amateurs in the crowd want to use airline loyalty as a starting point so I should too…

• Average meal cost (guessing and variable by region) = $50
• 2% of Spend = $1.00
• Spend required to get a “free meal” (assuming that would be one of the award choices) = $2,500  (remember – this is YOUR money – not someone else’s.)
• Now, assume you want to use your points for something other than services offered through the sponsor – like say an iPad (I only use that ‘cuz it might drive some SEO here on the site.)
• Cost of iPad = $500 (roughly – I’m into easy math)
• Point value using industry standard ½ cent points = 100,000 points
• Amount you need to spend at the restaurant to earn an iPad = $25,000  (for the real math geeks – that’s $68 per day for an entire year – no days off, no holidays, no weekends – every freakin day for a year!)

Yep… you’d have to spend $25,000 at a restaurant to get an iPad if we applied “normal” airline frequency payouts as our guideline.  And the iPad is just an iPad – no beaches, no family time, no shared experiences (okay – we can probably say something about accessing cool apps and membership to the Apple fanboy club – but really not the same as a vacation is it?)

Why You Need Experts

This is why you need experts in the field.  Scoble is a very smart guy.  Yet, he falls victim to thinking that because a concept works in one place – it should work in another – ignoring (or being ignorant of) the variables that go into creating a workable, successful loyalty and incentive application.

Social Currency

I realize I’ve spent the entire post talking about the financials here – and that is one HUGE variable in the equation.  But there ARE ways to use these local, small business programs effectively without having to make your customers live, eat, sleep and breathe your product.

And that is to leverage social currency such as badges, special VIP seating, notification of specials, special VIP events, etc.  There are a variety of awards you can bestow on your best customers that have nothing to do with redemption and point values. 

This is where Chatterfly could have some real juice – connecting all those non-purchase loyal behaviors to social currency.

But that also means you need to really understand your offer, your value, your position as a vendor/merchant to know what those social currencies are and how to leverage them.

Whew…

If you’ve stayed with me this long I salute you.  Love to hear your comments on whether you think local programs are valuable – and if the mode of points for “prizes” is applicable in the small scale, day-to-day world most of us live in.  I think it takes a different approach than points for purchases.

What say you?

 

Comments

[Drew Hawkins]

That's a lot of math but it makes a good point. Loyalty programs aren't a cookie-cutter situation. You can have a platform to run the loyalty program on, but the actual parameters of that program (rewards, which types of behaviors to reward etc) is where the expertise comes into play. Your example with the airline comparison to another award type was on target.