Discounts are used extensively in loyalty and member engagement programs by providing members with offers which are not accessible to non-members (exclusivity).
In exploring discount programs, five design variations of this loyalty program strategy are considered: basic, delayed, tiered, bundled, and third-party.
Access to discount programs is normally free, however some companies may charge a subscription fee.
1. Basic discounts
This is one of the simplest program designs, whereby members who join are entitled to a set discount off every purchase for in-store and online transactions. This type of design is simple to understand and engage with, and can drive high participation rates (with members not wanting to miss out on their discount), ensuring substantial member data is captured.
While useful in generating behavioural commitment, it is questionable whether discounting can drive attitudinal commitment. Anyone can access the discount (one-time and truly loyal members), making it expensive to operate. If a member can access a better price or discount at a competitor, there are no exit costs if they switch, meaning the design may be limited in its ability to generate stickiness.
Baby Bunting VIP Membership gives members who register an immediate 5 per cent discount across a range of items in-store. The member retains the 5 per cent discount ongoing for all qualifying future purchases with Baby Bunting.
The Beyond+ program from Bed Bath & Beyond is a paid yearly membership program (US$29 per year) which gives all members access to 20 per cent off their entire purchase made at any Bed Bath & Beyond store in the US or online during the year of membership, plus members also receive free shipping. Incorporating the ongoing member discount and benefit within a yearly subscription is a sound strategy to leverage the sunk cost effect bias and generate stickiness from members looking to make the most of their US$29 membership. The membership fee is also another revenue stream for the program.
2. Delayed discounts
Delayed discounts are a more sophisticated version of a basic discount program, where a member transacting above a certain amount earns a discount to use on a future purchase. For example, ‘spend $50 and save 10 per cent on your next visit’.
This design is simple to understand and engage with, and has the added advantage of locking the customer into a future purchase to access the discount. An expiry date can be applied to the discount to stimulate FOMO (fear of missing out) and encourage the member to transact more quickly than they may have been intending. One-time customers will not access the discount, helping to manage program costs.
|My Cub Rewards
My Cub Rewards offers a delayed discount on fuel for all members who refuel at participating Holiday Station stores. For every US$100 a member spends at Cub, they get ten cents off per gallon of fuel the next time they fill up at any participating location. Frequent shoppers can redeem up to US$1.50 per gallon which would save them US$24 on a 16-gallon tank. This strategy takes advantage of the loss aversion bias where members are motivated to avoid losing their benefit before it expires, resulting in repeat purchases.
3. Tiered discounts
With tiered discounts, the level of discount provided increases based on the cumulative value of spend. For example, a member may start by receiving a 2 per cent discount, which increases to 4 per cent when they spend a cumulative $2,000 over a one-year period, and further increases to 6 per cent for $5,000 cumulative spend.
It can be argued this is a simple version of a status tier program, with status resetting at the end of the period. This approach is unique amongst the discount program designs in supporting the endowed progress effect and goal gradient effect.
Home Depot Pro Xtra Rewards by Home Depot is a tiered discount program. Cumulative spend with Home Depot accrues and once certain spend thresholds are reached, the discount off purchases increases thereafter. Members who reach Bronze level (after spending US$2,000) get 10 per cent off everything, members who reach Silver level (after spending US$4,000) get 15 per cent off everything, and members who reach Gold level (after spending US$7,500) get 20 per cent off everything. Since all purchases are counted towards the total spend, members are reluctant to give up the progress they have made towards unlocking higher discounts by shopping at a competitor.
4. Bundled discounts
Bundled discounts involve members being provided with a set discount off all products or services when a minimum number of products or services are purchased. For example, a member takes out three different insurance products with a single insurance company, earning them a 10 per cent discount off all insurance products.
Like a basic discount program, this design is simple to understand and engage with, however it also has some additional advantages. The discount is only provided to members who have a minimum amount of product or service consumption (indicating some level of brand loyalty), and program stickiness is built-in, because if a member reduces the number of product or services they access, they will lose their discount across all products (a clear exit cost). For example, if the member reduces their insurance products from three to two, they will lose the 10 per cent discount on the remaining two products.
NRMA is an insurance provider offering a loyalty discount to members. Members can use the loyalty discount calculator on the NRMA website to determine the amount they could save across all policies based on the below inputs:
– How many eligible policies the member has taken out with NRMA
– How many consecutive years the member has been with NRMA
The loyalty discount is re-calculated at each renewal and is adjusted based on how many active policies the member has at that time.
5. Third-party discounts
Under the third-party discounting model, brands provide discounts which can be used at third-party companies. For example, ‘spend $50 and earn a 10 per cent discount voucher to use at brand X’. This may be because the company does not have sufficient margin to offer its own discounts. It may also be because it is an independent program which relies on sourcing third-party offers for its reward pool.
This program design faces some challenges. It is more complicated to understand. It assumes members transacting with them will also be interested in transacting with the company honouring the discount. It involves the company promoting another brand, which may be positive (a halo effect could eventuate) or negative (marketing efforts focus on promoting another brand). There may be costs to access the third-party partner’s discounts.
AIA Vitality is a third-party rewards program aimed at improving the health of members by rewarding them for meeting health goals. The cost of rewards to members aims to be offset by a reduction in AIA insurance claims on the premise that members will have reduced their health risks and thus their liability to the company. Members earn AIA Vitality Points for committing (commitment bias) to making healthy choices like healthy eating, going to the gym, going for a health check or completing a set number of steps. Members can redeem points for third-party rewards like discounted movie tickets, spa vouchers or shopping vouchers. The AIA Vitality program is offered as the rewards program for members of a range of companies across banking, insurance, healthcare and other industries.
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 Bed Bath & Beyond, Beyond+, https://www.bedbathandbeyond.com/store/loyalty/beyondplus, accessed 29 June 2020.