SME Update - Loyalty vs Rewards

Rewards vs Loyalty programs. 

I regularly get asked by small to medium businesses whether they should consider joining this loyalty program or this other loyalty program. Is it worth the cost and how can you judge the effectiveness? I am writing this blog to explain in detail what a small to medium businesses should consider when looking at a program for their consumer base.

Firstly - It is highly likely that the solution you are looking at is not a loyalty program, but a rewards program. They are easier to implement and also generic, hence easily sold. Interestingly, they use the word 'Loyalty' in most of their branding material, but in reality, when you dig into the detail, they are a rewards card. In fact, they are usually high margin rewards card with a high cost. Loyalty and rewards are two vastly different structures and you need a loyalty program which may or may not have a rewards component.

What is the real difference between the two and does your business actually need either?

The question can be answered by the following question.

Are any of the following items of interest?:
1) Increasing frequency of consumer purchase.
2) Increasing average purchase value or duration of consumer?
3) Do you want to increase breath of offering for your consumer?
4) Do you want to leverage more consumer data?
5) Do you want to lower your costs of goods sold?

If you answer no to all, you do not need a loyalty or rewards program. An example of this is a real estate business. Their customers are infrequent and an extremely high percentage of customers are single visit per multiple year.

What are reward schemes?

There are literally thousands of schemes in this segment as they are actually easy to implement. You charge the merchant as little as 0.7% through to 10%. The big names in the business are Visa, Mastercard, Amex, Flybuys through to the lesser known more expensive ones like Lyoness. They are an extra cost to the merchant, so the merchant who services these cards has to consider this in their margin planning and typically has a slightly higher price to incorporate those costs. In general, these cards profess to increasing your revenue by driving customers to your business which more than offsets the cost of the card lowering your marketing overheads as you only pay for it on 'success'.

Issues with reward schemes?

Longevity - The more expensive the scheme is to the merchant the more they become noncompetitive on price and also the more likely they are to drop the scheme. Numerous expensive rewards schemes have come and gone over the last 15 years. Some of the cheaper ones, just linger on as the cost to the merchant is bearable, but the benefit is also intangible and they are loathe to drop them due to perceived risk.
Margin erosion - These schemes take off the top and can be more than your normal marketing expense as a % of revenue. Does it actually translate to increased revenue. For lower margin businesses, that may require a doubling of revenue just to break even.
No Loyalty - They are reward schemes, they do not create attraction and retention. At the lower end, as a customer, do you choose a location just because they take Amex or are you just happy if they do so you get a few extra points?

So, what is a loyalty Scheme?

A well executed loyalty scheme is different for all industries, but it does the following:
1) It is inclusive.
2) Status needs to be earnt and the result is recognised (Potentially publicly).
3) It creates recognition of the individual.
4) It has multiple tiers (gamification) which confers multiple levels of high perceived value rewards. It elevates the customer to a higher perceived 'social status'.
5) It gives the customer a value differential. The perceived value the customer receives by being included in the club is significantly higher than the actual cost. In a similar fashion to elegant currency in a negotiation.
6) The rewards that are given are unobtainable easily with money and are conveyed graciously to those with elevated status.

These types of structures as a loyalty program in your business will drive up frequency and breath of purchase and result in a higher average sale as well.

How do you structure those 6 points for your business? You go back to the customer and analyse their journey and what they value. Having done this analysis numerous times for small to medium businesses, it is the same analysis whether you are a electrical supply company for tradesman, a caravan park or a main stream retailer. All businesses must ask the same questions as their customers are generally human. What do they truly value from your business?

If you would like to have a chat about what type of program would work for your business, give me a call. I love these types of business model / consumer discussions.

Have a great day!


Ross.

The Dry Season of Innovation Funding

Whilst I am a complete advocate for the new Tax Incentives for Innovation Bill 2016 for early stage investors, it actually has one very large problem...

It has created an immediate absolute dry season of funding. A complete drought!

To be eligible for the tax incentives (for early stage investors such as capital gains tax exemption and a 20% tax offset), the purchase of newly issued shares must occur after the 1st of July 2016 or Royal Assent, whichever comes later.

Even if the bill passes quickly, everyone has to at least wait till the 1st July 2016.

I am aware of one investment group on a project who understandably no longer wants to invest in April, but now wants to wait till at the bill comes into effect.

The interesting thing is, admittedly, almost all the tax amendments over the last 10 years have been closing down holes and usually are dated back to the announcement date. Why in this case did we create the funding gap and put the effective date into the future? Even deals that are on the table and haven't been signed are highly likely to be postponed due to the generous effect of the bill for investors. Even existing open channels are likely to dry up.

So....

Where will ESIC's (Early Stage Innovation Companies) get funding between now and 1st July 2016 / Royal Assent?

How many ESIC's will now fall over with no access to funding for at least 3-4 months?

Lets hope for an amendment to back date the effective date and that existing funding will sustain you until the wet season!

The first 12 months

Well, it has been just over 12 months ago since I started my own business and I have learnt a lot in that time. Perhaps one of these may help you.


1) Before you start, take a break
I don't know how long you can afford to do this, but I took two months off without a phone. After 6 weeks, the stress and pressure had completely dissipated and I felt like a university student again. I came to understand what makes me happy and consider appropriate business models.

2) Create a business that makes you happy
I am truly happy when I am:

• Helping people; or
• Creating stuff from scratch

3) Create your model
I considered many and created 4

• Board roles (helping people)
• Business transformation (helping people)
• Creating a disruptive startup (creating stuff)
• The CIO Hub. CIO's part time for small to medium business (helping people)

4) Recurring revenue, not selling your hours.
Jumping into consulting would have been easy. My hourly rate would have been good and I have enough connections. The issue was that I would have been trapped into constantly finding the next gig or holding onto a cornerstone client. Over 12 months, I have steered clear of selling my time and focused on building low risk, lasting business models that do not require my time, but trickle in growing EBIT.

5) Set a budget
We had set a budgeted loss for the first 12 months and I am happy to say we did much better than budget although we still lost some money. This year we are cash flow positive.

6) Focus on helping people and the money will follow
If you are truly helping people with integrity, the money will follow. It is a slower way to build a business, but it builds lasting relationships and creates a great reputation in the small market of Brisbane.

7) Stick to your skills.
I have a lot of years experience in business transformation, financials and technology and that is very helpful to small to medium businesses who are bombarded with technology messaging every day. It is very easy to be extremely knowledgeable in an area you have specialized in for 25 years. You might need to tweak the model/s to match your core skills and what makes you happy.

8) Diversify your risks.
By creating 4 models, I didn't have all my eggs in the one basket. In fact the business transformation model has took off very quickly with a number of businesses loving the low cost transformation all managed by the highest quality local freelancers. This allowed me to put a little more effort into the disruptive start up.
The CIO Hub in comparison was slower to launch due all the enormity of setting up all aspects of a complete business.

So overall, the last 12 months have been a great experience. The business continues to grow successfully and I have loved the journey. There has been a dramatic increase in family time and being there for my 2, 3 and 4 year old children is priceless.

I say, have a go and enjoy the journey!

Have a great day!


Ross.