Tier status: How to best ensure your customers grow with you

Tier status: How to best ensure your customers grow with you
Oct 22, 2019

Four steps to take before you launch your new elite tier.

At the start of every year, loyal customers everywhere begin their quest to earn elite status...again. Those who are well-versed in their favorite program know whether they qualified, or better yet, requalified for the prized status that brings them a different level of service and a better experience.

Established programs have long-standing structures that members memorize and follow earnestly. To stay current, these programs need to periodically announce new benefits and inspire members to requalify year after year. For example, United Airlines recently redesigned its upgrade system to better reward higher tier fliers.

For newer programs, the road to inspiring members to engage with or advocate for your brand can be complicated and filled with challenging questions.

Wherever your brand sits on this spectrum, it’s important to outline your objectives and the associated measurements that will define success for introducing a new tier. Are you protecting and growing share of wallet from your highest spending customers? Are you aligning your resources to focus on members who provide a larger share of revenue and profit to the organization? Or, do you need to maintain relevance as competitors launch tiered programs within your industry?

Outlined below are steps to take before launching a new tier so you can demonstrate ROI within the business and create an exceptional customer experience.

Study your customers’ past behavior.

Many companies focus on year-over-year changes to understand how their business is trending. For tier status, consider looking at a minimum of three years of data to truly understand patterns.

Travel industry programs focus on business travelers who are likely to continue behaviors year after year, which makes the qualification process second nature. However, for another industry, such as specialty retail, the same is probably not true.

Consider the electronics consumer who spends $6,000 on a full home theater setup. Are they going to do that again next year? Probably not. In this instance, you need to create a way for members to overcome the episodic nature of your business.

Knowing what your members will do year after year is not only helpful in understanding the natural migration in and out of a tier but will also provide you with a strong grasp of how many members you can expect based on your qualification threshold.

Models developed to predict the total number of qualified members will take into account qualification and requalification over a number of years. This not only helps you manage program messaging, but also your budget and capacity to deliver that top-tier experience your members desire.

Determine the qualifying criteria for tier status.

Qualifying criteria for tier status will vary across industries. To demonstrate, we’ll explore the different options for airlines vs. retail.

Miles or segments flown are the most typical qualifiers for elite status on airlines. But in today’s world, are these the right behaviors to be measuring? These metrics were relevant in the early 1980s when first-class tickets were not exponentially more expensive than economy. But now, a quick search on Delta indicated a fare between New York LaGuardia and Los Angeles for a month from now costs $611 for economy and $1,776 for first class, making the first-class ticket almost three times the cost of the economy ticket.

Keeping up with competitive programs is crucial in developing the qualification criteria, and companies that go against the grain will inevitably gain a lot of attention, both positive and negative. This is one reason why all three legacy airlines moved to points-based on dollars-paid as the base structure of their programs. Their highest loyalty member status is earned through actions like one-way flights or Tier Qualifying Points, which are based on the price paid for the ticket. This is advantageous for the big-spending business travelers but not the bargain hunters who favor lower prices over higher quality.

Either way, airlines have metrics that can directionally place value on a flight fairly systematically. For retailers, that is not always so easy. Retailers most often base tier status on spending, which is the easiest to communicate and track. Nordstrom’s Nordy Club loyalty program awards the title “Ambassador” for those who spend $5,000 or more annually on their Nordstrom credit card.

The retail industry isn’t yet able to provide many options for qualification. Other earning systems, such as shopping frequency, might end up awarding a tier to someone who comes in and buys 15 packs of gum when you want them to be purchasing bigger-ticket items. However, for brands like Starbucks, it works because the typical visit does not have a wide range of spend potential.

Once you determine the criterion of points, miles, spend, frequency or another mechanism, you will need to examine the level of that criterion. This can be a painful line to draw; regardless of which break you select, members who just miss earning status will demand they be granted it anyway. To combat that issue, most programs exercise both a published threshold and an unpublished threshold, whereby members within a certain range (e.g., within 5 percent of earning the tier) are granted with tier status anyway.

In conjunction with what the business can deliver is the balance of how elite the status truly is and what members must do to earn that status. What percentage of your member base do you want to have in the tier so that you are able to protect this valuable share?

Identify the right benefits.

The right benefits will balance what you can afford to deliver based on the number of qualifying members and the natural breaks in customer spend or behavior. Your benefits should also take into account what members say they want, what assets you have to work with, and how much growth or improved retention you can drive among those who qualify. All of these factors are interdependent and should be evaluated together.

As airline elite tiers have evolved, many of the benefits offered are based on the notion of removing a pain point. The process of flying has become more cumbersome with added fees and necessary security protocol, so elite members are able to bypass much of the additional costs and waiting. Upgrade to first class and get a little more space. Check your bags for free and accelerate through security.

Figuring out what benefits to offer in a tier, however, is not always easy. Retailers have to reach a bit further for benefits they can afford. Unlike the hotel industry, where free room upgrades are utilizing distressed inventory, retailer services such as offering free shipping have costs that directly correlate to the number of members using them.

Identifying the right suite of benefits involves looking at the assets and partnerships that your organization can leverage. A luxury company might invite top members to an exclusive fashion event. Similarly, an insurance company could offer discounts to health clubs or spas. Partner benefits are appealing no matter the industry—they give partners access to a new segment of customers, and rarely bring a cost to the brand or program providing those benefits.

Find impact through unpublished testing.

All of the mentioned elements are important, but the biggest assumption that an organization has to make—and be comfortable with—is what impact the tier will actually have on behavior. Your study of past behavior is based on what members have done without any tier, so how will this change when you launch the tier? Sometimes, this is difficult to know.

So, start with a test. Market the new tier like a promotion and limit it to a certain group that represents the group you’d want to participate. Measure their behavior compared to similar members to demonstrate the impact of the tier and its associated benefits. Communicate important details such as the time frame of the tier “promotion” and share that it may be discontinued. That way, if it does not achieve what you want, you have a strong exit strategy.

Applying rigor to a test will ensure it is effective, but there are downsides. Starting with a test still requires building the capability to deliver the tier to a smaller group of people. This often costs the same as building it for the entire member base. But you can explore qualification criteria, measure a test versus a control, and better understand benefit usage to gain a more accurate view of ROI once you decide to officially launch.

For instance, one organization assessed the costs for each benefit it wanted to deliver and determined that a single benefit would cost about $8 per member to deliver. It rated as one of the highest costs per member in consumer research, which led the company to believe it would have a higher participation rate. After introducing the benefit, not many members actually used it, even though they loved that it was offered. As a result, that $8 per member cost lowered to $1 per member. A small, discreet test of a tier can help ensure you’re prepared for the cost before it’s too late to turn back.

Make your brand’s tier status ‘stick’.

Are all of these components absolutely necessary? No. You might have to have them available simply as a way of staying competitive, considering it a cost of doing business. Bringing to life an elite tier is not easy, but if you can do it correctly, you will create an even greater layer of stickiness for your best customers. And you’ll provide something for all of your customers to aspire to.

ICF’s global marketing services agency focuses on helping your organization find opportunity in disruption.
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