Loyalty Punch Cards 2.0
Rethinking how stores approach their Loyalty Punch Cards
What happens when you enhance the “By 10 X, Get 1 X Free” program?
The Loyalty Punch Card can be viewed as one of the most primitive and simplistic plays for a business to apply behavioral economics, promote psychological habits and bolster organizational allegiance today. This archetypal purchase gamification, boiled down, is essentially a mere program of motivation, influencing customers to purchase more “X” in order to strive towards a reward of “Free X.” However, I believe there is a compelling missing layer to this program, which can significantly increase incentive and loyalty, which after all, is the initial purpose of employing and operating such programs.
As a disclaimer, this enhanced program will not work for all businesses due to varying overhead expenses. However, it is quite fluid and can surely be adapted in order to make economical sense for any business no matter their distinct variables. This proposal is just a concept, not an explicit standard for mass-adoption.
To understand this new program enhancement, let’s imagine and use a local coffee shop, which already offers a “Buy 10, Get 1 Free” Loyalty Punch Card. Additionally, let’s presume the total cost of making a coffee is $1, which sells at $3, a conservative average according to sources.
The 1.0 Card
At this time, if the exemplary coffee shop sells 10 coffees (at $3 each) for a total revenue of $30, and their total cost is $10, their gross profit would be $20. With their “Buy 10, Get 1 Free” Loyalty Punch Card, after selling 10 coffees for $30, their total cost (now including the complimentary coffee) would be $11, lowering their gross profit to $19.
The 2.0 Card
The imagined Loyalty Punch Card enhancement just adds another tier to ones’ existing program. So, instead of a customer restarting with a new card after purchasing 10 coffees and receiving their complimentary drink, the program enhancement acknowledges their completed card and the gamification process continues. In other words, when one completes a second tier card, which counts how many times they complete that original first tier card, the customer earns a more significant reward, such as a week worth of free coffee. One already purchases 10 coffees and gets 1 free, but when this happens 5 times, they get a (work) week’s worth of free coffee (5 extra free coffee).
Rather than the existing program of “Buy 10, Get 1 Free” scaled up to 50, becoming “Buy 50, Get 5 Free”, we want to acknowledge and reward the customers who complete the first tier 5 times. As mentioned, let’s reward those customers who complete the first tier 5 times, with 5 extra coffees (on top of the original 5 which they earned from the first tier).
So according to the enhanced program, when one buys 50 coffees, they’ll now be getting 10 free coffees (5 from the original “Buy 10, Get 1 Free” program, and now 5 extra for completing that first tier 5 separate times).
The Economics of the 2.0 Card
When looking at the original economics of the first tier for 50 purchased coffees, it would look like this… The total cost of 50 coffees would be $50, but with the 5 complimentary coffees for completing the original Loyalty Punch Card 5 times, the total cost for the business would be $55. When the business is making $150 for selling those 50 coffees (50 x $3), their gross profit becomes $95.
So what happens when you take into account giving away 5 extra free coffees for ever 50 sold (aka the second tier)? The business would still be bringing in $150 (because they haven’t sold any additional coffees), but their total costs are increased by $5 (for those 5 extra free coffees), making their new gross profit $90.
Originally the business is running at a gross profit margin (GPM) of 66% or 200% return on investment (ROI) (as they profit $2 for every $1 they put in to make 1 coffee). They run at this 66% GPM for 10 coffees until they hit that “Get 1 Free” point in time, which is when they then run at a 63% GPM or 173% ROI (as they profit $19 for every $11 put in the make 11 coffees). After the 11th coffee, the business then returns to running at a 66% GPM until they hit another 10 coffees. Repeat this pattern until they hit the proposed second tier. Here is when they then run at a 60% GPM or 150% ROI (as they profit $90 for every $60 they put in to make 60 coffees). After those extra free coffees, the business then again returns to running at a 66% GPM.
At the end of the day, this second tier enhancement is only dropping the business’ GPM down a mere 3% or 50% ROI every 50 coffees purchased, something that takes months to accrue for the extra loyal customer. Again as a disclaimer, that 3% GMP or 50% ROI may actually be less-so “mere” and more-so “significant”, but it’s the broader concept that should be considered, not this example’s precise feasibility.
Reasoning for the 2.0 Card
Loyal customers are better than unloyal customers. It is a business’ utmost priority to turn all customers into loyal customers. Money and profits aside, this proposed concept is consumer-centric, entitling it as an essentially invaluable strategy. After all, we’re discussing brand allegiance, which is often difficult to put a price tag on.
Let’s step out of the shoes of an economist, and into those of a psychologist.
Suppose Mary purchases 10 coffees and gets her 1 for free, and so does John. However, while Mary is a loyal customer to this particular business, she only purchases a coffee there once a week. John on the other hand, is a more loyal customer who purchases a coffee at this business every day. With the business’ current single tier Loyalty Punch Card, Mary and John are being rewarded for the same behavior, which in actuality are completely unequal purchasing habits.
It will take Mary 2 more months to complete her “Buy 10, Get 1 Free” Loyalty Punch Card than it will for John, but why isn’t John being rewarded for completing those cards more often? While its obviously considered that John is receiving his “Get 1 Free” coffees more frequently (just a basic reward), ultimately though, John is not being treated as the more loyal customer that he is. This proposed second tier acknowledges Mary and John’s differences beyond mere single tier purchase frequency. This enhancement is for customers like John in order to incentivize those to remain the extra loyal customers that they are. It would take Mary nearly a year to reach the second tier, which is attainable, but more unlikely for her than it will be for John.
While one may argue customers like John do not need added incentive as they are already loyal and will continue coming back regardless, again think, isn’t it in the business’ highest interest to secure John’s steady business and make sure his $150 is a near absolute? In this situation, would you pay an extra $5 for a more definitive $150? Lastly, recall your favorite, most frequented business and imagine what it wold feel like to be acknowledged for your extreme loyalty. That feeling is priceless.
Again, while not every business can adopt this second tier Loyalty Punch Card program at the same scale, it is the concept that should be taken away. Not all customers are equal, and not all loyal customers are equal. Additionally, this scheme can be offered to various other parties in the chain, for example, by the coffee bean supplier in order to incentive the coffee business to continue buying from them.
Are we acknowledging all the opportunities to provide the sense of loyalty in everyday business? To justify the cost of losing money on Loyalty Punch Cards, it makes sense to view the enhancements discussed here as mere enhancements to advertising, no different than spending money on websites, social media, billboards or flyers (all marketing costs that businesses are already accustomed to).
Although a business may think they’re treating loyal customers better than unloyal ones, are they acknowledging the distinction between different types of loyal customers? This second tier program attempts to turn loyal customers into extra loyal customers, and to acknowledge those already existing extra loyal customers. In today’s hyper-competitive market, whether for coffee or another product or service, a business cannot afford to lose customers.