Loyalty Glossary of Terms

A

Accrual Rate

The rate at which customers earn points in a program. For example, earn 1 point for every $1 spent.

Accrual Partner

A partner that purchases points in a sponsor's program. For example, when credit cards offer airline points to their cardholders - the credit card pays the airline for points issued.

Attrition Model

An attrition model predicts which customers are most likely to "leave," meaning those who have a high probability of discontinuing use of a company's goods or services.

Attrition Rate

The rate of fall-off in regular respondents, or the percentage of customers this year who are no longer a customer next year.

Appreciation Gifts

Also known as "Surprise and Delights." Rewards that are sent to customers without "earning them" through points or other specific behaviors e.g. customers are sent a local coupon booklet of restaurant discount coupons, cleaning coupons and other entertainment coupons. The customer isn't expecting the gift. They don't necessarily know how they qualified for the gift. They just got it as a “Thank You” for past behavior. Phone companies have employed this strategy by sending $50 pre-paid long distance cards to "great, loyal customers".

Award Fulfillment

The process by which awards are requested by or issued to a customer. Fulfillment may include warehousing and security for the award item, order entry, customer service, postage, shipping and handling and returns

.

Auto Enrollment

Customers are enrolled into a program without requesting to be involved in the program.

Auto Redemption

When a program member's account balance reaches a specific threshold of points, a reward is automatically generated. This is a passive reward since the member does not choose to receive it.

Award

An item that is purchased by the exchanged of points or other program currency

Aspirational Award

These are generally travel or luxury goods that a customer will “aspire to,” and thus motivate desired changes in behavior. Generally very high in perceived value.

Award, Cash or Cash Equivalent

An award of cash by check, a dollar denominated gift certificate or a rebate credited to the participant's bill.

Award Expiration

The automatic voiding of issued but unredeemed points. Often used to create breakage.

Award Issuance

The exchange of member points into awards for which the member has qualified.

Award Redemption

The exchange of an issued or qualified award for goods or services.

Award Tier

Some programs may group awards into specific tiers. For example, Tier One would consist of several awards valued at 5,000 points; Tier Two, 10,000 points; Tier 3, 20,000 points; etc. The benefits of this structure are to create breakage between levels and to create customer motivation to “stretch” up to a more valuable set of awards.

B

Back end

Loyalty programs are generally divided into front end and back end activities. The front end refers to all process that relate to the processes that relate to point earning and accrual. For example, the front end tracks transactions and sets the value of a point at issuance in terms of the earning rate(s), such as 1 point earned for every $1 spent. The back end refers to all processes that relate to point redemption. For example, back end processes are responsible for award fulfillment and setting the value of points on the reward side. For example, 5,000 points may have a perceived value of 1 cent/point ($50), but at 10,000 points, may be worth 2 cents/point ($200). Escalating value of points on the back end is one of many techniques that serve to give a company's bet customers a little something extra, and to encourage participants to “stretch” to the next level.

Behavior, Current & Desired

Customer behaviors are closely monitored by loyalty program managers and evaluated in terms of changes between current and desired behaviors. Current behaviors refer to what a company's customers are doing now, such as frequency of purchase, purchase characteristics, share-of-customer and trends in behavioral segments. Desired behaviors represent what the company wants its customers to do in the future, such as spend more or purchase more frequently.

Benefits

Ongoing privileges of being a member of a program. These may include express lines for program members and invitations to members-only events. Benefits help a customer feel recognized for their patronage. Also known as Customer Benefits.

Breakage

The difference between points issued and points redeemed. Breakage may occur from participants who drop out of or lose interest in a program, expiration of points or point balances that are beneath the first award level.

Burn, Open & Closed

The consumption of loyalty program currency to obtain reward benefit. Open burn refers to the ability of a participant to redeem for rewards from several companies. Closed burn means that reward options are limited to only those that the sponsoring company provides. For example, if airlines only offered airline rewards, that would be an example of a closed burn; when the airlines began offering awards from hotels, cruises, retail merchants, et al, it became an open burn.

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C

Cannibalization

The act of rewarding customers for behaviors that did not need to be rewarded. For example, many companies cannibalize existing versus incremental customer spend.

Call to Action

What the customer is instructed to do by the communications campaign. This may include calling, stopping by or visiting a web site to enroll in the program, referring a friend, completing a survey or simply using the product.

Churn

The number and type of customers who have left or are expected to leave a company during a given period of time. Also known as attrition.

Closed Economy

Equity programs whose hard benefits are provided exclusively in the form of the sponsor's product/service. Program currency stays within the company and the client

Closed-Loop Analysis

A continuous improvement process in which data analysis, campaign planning and customer interaction are combined in a virtuous "closed loop" where execution of the campaign through customer interaction produces metrics that can be further analyzed for better campaign planning.

Cluster Analysis

List analysis technique examining geographic, demographic or psychographic characteristics. Defined as the process of dividing data into groups (clusters) to meet the objectives of a particular application.

Coalition Model

Reward customers with promotional currency shared between 2+ partners. Provide ability to trace & reward individual behavior, great potential to create value, customer acquisition vehicle and expense are shared among the partners. However, this model is difficult to implement and there are multiple brands competing for the customer's loyalty.

Cohort

A group of like customers.

Community Benefits

The rewards/benefits that program members received by just a member in the program, without using program points. See Benefits.

C.R.M. (Customer Relationship Management)

How a company manages the relationships it has established with its customers. Ideally, it's a comprehensive, well-planned and executed approach to retaining customers through good customer service and support.

Control Group

Core group of target population that would be interested in general promotion, but is not exposed to the current promotion. Use of a control group allows program managers to detect the incremental impact of a program or a promotion by measuring the behavior of respondents versus the control group.

Critical Mass

When a program reaches critical mass, it has sustained enrollment and has accomplished sufficient behavioral change to make it self-supporting.

Cross-sell

Encouraging customers to buy products from other departments or categories. The promotion of other products when one product is originally purchased.

Currency

The exchange mechanism that allow a participant to swap equity (earnings) into an award. Types of currency may include points, miles, credits, rebate dollars or other.

Customer Segmentation

The grouping of customers into geo-demographic segments including such factors as age, spending, location, income, psychographics, purchase profiles or combinations thereof. Also, the use of OLAP or data mining techniques to find groups or "clusters" of customers with common attributes or spending patterns.

Customer Value

Determination of customer value varies by company and industry. Most of the time customer value is calculated based upon some measure of recency and frequency of purchase, tenure (length as a customer) and the amount the customer has spent in a given time period. To determine a customer's potential for incremental performance, that customer's current value statistics will be matched against the average for his/her cohort group. The difference between the two represents the customer's potential for a positive lift in value.

D

Data Mining

The process of using software tools to sift through large amounts of information in a database to find patterns, groups, statistical correlations, and relationships. Also, the process of utilizing the results of data exploration to adjust or enhance business strategies. Data Mining tools are typically geared for users who do not know exactly what they are searching for, and so they are looking for particular patterns or trends. The analysis of consumer data related to other market data to predict buying patterns.

Data Warehousing

The extraction, consolidation and analysis of operational data within an organization. A data warehouse is typically a subject database that allows users to tap into a company's vast store of operational data to track and respond to business trends and facilitate forecasting and planning efforts.

Dialogue

Consistent exchange of ideas and value between customer and company that leads to a more productive, more profitable relationship.

Direct Marketing

Any advertising activity which creates and exploits a direct relationship between you and your prospect or customer as an individual.

Discounted Cash Flow Analysis

A method of frequency campaign financial planning that takes into consideration the time value of money. Serengeti uses the present value of future transactions in the determination of award incentive budget allocations by member segment.

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E

Earn, Open & Closed

Earn is a term used to reference how a customer accrues equity in a program. Open earn refers the accumulation of points or other currency from any participating source or partner within the program, whereas closed earn is restricted to the accumulation of currency only from within the participating source.

Effective Funding Rate

The actual rate at which customers earn points and rewards in a loyalty program. Typically calculated by dividing the actual price paid for an award by the loyalty program/the amount of $$ that had to be spent to earn the award.

Enrollment / Re-enrollment

Becoming an "active" member in a loyalty program. Often performed online, through call centers, or at the point of purchase, enrollment makes the customer eligible for the benefits of the loyalty programs. Such membership may expire over time due to non-use at which point re-enrollment may be required for further program participation.

Equity

The amount a participant has earned that is translated into points or other program currency

Equity Programs

Frequency/relationship/loyalty programs which use a promotional currency, allowing customers to accumulate a store of value redeemable for hard benefits.

Event-driven programs

Database programs that are triggered to produce communications based on events such as birthdays, anniversaries, thank you letters, etc. or signals of imminent attrition.

Exit Strategy

The plan that details the process for ending a program. Components may include embedding a cancellation clause in the program's terms and conditions of participation, notification to customers that the program has ended or will end on x date and the amount of time allowed between notification and program end date for earnings and redemption.

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F

Financial Model

A financial model is essentially the pro forma for the program. It projects enrollment, administrative costs, points accrued, points redeemed and the program's ROI on a one- to five-year basis.

Frequency Marketing

A.k.a. Loyalty Marketing, Relationship Marketing. Any sales or marketing strategy that rewards loyal customers for their repeat business. Typically, involves point accrual based on the customers' transactions or activities and the exchange of those accrued points for incentives such as free or discounted goods and services and/or enhanced levels of service; identifying, maintaining and increasing the yield from best customers through long-term interactive value-added relationships.

Front end

Loyalty programs are generally divided into front end and back end activities. The front end refers to all process that relate to the processes that relate to point earning and accrual. For example, the front end captures participant transactions and sets the value of a point at issuance in terms of the earning rate(s), such as 1 point earned for every $1 spent. Bonuses for specific behaviors are also awarded on the front end. The back end refers to all processes that relate to point redemption. For example, back end processes are responsible for award fulfillment and setting the value of points on the reward side.

Funding Rate

The rate at which customers earn points and rewards in a loyalty program. See perceived funding rate and effective funding rate.

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H

Hard Benefit

A tangible reward, which may be earned in its entirety, which requires the program sponsor to spend out-of-pocket dollars to provide it, and for which the member would otherwise have to pay. (Do X…get Y, such as travel, merchandise, gift certificates, rebate checks or experiences.

Hard Points

Points are awarded contingent upon a purchase, such as 25% point bonus for X+1 tanks of fuel at ExxonMobil.

High Value Customer

An economic view of a customer that measures how profitable the customer is to the company, instead of measuring the profitability of product or service lines. Customer relationship management is geared towards optimizing the value of each customer.

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In-Kind Awards

The host company's own products and services. For example, wireless minutes and caller ID are examples of in-kind reward that would be offered in a cellular loyalty program.

Invisible Points

Offers/rewards of which customers are unaware of the accumulation. Used for scoring based on behavior/profit margin of purchase.

IVR (Interactive Voice Response)

A system that presents callers with menus of options, and assembles prerecorded words and phrases in response to information the caller inputs into the telephone keypad; systems that provide recorded messages over telephone lines in response to user input in the from if spoken words or touch tone dialing.

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L

Liability

As points are issued by a program, a percentage of their total value is recorded on the company's balance sheet as a liability. The percentage of points issued that is recorded reflects the total points issued minus estimated breakage. This accounting procedure recognizes that although it may take time for a point issued to be redeemed, the company nevertheless has made a promise to pay for them in the future. As points are redeemed, “used” points are retired on a company's income statement as an expense, and the balance sheet liability is reduced accordingly.

Lifetime Value (Value Contribution)

Defined by Don Peppers and Martha Rogers in their book Enterprise One-on-One as "the stream of expected future profits, net of costs, on a customer's transactions, discounted at some appropriate rate back to its current, net present value."

Loyalty Marketing Programs

A.k.a. Frequency programs, relationship programs . Marketing programs that recognize and reward customers based on tracking purchase and retention behavior.

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M

Market Penetration

A measure of marketing effectiveness expressed in terms of the number of customers or revenue a company has in a particular market segment, divided by the total number of companies or possible revenue in that market

Member Tier (Recognition Level)

A customer may be placed in a special member group or tier based on their volume of purchases, value contribution or account lifetime value. In addition to offering a higher level of customer service, such member tiers typically afford greater rates of point accrual, more advantageous point exchange rates for awards and less restrictive expiration and re-enrollment policies. Often members in elite tiers must maintain a specified level of purchases within the calendar year to re-qualify for that recognition level in the following year.

MSR

Member Service Representative. A call center agent dedicated to responding to loyalty member questions and requests.

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N

NPV

Net present value, or the present value of all cash inflows and outflows of a customer, project or investment at a given discount rate. NPV first determines how much a customer's purchases are worth over time, and then discounts that information back to the present.

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O

OLAP (On-Line Analytical Processing)

A technique for deriving information and business intelligence from a data warehouse by summarizing the data into a multi-dimensional schema. This technique is used for decision support such as trend analysis. Typically OLAP tools support drill-down from top-level summaries to underlying detail data.

On-Demand Redemption

As opposed to automatic redemption, customers request an award at a time of their own choosing over the telephone, via fax or internet.

Open Economy

Equity programs whose hard benefits include products and services other than and/or in addition to the sponsor's product/service; currency of the reward program moves in and out of the program as opposed to the currency staying between the company and the customer.

Open Enrollment

Anyone can enroll in program but the individual must choose to opt into the program.

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P

Participation

When a member in a program responds to dialogue. This includes calling the toll free number for information, visiting the program's web site, making an additional purchase.

Partner

Another company that participates in a sponsoring company's program. Partners can perform any number of roles within a loyalty program. They can be a one-time promotional partner, an awards supplier or an accrual partner where participants can also earn points by purchasing the partner's goods and services.

Payout Rate

Funding rate. For example, if 1 point is earned per every dollar spent, and if every point is worth 1 cent, then the payout rate is 1% of all purchases.

Perceived Funding Rate

The perceived rate at which customers earn points and rewards in a loyalty program. Typically calculated by dividing the retail price of an award/the amount of $$ that had to be spent to earn the award.

Perceived Value

How awards are valued by the customer. For example a $50 gift certificate would have a perceived value of $50, whereas a concert with backstage passes to meet the band would be perceived much higher than the face value of the tickets.

Player Model

A way to reward customers with another company's promotional currency. It's inexpensive and customers get instant recognition but customers decide whether to be in the program and the relationship is second hand. Reward examples include long distance, hotels, car rentals, credit card usage.

Point Caps

The amount of points a customer can earn in a given time can be limited, or “capped.” This can help limit fraudulent practices by participants.

Point Accrual

The predetermined means by which members within a Loyalty Program accrue program currency as an incentive or reward for purchasing products and services.

Point Expiration

The automatic deduction of unused program currency from the member's account for non-use. Frequency Marketers use point expiration policies to cap future point-related liabilities. Point expiration is sometimes referred to as breakage.

Points

Units of currency used to signify the amount of customer equity earned by participating in a program.

POS

Point of sale. At a retail location, POS represents 1) a communication vehicle located at or near a check out or 2) device or system to capture transactions at the time of sale.

Positioning

The 'character' of the product or company, as opposed to what it is. Is it efficient? Or friendly? Or cheap? Or deluxe? the tone of voice used when communicating with people, the frequency of communication, and the types of offers all contribute to the positioning of a product or service

Promotional Model

An inexpensive model that creates the illusion of value through sweepstakes, games, punch cards, stickers, charity, collectibles & affinity. However, this is a short term model with no continuity and now way to motivate specific, individual customer behavior.

Proprietary Model

A program structure that reward customers with the sponsoring company's own promotional currency based upon the customer's spending. This model is used to track and reward individual behavior, create value far in excess of actual cost and establish a continuity relationship. The advantages to a proprietary structure include more flexibility and control of currency issuance, database, dialogue and relationship components. However, this model is the most expensive to operate and maintain, and poor design/structure can be costly.

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R

Real Time

Transactions that occur at present. Eliminates the lag time that results from transactions being captured, stored, and then fed into another database.

Recency

Is a measurement of when the customer last interacted with program in a recorded event such as visited the Web site, making a purchase, calling the customer contact center and so on. Recency is usually considered the strongest predictor of future buyer behavior.

Recognition

The act of recognizing and thanking customers for their patronage. Recognition may include preferred program status, expedited handling, appreciation gifts, etc. The goal of recognition is to make customers feel special and appreciated.

Redemption

The process of exchanging program currency for an award.

Relationship Chain

The voluntary exchange of information and value between the brand and the customer with the mutual expectation of gain.

Relationship Marketing

Building relationships with customers so that the customers are loyal, buy repeatedly, and stay on as customers. Database marketing that stresses customer retention over acquisition.

Retention

Defined as customers making repeat transactions. Internet users may be considered retained customers if they make frequent Web site visits, purchase regularly, often post comments to message boards.

Reward

An item of value that is exchanged for points, or offered as compensation for completion of desired behaviors.

Rewards Earning Ratio

The amount of time it takes a typical customer to earn an award. For example, it takes 10 visits (or 6 months for the typical RediCard customer) for an RRI customer to earn 1 free night.

Rules Engine

A set of instructions that awards points based upon a selected set of desired behaviors. Also converts spending volume into point values.

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S

Segment Mobility

The ability to move customers within one performance category into another, more profitable category. For example, migrating occasional users to frequent users is one example of segment mobility.

Share-of-Customer

The level of penetration of a customer's total expenditures in any given product/service category which a marketer has succeeded in achieving.

Share-of-Market

The percentage of business (transactions or dollar volume) that one company has as compared to the total business available from all competitors within a category.

Soft Benefit

An intangible consideration extended to a member as evidence of the member's special status, and it usually takes the form of some sort of special treatment (special access, special deals/ discounts, special experiences), often requiring little or no out-of-pocket funding by the sponsor.

Soft Points

Points that have no monetary value since the value is derived from the benefit it allows that customer, such as first access to newly released rentals at Blockbuster.

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T

Targeting

Selection of best customer prospects to fulfill specific company objectives.

Tier Level

Programs may add escalating customer benefits and award earning opportunities by establishing membership tiers (e.g. gold and platinum levels). Levels are one method to build in customer recognition, and are also highly effective at targeting the highest funding rates to the best customers.

Tier Mobility

The movement of customers between membership tiers. Tiers are often assigned on an annual basis. See Tier Levels .

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V

Value Added Proposition

Managing and enhancing the value to both the customer and the company within the relationship.

Value-at-Risk Customers

Any high-value, high-yield customer with a high propensity to churn. Often Frequency Marketers give extra weighting to Value-at-Risk customers in policy planning and award budget allocations

Vested Equity

A lump sum of points given to a customer upfront that can only be used as time passes or the desired behavior is exhibited. For example, "to jump start your account, we have placed 5,000 points in your account. If you remain a loyal customer for 6 months, you can use 2,500 of them. After 12 months of remaining a loyal customer, you can access and use all 5,000 of them." This strategy is typically used in concert with a regular equity accrual strategy.