A loyalty scheme's rewards catalogue is crucial to its success, so why do so many fail by offering the unattainable or the uninspiring? Happily, the problem can be fixed with a little research...

Countless marketing academics have hammered home the idea that rewarding best customers drives their behaviour towards a brand. And yes, rewards are a crucial part of any customer loyalty programme - so why is it that the customer loyalty programme's rewards catalogue is perhaps the least well understood and most neglected part of the loyalty tool kit? What we marketing managers have to understand is that the rewards catalogue is the most important weapon we have at our disposal, mainly because it can influence participation levels and therefore the success of both customer and partner relationship management programmes.

The approach to the rewards catalogue is often ad-hoc; it's either relegated to the redemption manager to cook up the best catalogue he can manage at the time of the programme, or it might be arranged over a coffee-and-biscotti meeting between the marketing manager and the loyalty manager (i.e. a couple of options are presented and after some basic questions like "Is it attractive to my target audience?" the team quickly wraps up the catalogue so the programme can be rolled out). And therein lies the tragedy.

A rewards catalogue has the potential for maximum impact on a loyalty program - either for good or for bad! Just as a well conceived and properly constructed rewards catalogue can boost response rates phenomenally, a badly constructed one can drive response rates down drastically. But the impact doesn't end with response rates. In the mildest cases it can lead to what is known as "redemption inertia" (where participants in the programme accumulate enough points but never redeem them because the rewards just aren't exciting enough). In more severe cases it can result in poor participation rates, high attrition in the programme and - most importantly - high levels of irritation among programme members. Needless to say the latter factor will adversely affect future initiatives and probably derail the whole relationship management exercise.

So what are the factors that lead to redemption inertia and low participation levels? Well, at a broad level it's often down to insufficient attention being paid to the construction of the rewards catalogue. But more specifically, the main reasons are:

1. Little or no excitement value
   Rewards catalogues often fail because they don't excite the minds and emotions of the audience they're aimed at. Even though it's hard to believe, this is an every-day occurrence in loyalty programmes around the world.
2. Not enough variety
   This problem can cause a loyalty program to stumble badly. A catalogue that contains only one or two items in each redemption level provides very little choice and leads to certain redemption inertia.
3. Width of reward intervals
   Another thing that's often overlooked is the width of the redemption interval; in other words, what is the points gap between different items in the catalogue? If insufficient attention is paid to the reward intervals, it will lead to irritation for programme members, as well as large unusable points balances in their accounts (a high 'breakage' level).
4. Lack of aspirational rewards
   Closely related to the excitement value, the aspirational threshold determines the upward pull the catalogue exerts on sales. In other words, if there are no aspirational items (or if they are placed so far beyond reach of the average programme member), the aspirational threshold starts acting as a depressant for sales when consumers start to feel there's no point even trying for the big rewards.

So what's the answer?
How do you construct a perfect rewards catalogue so your programme members are galvanised into action, and your sales show real growth as a result? Where's the magic wand that you wave to achieve this? Well, sadly, there isn't one - there's no magic formula for building a powerful catalogue... but there are a few simple steps you can follow which, when followed diligently, can significantly improve the effectiveness of a loyalty programme:

1. Start with profile matching
   Put down the profile of your programme's participants in black and white, in as much detail as you can. Include their demographic and psychographic characteristics. (Demographics are physical attributes such as age and income, while psychographics are likes, dislikes, preferences in various areas, and so on.) Gather as much information as you can.
2. Interview your field sales teams
   They can tell you what the target audience's likes and dislikes are. They can tell you what kind of people are using your products in their various regions and territories. They can also tell you how people have reacted to different promotional campaigns. All this information will help you finalise the profile of the target audience.
3. Analyse past redemptions
   If you have run similar campaigns or programmes in the past, that could be the very best source of information you will ever get. Study the redemption patterns in your existing database as carefully as possible, using any and all analytical tools at your disposal. Ask which items were redeemed the most, and which were ignored the most. What was the points value of the most popular item? This gives you crucial guidance in deciding rewards and points levels for the new catalogue.
4. Member distribution mapping
   Study the distribution of your programme members across different purchase levels (e.g. an RFM segmentation). How many of them fall into the lowest purchase threshold? How many fall into the top purchase interval? What is the average purchase level for the intended target audience? This will help you decide not only the width of the interval between redemption items but also where to have the biggest range of item choice. This single element alone could boost response rates by as much as 100%.
5. Reward selection
   This is the final step in the catalogue building process. Study the information on member profiles and their points earning capacity to understand what their aspirations are. What is the maximum number of points that they can earn during the programme's lifetime or points cycle? What's the best reward that you can afford to offer for this value while help members realise one of their dreams? Choose your reward items carefully based on questions like these, and make sure that you have a fair combination of fun, utility, and aspirational items in the catalogue.

Building a rewards catalogue is a pains-taking and even arduous task. It is often for this reason that even seasoned loyalty managers tend to take shortcuts. As we saw last week in part one, the rewards catalogue is perhaps the most misunderstood weapon at the loyalty manager's disposal... but it is also one of the most potent weapons and if handled properly. A well planned and researched catalogue really can make all the difference between a so-so loyalty programme and an absolute blockbuster.