Importance of Tiering and Approaches to it in Loyalty Programs

One Size doesn’t fit All is an age-old adage that holds true in many different contexts including the structures of Trade Loyalty Programs. Exactly same incentive structures for every partner in a program would lead to many issues which we will cover in more detail below.

  • No Incentive to Grow

Having a tiered system with higher ratio of rewards for partners in top tiers will provide motivation to partners from lower tiers to grow their business. There are hard tier cut-offs in place which give explicit goals for people to aim for which in turn leads to growth of business with each individual partner. In the absence of tiering system there is no hard incentive to grow the business.

  • No incentive for big partners to retain

The converse of above point, having tiered structure also gives incentive to top tier partners to retain their business level at all points of time. Not maintaining the level would mean losing their tier benefits for longer periods of time which they would want to avoid at all costs.

  • Missing the Opportunity to Establish Stronger Relationships

Tiered structure also gives easy avenues to provide differential treatment to higher tiered partners beyond higher earning potential. Specific relation building activities such as Family engagement, Special occasion celebration, etc can be undertaken for higher tiered partners which go beyond the transactional nature of the relationship. Higher tiered outlets are most likely very important for competition too so it makes sense to build firmer relationships with them.

  • Lack of Priority Assignment

Handling service calls and requests is a very important component of management of loyalty programs. Tiered structure helps the executives immediately identify high priority calls to ensure faster response and resolution. This in turn ensures positive experience to the most important partners

Now that we have established the importance of tiering in Loyalty Programs, lets look at the various approaches on how it can be done.

  • Quartile Classification

The simplest approach is to divide the partners into quartiles basis their business and considering the quartiles to be different tiers. This is a rudimentary approach, but it is easier to communicate the logic behind it to the partners and Sales teams which helps in better cascading and buy-in of loyalty programs.

  • Business Contribution

Starting point of this approach is to calculate the contribution of each outlet to overall business. Then the outlets need to be sorted by business and by calculating cumulative contribution, one can figure out the outlets contributing to top X% of the business. In many cases the results are in line with the 80:20 principle where 20% of the outlets contribute to 80% of the business. In some cases, the distribution is even more skewed. By drawing a line at business contribution levels instead of through numerical distribution, the tiers can be made in a more refined way.

  • Compliance and Other Hygiene Factors

Other factors that can go into tier classification are hygiene factors which need to be done by all partners by default. By including them as entry barriers in tiers, one can ensure high levels of compliance among all partners. Factors such as timely payments, sticking to their assigned territory, low sales returns, etc can be included here.

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Topics: Loyalty Programs

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