How Should Cannabis Retailers Structure Their Dispensary Loyalty Program?
Rewards programs are a proven way to generate loyalty to your business – especially in the emerging cannabis market, where early customer engagement is key to long-term success. But not all dispensary brand loyalty programs are created equal. From a business perspective, it’s not enough to generate loyalty as a check-box item --retailers also have to create a program that makes sense financially.
First, think about what you are rewarding – visits or purchases? One way to structure a loyalty program is to award a number of points or a discount after a certain number of visits. For instance, a customer could receive a $20 coupon after four visits to your dispensary. But let’s look at what might happen. If your buyer spends a lot at each visit – say $100 – then the $20 reward is a good return on investment from the business’ perspective, representing just 5% of their total spend. But what happens if your buyer spends only $20 per visit? The reward just jumped to 25% of their total spend...and 100% of their average spend! This cannabis product promotion might make the customer very happy, but it's a terrible deal for your business.
Another problem with structuring a dispensary brand loyalty program based on visit count is that there is no way to track how much the program is costing your business. Since each individual customer can spend a drastically varied amount of money over those four visits, the reward value in terms of percentage of sales is unique to each customer. That makes it impossible to aggregate and measure how much the reward program is costing your business as a percentage of total sales. Consequently, this makes it nearly impossible to understand how much the program is impacting your business’s return on investment.
Also keep in mind that even from the customer’s perspective, a visit-based reward program can be less appealing. If your customer spends less per visit ($20) and, therefore, the percent of reward relative to sale is high (25%), that customer is gaining more benefit from your program than the customer who spends more ($100) and their reward percentage is less (5%). In turn, the higher paying customer would rightly feel that your loyalty program is worth less for his or her buying patterns. At the end of the day, a visit-based structure could backfire and incentivize lower customer spending per visit, which certainly does not help you stay in business long-term.
On the other hand, basing your loyalty rewards on purchase amounts can get you the results you’d hope for – and more importantly, you can actually measure the cost of the program. For instance, if every dollar spent earns one reward point, then no matter how much a customer spends on a particular visit, their reward is the same percentage of their overall spending. A $20 coupon is always 10% of $200 of spending, whether a customer earns the 200 points in one visit or 10 visits. This deal incentivizes the bigger spenders --the more they spend per visit the faster they accumulate points and can redeem rewards --and, from a business perspective, 10% is a fair, market-standard percentage with which to be rewarding customers.
In addition, this model allows you to track exactly how much your loyalty program is costing your business. Taking the numbers above as an example, no matter how much a customer spends, your gross cost of the program is 10% of sales. But net is actually far less, closer to 2%. First, we subtract your 50% markup on products, which takes the 10% down to 5%. Then, we account for 40% of customers who never earn enough points to get to a reward level (called “slippage”) and another 30% of customers who do earn enough but don’t bother redeeming their rewards (called “breakage”). This formula results in your loyalty program actually costing just 2%, net. Clearly, basing rewards on purchasing is the more lucrative and financially sound way to structure a loyalty program.
The following springbig case study perfectly demonstrates the advantage of a points-per-spend program over a points-per-visit program:
As you can see, the points-per-spend program saw a 30% dollar increase and a 77% visit increase over the points-per-visit program. That is a clear advantage.
Of course, once you have the right loyalty program in place, you want to make sure customers are engaged with the program and are using it. Make the program accessible to all customers by offering a free membership or even a signup bonus. Make reaching the first few tiers easy, so that customers will have relatively quick gratification and a strong incentive to keep on spending at your dispensary. For retailers that are figuring out how to push cannabis products and brands, this system may reap long-term returns and happy customers. In short, the key to an engaging loyalty program means building a model that creates value for both your customers and, most importantly, your business.