Loyalty programme. Automatic and efficient

April, 2011
proto$ gen V mod 3F47BD (Londinium)
A bonus-based loyalty programme with multi-level marketing (MLM). Bonus assessment, use, and transfer. Processing of vendors" marketing actions, rebates and gifts to customers. Intellectual logic for bonus-based stimulation of sales of slow goods, and vice versa. Automatically and people-free. Theft-free as well, by the way.
Let’s dream of an ideal customer — from the seller’s point of view.
The ideal customer surely will:


  • buy things you want to sell. That is merchandise with the highest markup (and not necessarily with the highest price) or the merchandise you want to get rid of —slow sellers, etc.
  • buy from you, even though competitors 6sell it cheaper
  • never ask for a discount; in fact, sometimes they will be eager to pay a higher price (well, we’re dreaming, right?)
  • act as an agent of influence, promoting buying from you within their social circle, and virtually drag friends and acquaintances into your store
  • if potential conflict situations may arise, proceed on the presumption of your good faith (as opposed to the usual customer behaviour pattern "scandal" — "internet flame" — "court" — "Consumer Protection")

It’s hard to expect more even from an ideal customer, right? That is, of course, if we ignore the waiter’s fantasies from an old joke ("they should cook at home for themselves and send me tips by post") and the big red button "Print $".

Almost all technological innovations described in science fiction in the 19th and 20th centuries have been implemented or will be, beyond all doubt, in the near future.
Could the ideal customer, as we have described, be implemented in practice?

Most certainly.

Such customers are in abundance all around us.

The army of Apple fans — is it a bad example? 90% of users of iPhones, iPods and other plastic stuff at the price of gold ideally suit all criteria of the ideal customer.
The number of products in the Apple product range (laptops and computers excluded) can be counted on the fingers of one hand: Apple themselves decide what the customers will buy.
There’s a million of alternatives on the market at prices several times lower, but Apple is the absolute leader.
The prices are set obscenely high — and this fact does not inhibit sales, while the company’s profits (and capitalization) number in billions and are "off the charts".
When new products come out, people stand in lines to buy them, and many fans are ready to pay more to get their yearned after piece of plastic sooner.
The commonly known problems with quality and reliability of the products are by no means an obstacle to popularity, despite the fact that media pay close attention to such blots on the reputation of the world leader.
And, finally, every Apple gadget owner can argue about its advantages for hours (no big deal that sometimes you can’t reach a person by iPhone — it’s still THE BEST PHONE, because IT’S THE MOST USER-FRIENDLY! The fact that the phone that can’t always be reached is not completely a phone is not an argument).
To achieve such results, Apple had to combine innovative engineering (plus sleek styling) and truly brilliant marketing (in the actual sense of this term, which in Russia is almost always reduced to straightforward advertising).
Nevertheless, to achieve fantastic results you would expect fantastic effort is made.

But this is Apple, this is the USA, it’s like a different planet altogether. Steve Jobs is in a different league and is as unique as da Vinci.
And after all, Apple is the manufacturer and creator of the product.

But how do the down-to-earth merchants and resellers create their own ideal customer?

The necessary (but INsufficient condition), same as in the case with Apple, is having a great product. Only if Apple has great devices, Humanless — a great software solution, your great product, dear merchants, is a complex mixture of great product mix, right prices, combination of easy-to-use and in-demand services, and a high quality of company’s work in general, which is impossible to achieve without smoothly running business processes.

At Stage 2, when you already have a great product, your main goal is to solve, or at least to significantly relieve, the basic antagonism of the customer and seller interests, which is actually the basis of the highly competitive market economy: the seller wants to sell for more, the customer wants to buy for less.

In fact, efforts to create a great product are focused on reducing this antagonism by reducing competition: a unique product is unique because it has few or no competitors (Apple products are a good example).

A good customer loyalty program softens the basic antagonism (its total elimination in a market economy is essentially impossible) by harmonizing the interests of the seller and the customer.

This is how it works in the case of the XXL-Bonus customer loyalty program at Ulmart.

The loyalty program budget is set up as a percentage of the gross profit margin. Let’s say, you’re willing to give 10% of the markup to customers. So, if you earn 2$ on an item, then the rebate amount is 20 cents (hereinafter "the bonus"). The bonus size is specified in the online catalog on the website, and a customer can see online what bonus is awarded for the purchase of each product. The earned bonuses can be used later to pay for the following purchases. This immediately tackles the problem of the harmonization of interests in terms of maximizing the overall profit margin: the customer is interested in buying products with the biggest repayable bonuses, and therefore — with the highest gross profit margin for the seller. Note that such approach completely eliminates a drawback typical of traditional practices, when a bonus is calculated as percentage of the price: it’s obvious that the product margin and the product price are not always linearly dependent.

What do we do with slow sellers? The bonus program settings have parameters that define a product as "slow selling" (e.g. the warehouse stock is for over X days of sales AND/OR not a single sale within the last Y days, etc.) and a bonus multiplication coefficient matrix. E.g. if the warehouse stock is over three weeks, then the standard bonus is multiplied by the coefficient 1.5, five weeks — by 2, etc.
The multiplication logic may be however complicated. E.g. specific product groups or specific products may have constant multiplying/decreasing coefficients. Such options are useful in cases when you need to stimulate sales of particular products/product groups: for brand-new products in the catalog, or when you get an additional back-end rebate for sales over the target volume.

By default, dia$par uses a pricing model, where the final price is calculated by applying the markup matrix (in percentage points) to the so called current market price. This price is ideally the same with the actual entry price, but is corrected by product managers (or by the robot — according to predefined business rules and automatically imported competitors" prices), consequently all prices for various customer categories are automatically recalculated. The markup in the bonus program is calculated on the basis of that exact current market price. Such approach to pricing has a number of advantages, in particular — sales prices and theoretic markups that are used to calculate bonuses on each of the products are updated with minimum man hours (or even with no man hours — in case with the robot). Though pricing is a separate topic.

Users may control the size of the bonuses. Once they add products to the shopping cart, before completing the order, they can increase or decrease the bonus size for each product; the product price changes accordingly. In both cases the adjustment ratio is not 1:1, but with a certain decreasing coefficient, set by the administrator. Commission resulting from such adjustment (in any direction) is an additional profit to the company.
This service is especially in demand with corporate customers — with the resulting loyalty growth.

How is word of mouth stimulated? For the time being, there is nothing in the world business practice that can exceed MLM networks in effect. We also without further ado decided to follow suit.

So, the Herbalife scheme in the dia$par interpretation: relations between registered customers (counteragents) of the company have a classic fractal structure. Every new customer becomes a node of a tree, which grows branches of customers that he/she will bring in his own turn. And so on, and so forth.
A certain percentage from every total bonus for each purchase goes "up" the tree (from "lower" to "upper") — in the cartoon example it’s exactly half, 50%. So, if a certain customer receives 20$ for a purchase, then the "father" gets 10$, "grandfather" — 5$, "great-grandfather" — 2,5$ , and so on, until the size the of transferred bonus reaches 2 cents, then the transferring stops. Simple, clear, and effective.
And once again, this harmonizes the interests of the seller and the customers: now they too profit from advertising your company as the best provider of products/services in its market segment. A small amount (in most cases) of the MLM bonus is by no means a barrier: for most people it is the concept of taking minimum action and receiving dividends for life (or, "do nothing and make passive income") that is compelling.
In fact, high quality implementation of Stage 1 will give you a lot of enthusiasts: the very same Apple pays nothing for the loyalty of its fans. But having an intelligently designed and easy-to-use MLM system will be an additional catalyst to your success. The two key factors to the ease of use: a) upon a successful completion of Stage 1 you will indeed become one of the best, if not the best company on the market, and your customers won’t have to be ashamed for their testimonials; b) an easy-to-use suit of tools provided by the software (we took really good care it would be like that): after receiving an invitation via e-mail, a potential customer only has to click the link (or enter a promo code during registration), the stimulus — is to become a privileged customer right away.

HOWEVER: please note once again that all these schemes only work after a high quality implementation of Stage 1 — creating a great product.
If you have poor products and there’s nothing worth buying, if prices are out of market, if half of customers after they’ve made a purchase resolve to never ever come to you again, if you consider handling customer warranty claims as an expenditure item rather than a powerful tool for creating a loyal customer base, then having a good loyalty program is the last thing you should be thinking about.

What can we say about results?
Within two years since the start of the bonus program (December 2008 — December 2010) the Ulmart business has grown three times. The company grew during the toughest months of the depression, in spite of the fact that the computer and electronics market suffered the most and shrank in 2009, at some estimates, by 40% compared to the previous year.
The result could not be attributed to the low base effect: at the start of the program, the company’s monthly turnover (in dollars) was an eight figure amount.
?What part of that growth can be accounted for the organic growth of a good business and what was contributed by the loyalty program proper?
It can’t be measured accurately, but 25-30% (the company’s estimate) seems a decent result to us.

A significant point. This powerful and intelligent system does not require any human input and after a one-time setup (15 minutes) works in a fully background mode.
As they say, feel the difference.

And several accompanying goodies, that traditionally come as a result of a good implementation of a beautiful idea, as if on their own accord.
Gift certificates that are pretty complex to be processed in common schemes were easily and simply implemented as part of the bonus system: a customer simply purchases a card for a certain amount of bonuses, which are credited to the card balance immediately after it’s been activated. This works exactly like mobile scratch cards.
And what about a sales promotion in collaboration with vendors? Everyone who has done it can imagine this processing and book-keeping horror. How do we, literally speaking, produce "those damn umbrellas" from storage with the purchase of monitors and cases manufactured by X, if they don’t figure in the delivery documents (and how they would, if a traditional system has no way of formalizing requirements of the sick (though primitive) imagination of vendor’s marketers)? How do we stop the promo in time, if we run out of umbrellas, and what do we tell our customers, who keep asking for them, saying that "it is written here on your website"?
How do we make a 10$r discount, if more than one component manufactured by Y has been used in the computer assembly?
?Anyone who participated in such promos with vendors can tell hundreds of similar stories and describe huge complexities, associated with them.
We, on the other hand, have it all easily and completely automated based on a common standard — a bonus program: everything works through bonuses (including gifts) and everything is transparent in accounting.
All sales promo parameters are set in dia$par, and from then on all processing (including a report on the promo) is done by the dia$par, which is never wrong.

Seek and ye shall find, as it is written in one reliable source.

Being inside dia$par. Some stories
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