“Show me the incentives and I’ll show you the outcome.” -Charlie Munger.
As many people know, this quote is one of the most famous and important phrases in the history of capitalism.
What Charlie Munger means is that incentives drive behavior. If you understand this phrase, I think you also understand one of the key levers to marketing, acquisition, and retention.
What you offer, aka the incentive, is a massive reason why a consumer ultimately decides to buy from you. What you offer to stay (aka the incentive for them to stick around) is also a massive reason why a consumer will either churn or remain loyal and become a repeat customer of your brand.
Although I don’t think incentives drive everything (I would also say that emotions, consumer psychology, branding and perception, and sometimes totally irrational and unexplainable things play a role in people’s behavior and buying decisions) incentives are a HUGE and critical piece.
That’s why the best brands in the world think deeply about designing intentional rewards and incentive plans to retain their customers, employees and even their shareholders. And the best form of incentives that I’ve ever seen when it comes to loyalty and retention are the programs instituted by massive companies like Delta and American Express.
For many consumers, the idea of credit card points and perks are the holy grail of loyalty rewards. I feel like earning these points and perks has become a borderline obsession for millions of cardholders around the world. I know that I personally love seeing my AMEX points go up each month and I love using them for flights, getting access to the AMEX lounge at airports, or on other purchases like hotels and tech for my office each year. When I fly, I always try to fly Delta, to keep maximizing my points so I can keep progressing toward higher and higher reward status tiers.
What’s fascinating to me is that this simple idea of creating branded credit card programs with points and perks to drive more loyalty and retention for companies has now become a global phenomenon that hundreds of millions of people think about and participate in when making purchases on their cards each year.
That’s also why so many of the top brands like Hilton, Costco, Amazon, Uber, Walmart, Southwest, Macy’s, and even Playstation have their own branded credit card programs. Each card has its own specific rewards, points, and perks that turn these cardholders from average customers to engaged and loyal shoppers with their brands.
This is another reason why I think more DTC brands should be investing in offering branded credit card programs to increase loyalty and retention as well!
Until recently though, this wasn’t really possible to do. Even if you wanted American Express, Visa, or Capital One to power your branded credit card program, your business would need to do over 1 billion dollars in annual revenue.
The bad news? 99.99999% of all businesses do less than 1 billion dollars per year in revenue.
When I first started researching this in 2022, I thought creating a branded payments system with custom reward program for DTC brands (even the larger ones that I work with that do multiple 8 and 9 figures of annual revenue) was simply going to be impossible to do at a smaller scale. That was until I learned about Tandym. Tandym is the first solution that I’ve seen that helps SMBs add these branded credit card programs with integrated loyalty perks directly to their Shopify stores.
I personally use it at Long WKND and it’s been great for us so far.
The 2 Types of Loyalty Programs:
When I look out across the DTC space, there are typically two core approaches to loyalty programs that I see.
Version 1 or “Loyalty 1.0” is what I like to call the “spray and pray” approach. This is where a brand is constantly offering new incentives, discounts, gimmicks, freebies, etc to engage their customers in order to get them to return. This “strategy” is basically about offering more discounts and incentives to keep people coming back over and over again. It can be effective, but if you do too much of it, it can really hurt your margins and it can also dilute your overall brand.
Version 2 or “Loyalty 2.0” is what I like to call the “Premium Rewards'' approach. This is where the brand gates special perks behind specific engagement or spend tiers for their top customers who have to stay loyal to unlock these rewards. This is exactly what Delta and others do when you get to the Silver, Gold, Platinum and Diamond tiers.
Historically, I think most DTC brands have operated by focusing more on number 1 while 80% of the fortune 500 brands that have large loyalty programs focus on the second approach. Large companies want to limit their discounting and the gimmicks they offer to improve their contribution margin and build long-term repeat purchase relationships with their top customers. They want their loyalty program to feel special and unique and they don’t want just anyone to get these rewards. The primary way they do this is through their branded cards.
The new KITH rewards program is a great example of this. KITH is definitely a luxury brand. Instead of offering discounts with their rewards program, they are offering early and exclusive access to new apparel, footwear, and collaborations only for their most engaged fans. They also have a branded payment model that powers their rewards program with their new molecule, elevation, and vitality tiers which is all based on LTV and cumulative spend.
I think this is pretty cool. Beyond early access, KITH also gives their rewards members (depending on their status tier) free birthday gifts, the ability to shop exclusive re-releases from the KITH vault, priority access to in-store pop-ups, with the ability to skip the line, in-store returns and more. I think this is a smart strategy to make their best customers feel appreciated while not discounting heavily or making KITH feel less premium and luxurious by doing a spray and pray approach.
Protecting Your Margin | Why Constant Discounting Isn’t Good
When a brand reviews their PnL on a monthly or quarterly basis, the number one metric they should be looking at is contribution margin or net profit for that month or quarter.
What I don’t think brands think about enough is the fact that every discount, reward or perk, is another phantom cost to their bottom line. Every time you need to offer 20% off to re-engage your customers, you’re losing out on valuable contribution margin that will allow you to pay yourself and your team more and more each year while you continue to scale your brand.
This is why the world’s top brands don’t really discount or constantly offer perks to anyone who wants them. Just ask yourself, when’s the last time you got a sitewide 20% off email from PlayStation or Delta, or Hilton? That’s right. It doesn’t happen!
These brands protect their margins and limit their discounting with premium rewards. Instead, they engage in partnerships with major banks and credit card networks to offer branded card programs that (if you actually spend and engage) will allow you to get access to premium rewards from that brand.
It’s a genius way to keep their profits high, while not diluting their brand, and still retaining customers over the long term.
A Growing Trend:
The more I looked into this, the more I realized that it’s an incredibly fast growing trend. For example, eMarketer reported in December that branded payments were 4X the transition size of Buy Now Pay Later (BNPL) in 2023.
The report also said that $238 billion dollars worth of purchases were expected to happen on branded cards last year. AOV’s were also significantly higher when a customer used their co-branded card.
Another report that I read also forecasted nearly 10% growth of the use of branded cards through 2025 in an already massive market.
In other words, customers are using branded payment methods at an insanely high clip which is something that most brand operators don’t really think about today.
Other perks worth mentioning:
Beyond being able to add sophisticated loyalty and rewards programs in just a few clicks with a software like Tandym, the other massive benefit to brands is reducing their transaction fees.
In my personal opinion, the hidden giant feature that I love about Tandym is that they are actually a card issuer, network, and payment processor all in one. When one of your shoppers uses a Tandym powered card at your store, as a merchant, you only pay a 1% transaction fee (unlike 2.5-3%) for most other major card brands!
It’s early in our journey of using this at Long WKND but I expect that it’s going to be super valuable for us going forward. For example, imagine that your brand processes 8 figures per year through card payments. By reducing your fees from 3% down to 1%, you’re saving $200K/year. That’s a healthy down payment on a house in the midwest of a few new Tesla Cyber Truck’s saved in fees!
Now do the math if you process 9 figures in sales through credit cards. It adds up quickly!
From all of the data I’ve seen, using Tandym directly helps brands increase loyalty, raise AOVs, and increase their margins due to lower transaction fees. It basically seems like a no-brainer for brands who have wanted to try out the concept of having a branded credit card program to mirror the playbook of the biggest and most successful companies on earth.
I know that Tandmym has been purpose built from the ground up to serve DTC brands as their software integrates directly with Shopify. If you want to try it, it literally only takes 20 minutes to stand up. From there you have a lot of customization options for how you want to structure your rewards and perks. Customers can then opt-in to get a digital branded card from you for free in just a few seconds once your program is live on your site.
If you want to see a real example, definitely check out how we’re doing it with WKND Pay to get a sense of how it works.
By signing up for a digital WKND card from us, you will get 20% off your first purchase and 5% in WKND cash for every order after. We also have some more fun perks we plan to roll out this year 🙂
And lastly, if you want to get a demo and learn more about how it could work for your store, just head over to their website and click “request a demo.” Feel free to tell them I sent you and they will hook it up! They also have a showcase of 20+ other brands highlighted where you can test out the experience as well there.
Give it a try and then tell me what you think.
Okay, that’s all for this week.
I hope you have an awesome close to the week!
-Nik