7 Steps to Designing a Successful Cannabis Dispensary Loyalty Program

Tailor-made for the dispensary business, this comprehensive design process will guide you through making clear and strategic decisions on each loyalty program dimension, one step at a time. By the end of Step 7, you will be ready to roll out an effective loyalty program that will bring your customers joy and bring you profit. Let’s begin:

Step 1 – Define business objectives

As with any good design, we will start with the end in mind. By articulating the purpose of creating this loyalty program, we can establish a clear foundation for all subsequent program design decisions. 

Loyalty program objectives can be based on revenues, profits, customer loyalty, and increased information on consumers.8 Common specific loyalty program objectives include:

  • Increase retention rate
  • Increase basket size
  • Increase purchase frequency
  • Increase profitability
  • Increase revenue
  • Receive valuable market research data

Can you have all of the above as your program objectives? Probably not. Different objectives often require different design strategies that can contradict each other, so you will have to prioritize. For example, dispensaries may not be able to increase both purchase frequency and basket size at the same time. And sometimes increasing profit requires cutting revenue from low-margin sales.

When starting a new program, we recommend selecting one objective at the beginning. As your program grows and more performance data becomes available, you can further optimize to achieve additional goals.

Step 2 – Develop a budget

Choosing an initial budget size can be tricky, because the program’s future performance is still unknown. In the face of uncertainty, one effective strategy is to start with a small pilot program and expand as the program proves itself. However, based on loyalty programs’ stellar records across many industries, there is a good chance that your program will prove to be a wise investment.

When deciding on an initial budget, here are the expenses to keep in mind:

  • Program setup cost (e.g. implementing a program database, admin portal, website, and mobile app)
  • Loyalty reward cost
  • Event organization cost (if doing events)
  • Loyalty newsletter editorial and production cost (if doing newsletters)
  • Cost of promoting the program
  • Cost of ongoing program management (e.g. providing customer support and monitoring the program performance)

If the program charges a membership fee, it can help reduce the program cost. But fees come with tradeoffs. We will discuss this in the next step.

How to save money without cutting corners

There are many smart ways to reduce cost without compromising the program effectiveness. Here are some ideas:

Reduce reward costs

The key is to offer rewards that have higher perceived value than the actual cost:

  • Source rewards from manufacturers or distributors who want to promote their products at your store. You are more likely to get good discounts from them. 
  • Offer overstocked items that would otherwise get marked down. When these items are offered as rewards, customers often perceive value at the level of the standard price.
  • Offer tickets to local events. These rewards have very high perceived value, but often can be acquired inexpensively.

Reduce operation costs

The key is to utilize existing resources so you do not have to build everything on your own:

  • Use pre-built design templates and email copy examples to save on design cost.
  • Work with a loyalty program solution like Toka to save on planning and implementation cost.

Step 3 – Determine membership eligibility (open vs closed)

There are two types of membership eligibility:

  • Open membership: Everyone can join at any time. For example, anyone can download the McDonald’s loyalty app today and start to receive discounts and earn points.
  • Closed membership: Customers can only join if they have met certain requirements, or have received an invitation from you. For an extreme example, the Emirates Airlines’ has an invite-only program for its ultra-elite customers. If you are lucky enough to get invited, a senior executive would personally drive to your house to present the membership card. For less extreme examples, Chico’s, a women’s clothing chain, uses a closed program (5% off every purchase plus frequent mailer and coupons) in which customers become members after spending $500. Barnes & Noble charges members (who receive 10 percent off on all purchases) $25 to join its membership club.8

In addition to minimum purchase requirements and joining fees, dispensaries may consider imposing minimum purchase requirements for members to continue in the program.8

Open membership is useful if you want to reach more customers, but the drawback is the program benefits can be exploited by deal-seeking customers who tend to have low profitability.13 

On the other hand, closed programs are constrained by a smaller enrollment size, but can exclude the customer segments with the lowest profitability (who only purchase merchandise on sale, frequently request that the marketer match a discounter’s price, or often return merchandise) by not inviting them to join.8

Which membership eligibility should my dispensary use?

The best choice varies depending on your program’s objectives and budget:

ObjectiveRecommended Membership Eligibility
Increase retention rateOpen
Increase basket sizeDepend on the target customers. If targeting all customers, use open. If only targeting high-value customers, use closed.
Increase purchase frequencyIf targeting all customers, use open. If only targeting high-value customers, use closed.
Increase profitabilityClosed
Increase revenueOpen
Receive valuable market research dataDepend on whose data you want to collect. If targeting all customers, use open. If only targeting high-value customers, use closed.
Budget SizeRecommended Membership Eligibility
SmallClosed
LargeOpen

Step 4 – Design program structure

There are three common program structures:12

  • Frequency reward programs

It takes the form of “buy X amount (or collect Y points), get a reward”. It is more common for businesses that encourage frequent purchases and are transaction-focused (e.g. grocery stores)

  • Customer tier programs

It takes the form of “buy X amount (or collect Y points) over a period of time, qualify for a tier”. Customers in different tiers are entitled to different benefits and may earn different point amounts per dollar spent. A tier program is more common for high commitment, higher price point, and relationship-focused businesses (e.g. airlines, hotels, and insurance companies).

  • Reward and tier hybrid program

Redeem rewards based on points, and also get additional privileges as you rise through the tiers. This is a good choice for businesses that want more ways to segment and incentivize customers.

Which program structure should my dispensary use?

We recommend the reward and tier hybrid program. Dispensaries are in general transaction-focused businesses, so frequency reward should be the foundation of a dispensary loyalty program. That being said, tiers are a very versatile tool you should also aim to incorporate in your program.

Tiers can help in the following ways:

  • Enable segmentation of customers by profitability

Customers in higher tiers tend to be more profitable than those in lower tiers. With this in mind, we can design a unique benefit scheme for each tier. The benefits of the lower tiers should aim to increase purchases and visits, while the benefits of the top tier should aim to give recognition and exclusive treatments to your best customers.

  • Provide goal-achieving motivations

Research shows that consumers accelerate their purchase speed as they approach a particular reward threshold.13  Each tier serves as a desirable goal that customers strive to achieve.

Tier structure FAQs

What’s the optimal number of tiers?

Research shows that three-tier programs develop higher satisfaction among all members than do two-tier systems, because having the third tier enhances feelings of status for elite members and allows for a clearer understanding of relative position for lower-tier consumers.15

How do I determine tiers from points? 

The simplest method is to use the customer’s total life-time points as the qualification criteria. However, counting only a rolling period may be more effective, as it creates a sense of urgency and helps stimulate more purchases. Most major loyalty programs use a rolling period counting system. You can count points accumulated over the most recent quarter, past 6 month (e.g. Starbucks), past year (e.g. Nordstrom), or a custom period (e.g. Marriott tiers are good for the rest of the year plus an additional 14 months). 

Step 5 – Design point structure

A point structure determines how many points a customer can earn per purchase. There are two common models:

  • Fixed points: Fixed number of points per dollar spent. For example, Starbucks rewards 2 points and Hilton rewards 100 points for each dollar spent.
  • Varied points: In addition to the fixed points that all purchases receive, some preferential products/brands receive extra points. If used wisely, the preferential points can be an effective tool for promoting products/brands and for avoiding discounting clearance items. For example, if a dispensary wants to attract more customers to its own brand, it can reward an extra three points per dollar spent on the store brand. For another example, instead of marking down a clearance item, incentivize people to purchase with double or triple point earns.

Preferential point structures can also open doors for win-win collaboration between the dispensary and manufacturers/distributors who want to promote in the store.

Remember that points can also be rewarded for activities other than purchases. For example, if you want to incentivize social sharing, you can reward points for referring friends, posting online reviews, and sharing on social media.  

Which point structure should my dispensary use?

We recommend starting out with a fixed point structure, because it is simpler to manage. As your loyalty program matures, you can gradually add in varied points to supercharge your purchase incentives. 

Step 6 – Design benefit structure

An effective benefit structure is a balancing act between making it attractive to customers and achieving the program objectives.

After reviewing the extensive loyalty research literature and conducting in-depth interviews with cannabis consumers, we have found that the following three benefit types are particularly valuable to cannabis consumers:

Benefit type 1 – Discount offers

A discount offer is the quickest and easiest benefit to set up, since it doesn’t involve managing physical rewards or organizing special events. So if you are just starting out, discount offers are a valuable tool in your benefit toolkit.

However, discounting as a marketing strategy has serious drawbacks:

  • General discount campaigns are largely ignored by customers because of their low relevance. 
  • Competitors are probably offering similar discounts.

Stand out with personalized offers

Personalized, highly-relevant discounts tailored to a customer’s preferences is a solution to discounting’s shortcomings. If a customer is a big Purple Haze flower fan, you bet they would not ignore a 10% off on Purple Haze. 

A successful example: British retail giant Tesco’s promotional efforts are carefully targeted to its members. Four of every six of its Clubcard discount vouchers are for goods that members already purchased within the past eight weeks, while the other two are for related cross sell/upsell items. While the industry average for coupon redemptions is between 1 and 2 percent, between 15 and 20 percent of Tesco coupons are redeemed.8

Personalization used to be a secret marketing weapon enjoyed only by big companies with large marketing budgets. Fortunately, the advancement of artificial intelligence has now made personalization technology affordable and accessible to smaller businesses too. We will discuss how to implement personalized offers in the implementation section of this whitepaper.

Benefit type 2 – (Almost) free rewards redeemable with points 

How to give out rewards legally?

States like California have laws that prohibit dispensaries from giving away any product for free (this includes both cannabis and non-cannabis products).16 However, there are ways to use rewards while staying compliant:

  • Charging an ultra-low price for rewards (e.g. 5 cents). Liquor stores are restricted by similar laws and have been successfully running this type of promotions for years. For example, BevMo has a long-running “buy one bottle get one for a nickel” wine promotion.
  • Offer free upgrades to premium brands or larger package sizes. For example, upgrade an eighth ounce to a quarter ounce. 

What makes a reward attractive?

An attractive reward needs to have high perceived value. Studies show there are three elements that determine customers’ perceived value of a reward:17

  • Cash value of the reward
  • Aspirational value of the reward
  • Perceived likelihood of achieving the reward

When selecting rewards and assigning them point values, make sure to keep these three criteria in mind.

What rewards should I offer?

There are many goodies you can offer as rewards: 

  • Cannabis products (e.g. flowers, pre-rolls, concentrates)
  • Cannabis paraphernalia (e.g. rolling paper, trays, grinders)
  • Dispensary-branded apparel (e.g. T-shirt, beanies, baseball cap pins)
  • Virtual goods (e.g. a series of cool mobile background images of cannabis under the microscope)
  • Let your imagination run wild.

Customers perceive some rewards as more valuable than others. Is a free dispensary-branded T-shirt (an indirect reward unrelated to the core product) as valuable as a free pre-roll (a direct reward similar to the core product)? Is an instant spin-to-win (an immediate reward) more valuable than a sure-win redeemable in the future (a delayed reward)? These are important questions and we have the answers for you based on academic research:

For products that are highly-involved (meaning consumers care a lot about the product), direct rewards are perceived as more valuable and consumers do not care if the reward does not come immediately. On the other hand, for low-involvement products (e.g. toilet paper), consumers want to get the reward right away, but do not care if the reward is unrelated to the product they purchased.26

Cannabis is a highly-involved product – most cannabis consumers we interviewed say they care a lot about their cannabis and are very involved with the products. Therefore, dispensaries should offer direct rewards that are highly relevant to cannabis, and it is O.K. to make the customer work towards it for awhile before reaching the reward. In short, delayed pre-rolls are better than instant T-shirts.

How many points should a reward cost?

When determining a reward’s “point price”, the anchor point should be customers’ perceived value of this reward. The actual reward cost does not matter. For example, if you acquired some signed Cheech and Chong posters at $20 each to use as rewards, but your customers value them at $70 each, your reward point price should reflect the $70 value.

It may take a few months of adjustments before you find the right point pricing that makes an reward attractive while achieving your program objectives. Make sure the finance and marketing departments work together on this effort as we need both teams’ expertise.

Don’t miss out on strategic rewards

(Almost) free loyalty rewards are perfect incentives for customers to try new things, thanks to the power of free. A smart dispensary should take full advantage of rewards’ role as a free sample stand. Here are some ways to offer rewards strategically:

  • Cross sell, upsell with rewards

If a customer likes live resin, maybe a cured resin reward would help them expand their resin pallette. If a customer likes Blue Dream flowers, maybe a Blue Dream hash will introduce them to the joy of extracts. Just like personalized discount offers, personalized rewards are much more effective than generic rewards.

  • Test candidate product with rewards

Want to find out if your dispensary should carry that new product? Test it out first as a reward! You can get immediate and insightful customer feedback (especially if you request feedback through your loyalty program mobile app) that will help you make informed decisions.

Benefit type 3 – Exclusive preferential treatments

Some researchers believe that customers perceive access to exclusive preferential treatments as more valuable than rewards and discounts.8 The feeling of exclusivity as well as the actual benefits can help dispensaries instill customer loyalty without feeding into the discount culture and devaluing products.

To provide you with inspirations, we have compiled a diverse list of exclusive preferential treatments successfully deployed in the cannabis industry (plus a few from other industries):

Exclusive services

  • Member-only smoke lounge
  • Access to VIP budtender services
  • Express delivery
  • Express in-store pick-up
  • Extended product return
  • Satisfaction or money back guarantee
  • Special phone numbers for priority customer service
  • Free gift wrapping
  • Free alterations (fashion industry)

Exclusive publications

  • Member-only newsletter with exclusive new product intros
  • Quarterly magazines about cannabis lifestyle and know-how

Early access

  • Early access to seasonal or sale merchandise
  • Early boarding privileges (travel industry)

Exclusive events

  • Cannabis workshops
  • Holiday gift soirees
  • Member community events
  • Cannabis farm tours
  • Member-only closeout sales
  • New cannabis product demos
  • Invitations to parties with major designers (fashion industry)
  • Preferential access to trunk shows of major designers (fashion industry)

Studies show that members of communal loyalty programs have much stronger loyalty and less likely to switch compared to noncommunal programs.18 However, keep in mind that organizing an engaging community event takes substantial efforts, so strive for low frequency but high quality.

These exclusive preferential treatments are not usually redeemed with points, but are associated with program tiers. Different tiers would have access to different benefits levels.

Step 7 – Design program communication

The modern consumer is inundated with marketing messages, and studies have shown that generic, untargeted loyalty program communication can actually breed distrust and apathy, rather than loyalty.23 Therefore, developing effective communication is as important as developing the loyalty program itself.

The best practice is to incorporate a sense of recognition and appreciation in all program communication.19 You can achieve this using personalized messages and pleasant surprises. Here are some ideas for inspiration:

Give recognition

Research has shown that the provision of recognition is a highly valued customer benefit. Loyalty programs can provide that conspicuous and unexpected recognition to selected customers by giving them prestige, distinction, partial celebrity standing, an elevated status, or the ability to “feel special.”19

Here are some great ways to recognize your best customers:

  • Hand-written thank you cards
  • Personalized product/package inserts
  • Personalized pickup/delivery packaging
  • Special occasion greetings and gifts (e.g. birthday, anniversary with the program)

Keep communication highly relevant

Customers learn very quickly which companies’ emails to ignore and which ones’ to open. The key here is to always deliver relevant information in your messages.

Instead of bombarding inboxes and getting ignored, send only infrequent but highly relevant messages. Examples include:

  • About to reach a program milestone 
  • Just earned a new reward
  • A personalized promotion
  • A relevant upcoming event
  • A birthday gift

Select the optimal message delivery channel(s)

A dispensary can employ multiple communication channels at once to create an omni-channel user experience:

  • Paper mail: Suitable for high-production quality newsletters and brochures. Can also be used effectively for delivering personal greetings and thank-you cards. High opening rate, but costly to send.
  • Email: Suitable for delivering e-newsletters and other messages. It is cheap and easy to send, but can have very low open rates.
  • Text message: Suitable for delivering quick updates and reminders. It is cheap and easy to send, has high open rates, but also has very high unsubscription rates.

By Nora Chen