Loyalty programs seem to be everywhere these days. Almost every brand from Taco Bell to your local market, it seems like wherever we go a company is offering us the option of joining their rewards program or loyalty club. U.S. internet users belong to more than 13 loyalty programs, on average, according to Bond Brand Loyalty data analyzed by eMarketer. But only 50% of users are active members, the data showed.
So what are these loyalty programs and, more importantly, how effective are they?
Below are the three best definitions I found, and ironically, none of them were from a “customer service” site:
“Loyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behavior — behavior which is potentially beneficial to the firm.” Source: Wikipedia
“A rewards program offered by a company to customers who frequently make purchases.” Source: Investopedia
“A customer loyalty program is a structured and long-term marketing effort which provides incentives to repeat customers who demonstrate loyal buying behavior.” Source: About.com
According to Gallup's analysis, loyalty programs are effective at activating only a relatively small percentage of a company's customer base. Gallup researchers define activated participants as those who say they are "much more likely" to shop or use the given brand because of their membership with the brand's loyalty or rewards program and who also say they are "much less likely" or "a little less likely" to use other brands because of their membership with the program.
Loyalty programs are effective at activating only a relatively small percentage of a company's customer base.
Activated participants are more than twice as likely as inactivated participants to be extremely satisfied in a primary grocery store, department store, or credit card provider reward program. And activated airline rewards program participants are three times as likely as inactivated participants to be extremely satisfied with their primary program.
It is safe to assume that a successful loyalty program is created around rewards that consumers actually want and learning which rewards those are requires market research. But setup and management of an LP can require increased staff and professional fees, items that might make the threshold for return on investment difficult to overcome.
So, can a loyalty program benefit your business? While the devil truly is in the details on this question — dependent on industry, business model, and competitive landscape — here are three big picture concepts that you should consider before pursuing a program.
- Differentiation — Will a program set you apart from your competition? What competitive advantage will you gain from a loyalty program?
- Value — Will it provide your customers value and will that value increase loyalty? Value is highly dependent on context. Will rewards add value where your business model does not? Wal Mart does not have a rewards card because its prices brings its customers back. Mattress companies do not tend to have rewards programs because their customers only purchase every eight years or so.
- Cost Effectiveness / ROI — What effect will loyalty and increased retention have on revenue? Will that amount be greater than the cost of the program? Make sure to calculate not only the hard costs of the rewards but also the softer costs of administration and setup such as legal fees, accounting fees, extra support staff, and computer upgrades to name a few.
Successful loyalty schemes require advanced technology—and age-old techniques. "It's about going back to the basic roots and origins of retailing," says says Harvard Business School senior lecturer José Alvarez.
"Talk to the customer, listen, find out what they want, and get it for them."
"When you combine this with a keen understanding of trends in the marketplace you can pleasantly surprise customers with goods and services that they may not have known existed. A great retailer is the agent for the customer. Loyalty programs and the insight and communication capabilities they provide can help retailers achieve greatness in a crowded and commoditized space."