DO LOYALTY PROGRAMS REALLY WORK?

  • Posted by careers 24 Mar
  • 2 Comments

DO LOYALTY PROGRAMS REALLY WORK?

imagesYesterday, I had a very interesting meeting with a potential client and one of the first things he said to me was, ‘I think it’s time for my business to thank my loyal customers, I have over 10,000 loyal people and I need to keep them loyal, do you really think a long term loyalty program will work?’ After our lengthy meeting, I thought to share some reasons why I think a loyalty program will work.

In thinking about implementing a loyalty program, some of our concerns could be:

  • Do loyalty programs work?
  • How can we ensure the program drives / changes behaviour?
  • Are we just giving away margin that could be used for ‘other things’?

3 great questions and I will try to answer them all in this email.

The key to a successful customer loyalty program or rewards program is that it is attractive enough for customers to change their current behaviour to regular, profitable behaviours. For example, bank transactions vs ATM on us Transactions. The thing to note however is these program should not erode your margins.

A couple of months ago, I participated in a bank’s ‘Promo Program’ that gave perks at the end of a period based on an increase in deposits within a timeframe, to increase my chances of winning, I did more than what was ‘demanded’, I grew my account balance over and above the requested amount for the required period and sadly, I didn’t get the ‘promise’. I was so disappointed, I immediately closed the bank account and decided not to participate in promotions any longer as there can only be 1 winner.

The truth is, the promotion got me to behave differently but only for a short period, imagine if myself and all the others that tried to ‘win’ actually won something based on our change in behaviour, without thinking, the required, profitable behaviour will be our norm and the bank will make more money for a longer period rather than the short term hike in deposits / account opening.

It probably is worth us putting the word “loyalty” to one side for now. It’s not about loyalty (defined: un-abiding trust – being faithful even when it is contrary to your own benefit) it is about an incentive for customers to behave in a particular way.

What can your loyalty scheme or rewards card do for you?

They can make it harder for a customer to deflect and go to a competitor. They are about customer retention. Psychologists have often referred to “Previous Investment” as a strong driver in behaviour.

Gain wallet share. Where a customer may buy products from a range of retailers, a loyalty program can give them an incentive to buy it all from you. For example, I have 3 bank accounts with 1 bank (my salary account, a savings account and a joint account) and it has been so for over 5 years but would I move any or all of these accounts anytime soon, well It depends on the offering of the next bank – the question will always be ‘what will I get in return?’.

Add-on Sale

Tiered reward programs or incentive programs sometimes can encourage customers to buy extra product to reach the next tier. This is common with airlines who operate Silver, Gold and Platinum air mile programs. As you elevate through the tiers, you gain additional benefits. This is clever in that you don’t treat all customers the same – you treat your most “loyal” customers better. This does need managing however, a tiered reward program can go wrong if a customer is downgraded without warning (as customers should be given notice to enable them modify their behaviour to maintain the desired status).

Although customers are unlikely to buy something they don’t need, they may pull forward a planned purchase for later in the year. We have noticed that customers increase their frequency of visit as they get closer to a reward status.

Costing your rewards scheme.

This is a challenge at the outset. Over time you will get good data to support your costings, initially you will be forced to make intelligent guesses.

How easy do you make it for the customer?

I had a discussion with a company that had invested $250,000 in a new CRM software that would give enormous insight into customer behaviour from 4 or 5 different contact points in the business. ”What will you do with all this data I asked?” Ten years on and a running total far in excess of the original budget, the company sends out a generic monthly e-shot.

Many retailers offering schemes have no proviso to data capture. This is crazy, customers should sign up and retailers then use email, social media and direct mail to drive customers back into the store.

Making your scheme work.

Getting started – rewards set in the future are less impacting on our behaviour. i.e. the further away the reward is perceived to be, the less likely I will participate. There are two things you can do that will help:

a) Start them off. Get customers to sign up and give them bonus points. It is noticed that points to get them started induced some momentum. Be careful, people are cynical, so some effort (I.e. signing up) is required.

b) Make the rewards accessible. Give people the option to redeem at a lower rate, You may find they will hold on and go for the higher rate. but the accessibility of it makes the reward program feel more achievable.

A colleague of mine got bumped up to business class to give him a taste of what it might be like to do on a regular basis thanks to his air miles and trust me, he hasn’t flown economy since.

Things to avoid:

a) Don’t reward the disloyal.
b) Focus on your active users i.e. rewarding the loyal. Perhaps a tiered scheme is the best way to achieve this.
c) Focus on profitability.
d) Look to bolster your loyalty scheme with things that do not cost you anything. For instance some airlines offer meals first to their premier customers. Be careful not to offer something you cannot actually deliver on a daily basis.

In Summary

Do loyalty schemes work, well yes they can. But it isn’t as simple as printing a loyalty card. A business that makes its reward program the centre of its activities, can influence and drive customer behaviour.

Post Comments 2

Posted by Leonard A. Duro-Emanuel on
  • Jun 3 2015
Reply  
Excellent analysis... As always. Perhaps the key is for clients to stop seeing loyalty as a "bribe" (as in the promo style you mentioned, which has little persistent effect. Right on the money again on the idea being retention. I suppose the challenge is to drive the mantra that a customer relationship is about more than a series of repeat transactions. Its what informs you as to where your Unique selling points and Points of differentiation should b, rather than where you have placed them? Looking forward to a follow up. #OnPoint
Posted by Bill Hanifin on
  • Jun 4 2015
Reply  
Great article Kola. Please stay in touch.

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