Loyalty programs are designed to reward your most valuable customers. Businesses choose to implement a rewards program to retain current customers and convert new buyers into loyal customers. Traditionally, many businesses use rewards programs such as rebate programs, cashback, earning points, and others to incentivize customers to make purchases.
What is a Loyalty Program?
The most basic definition of a loyalty program is that converting customers into brand loyalists necessitates a repeatable process that incentivizes them to continue purchasing from you. Loyalty membership is essentially the process of rewarding customers for their frequent or ongoing engagement with your brand through structured marketing strategies.
They receive more rewards as they spend more. Customers will feel good about purchasing from you if you put customer preferences at the heart of your marketing efforts and execute a program well, giving your business a competitive edge over your competitors.
Why Are Loyalty Programs Necessary?
Loyalty programs were created when businesses realized that the competitive advantage, they once had due to product differentiation was no longer valid due to the proliferation of similar looking and “me too” products. Having loyal customers became more important and difficult in such an environment.
Advantages of Loyalty Programs
Loyalty programs became popular because they offered businesses a way to maximize their customers’ lifetime value, along with the following advantages:
1. Retention of Customers
A loyalty program’s primary goal is to retain customers by rewarding them for repeat purchase behavior. According to Khan and Khan, “loyalty exists when a person regularly patronizes a specific (store or non-store) that he or she knows, likes, and trusts.” In short, a customer loyalty program is a tool for retaining customers by providing them with a compelling reason to return to the company and establishing habits.
Many studies have been conducted to explain the relationship between loyalty programs and retention rates. According to one European study, customers’ relationship perception of a loyalty program offered by a Dutch financial services company explained about 10% of the total variation in customer retention and customer share.
Customer retention strategies have a well-established direct impact on the bottom line of a business. A company with a 60% customer retention rate loses three to four times as many customers as a company with an 80% retention rate.
2. Customer Information and Consumer Trends
When a customer registers for a loyalty program, their information is saved in the company’s database. Companies can use this data to segment their omnichannel, offline, and e-commerce customers, profile their best customers and tailor their offerings to specific groups of consumers.
Because loyalty program data provide a comprehensive picture of customer behavior, purchasing habits, and preferences, the company can use it to improve inventory management, pricing, and promotional planning. This information also allows marketers to assess the effectiveness of special promotions based on additional purchases, the use of additional channels, or a shorter time between purchases.
3. Increased Cart Value
Data collected by a company can be used to cross-sell and up-sell. It can provide extended warranties after a purchase, recommend accessories that complement the purchased item, and provide discounts on related purchases. Furthermore, the loyalty program can provide relief by increasing demand during slow seasons.
The best example is an airline mileage program that is only available on certain flights. Because there are less wastage, such targeted promotions are more likely to produce satisfactory results.
4. Getting Rid of Unprofitable Customers
One of the less frequently mentioned benefits of loyalty cards and programs is that they allow businesses to shed excess weight. A well-designed loyalty program enables businesses to segment their customers and identify profitable and unprofitable customers. It assists them in dropping customers who only buy discounted lines and avoid the premium range regularly. These customer profiles may end up costing more than they generate.
5. Improved Customer Communication
A loyalty program provides a direct line of communication with customers, making interactions much easier. Aside from promoting sales and announcing new products/services, a useful item on this list of the benefits and drawbacks of loyalty programs is that they facilitate recalls when necessary. This is possible due to the recalled items’ purchase date and barcode. Because it is based on the consumer’s actual purchase of the affected good, the recall notice gains weight and significance. In comparison to a store sign or newspaper notice, this email-borne recall notice has a high chance of being read by the public.
Disadvantages of Loyalty Programs
Loyalty programs have not always worked the way businesses aimed them to. Here are a few disadvantages you should hedge against while using a loyalty program.
1. Loyalty Behavior Is Difficult to Assess
It is extremely difficult for the loyalty framework to break free from the transactional spirit. A frequent buyer appears to be a loyal customer often. However, this may not be the case, as he may be purchasing from the company simply because it is convenient for him. Or he may be purchased solely for the benefits provided by the loyalty program in the form of rewards. As a result, loyalty, which is essentially an emotion, may not be measured by the loyalty program.
2. Keeping the Bottom Line in Check
The financial aspect of loyalty programs is the most stressful of all the benefits and drawbacks. Discounts, in any form, are detrimental to a company’s bottom line. A typical $50 sale transaction has a cost of $40 and a profit of $10. A 5% loyalty discount—$5 off a $50 sale—reduces profits by 50%. The costs remain constant, but instead of earning $10 on each sale, the profit is reduced to $5. What appears to be a minor discount (in this case, 5%) can have a significant impact on profits.
The key to overcoming this financial setback is to ensure that your loyalty program is reasonably priced and effective. If the program is truly increasing repeat purchases and average order value, you should have no trouble recouping your losses if your discounts are balanced.
3. Saturation of the Market
Loyalty programs, like products, are ubiquitous and may appear identical. They are all similar in terms of membership requirements, purchase requirements, and benefits. However, in today’s ultra-competitive world, businesses are unable to back out of their loyalty program commitments due to the fear of lost sales.
With the average household participating in over nine reward programs, businesses must develop programs that are distinct and distinguishable. However, creating a loyalty program based on a sustainable competitive advantage that cannot be replicated is extremely difficult. However, advocate loyalty programs are a good way to stand out because you can reward customers for doing things that are unique to your audience.
4. Profitability Variability
Based on past customer behavior, loyalty programs hope to increase repurchases. However, their incomes, needs, and lifestyles change over time. Naturally, their purchasing habits shift. People prefer to avoid the traditional loyalty program. According to a Maritz poll, four out of every ten loyalty program participants left at least one program. That is why some experts are understandably skeptical of loyalty measures such as RFM (Recency, Frequency, and Monetary Value). RFM is a useful tool for measuring customer loyalty, but it is far from perfect.
5. Loyalty Data Limitations
Because loyalty data excludes purchases from other brands and stores, it provides a skewed picture of consumers’ overall purchasing behavior. Data from customer panels may also be more representative than data from loyalty card members. Furthermore, customers may be offended if they are uncomfortable sharing sensitive information to receive the program’s incentives.
However, this point on the list of the benefits and drawbacks of loyalty programs can be addressed by incentivizing customers to share their other purchase data by rewarding them for submitting third-party receipts to you. You can gather this information to reward them for their purchases of your goods while also processing the receipts for additional information, whether they do so by scanning physical receipts or forwarding e-receipts.
Nobody can deny the value of loyal customers. The point of contention is the loyalty program’s ability to generate more loyal customers. This is because not all loyalty programs are successful. Some have failed due to their undifferentiated appeal, while others have failed due to poor implementation. Some have also failed because of incorrect value propositions.
Understanding the benefits and drawbacks of loyalty programs will aid in avoiding such errors.
Frequently Asked Questions: -
Customer retention is boosted by loyalty programs, which can help businesses generate revenue, increase referrals, and achieve overall growth. Most businesses generate the majority of their revenue from existing customers, which requires less overhead than revenue from new customers.
Successful loyalty programs increase customer retention, lifetime duration, and customer SOW; their overall goal is to change customer repeat behavior by encouraging product or service usage and retain clients by increasing switching costs.
Many people join loyalty programs in order to receive freebies. Customers, on the other hand, want exclusivity and first-rate service. According to surveys, customers want exclusive access to sales, higher priority service, and elevated status in addition to free products and discounts.
Many different components of a business, such as customers, users, workers, and technology, one of the most difficult challenges for organizations today is customer engagement. It is critical to employ effective consumer interaction strategies. Customer engagement methods have a direct impact on the company’s overall profitability and ability to generate money because they affect apps and other digital products.
If a company’s users are highly engaged, it can increase brand awareness and loyalty while lowering customer acquisition costs and improving customer satisfaction and retention. As a result, employing the best customer engagement techniques will reduce a company’s churn rate, increase the number of active users and time spent using your app, and promote user growth via recommendations and word-of-mouth.
A Successful Strategy for Marketing
Gamification can be used in marketing by providing interactive and satisfying solutions that can be integrated into your website, app, or email campaigns. Gamification instils a sense of competitiveness in customers, motivating them to strive for goals and rewards.
To increase client acquisition and retention, gamification can be used. Gamification should give users the chance to share their rewards, accomplishments, and “plots” with friends or other users. A company will have more opportunity to attract new consumers and incur reduced customer acquisition costs if it has social connections with its customers.
Use games to teach your audience
For instance, John Findlay, cofounder of Launch fire, says, “Imagine you’re a bank that’s wanting to gain new customers.” “Develop a [free] online game that pushes users to build a financial empire by making wise investment decisions, rather than providing commercials that boast about how your bank [or financial service business] is different.”
“Nest branded messaging and pertinent advice within the game so players learn more about your offerings as they play” is a strategy to increase engagement. Offer some sort of “prize,” such as free checking for a year or a $100 savings bond for “winning” the game, to further boost interest and persuade players to register an account.
Using an entertaining, educational game, advertise a new good or service
Cite the example of a sports retailer using a racing-style game to advertise new running shoes. “In the game, they might give suggestions on the best footwear for long distance running. Then, players might use the instruction to “run faster,” score more points, and win the game.
Comprehensive business planning
If you only take into account one component of your organization, it is quite difficult to build a meaningful engagement through gamification. Using data on consumer traffic patterns and purchasing patterns to integrate behavioral economics into website or mobile app testing would enable businesses to take a comprehensive approach to company planning and will benefit businesses in the long term.
‘Customer Retention’ or ‘Customer Acquisition’, these are the two conflicting ideas marketers face when deciding what is more important. And with so much importance given to ROI, marketers overlook the reason of just why are they in business- that is to serve the customers. Old school marketers used a multichannel wide net marketing strategy to reach out to more number of prospects, however much like the definition of this strategy has changed, so has this mindset developed. Multichannel marketers now see that it’s about using different touchpoints to interact with customers and create a more personalized experience.
As alluring as customer acquisition may seem, the truth is that it is important to invest time, effort and resources in maintaining a relationship once the customers are on board. Customer loyalty and brand loyalty initiatives facilitate companies to retain customers, beginning from the first contact one has with the company and endures throughout the period of the relationship.
In this article, we’ll make the case for customer retention and explain why it deserves the same amount of focus as acquiring new ones:
Low Marketing Cost
Acquiring new customers requires a lot of resources, efforts, and expenses. By focusing the marketing strategies on existing customers, customers who show a demonstrable interest in the product and the willingness to buy increases the chances of converting them and making a sale. This not only significantly reduces the ad spend but also is a chance to showcase the brand’s commitment to rewarding the customer’s loyalty.
Loyal Customers Boost Sales
Loyal customers have a relationship with the company and trust the brand more than new customers do. Since a current customer has been with the brand for some time and has experienced the product or service first-hand, they’re more likely to upgrade or make a repeat purchase. Also, loyal customers are better at word of mouth and so your customer acquisition costs decrease.
Improve Brand Image
Brand Image is the customer’s interpretation of the product and services of a brand. A positive brand image helps businesses acquire new customers, cross-sell and upsell and reduces marketing cost. One of the best things about customer retention is that the brand gets an idea of who the customers are, what they want and the data collected facilitates in creating personalized and targeted promotions to maximize chances of success. It’s impossible to overstate the vitality of a brand profile, as prospects connect with it directly and build a relationship.
Retention equals acquisition
A price cannot be put on customer loyalty and can even result in the further acquisition of customers for the brand. Word of mouth or WOM is not only a free advertising tool but possibly one of the most credible forms of advertising. It’s a fact, that customers will talk and prospects will listen. Happy customers will give positive referrals will which in turn increase the profitability of the company. Acquisition can also be increased through retention by giving incentives to existing customers when they refer the brand to family, friends, and acquaintances.
In today’s competitive market, it is really difficult to differentiate your brand from its competitors. Arguably the most important driver of a company’s good health is customer satisfaction and retention. A loyal and satisfied customer is more important than one who is not. While closing new business might be exhilarating, your company won’t truly advance and grow without retaining your current customers as well. The bottom line is to not lose sight of the existing customers in pursuit of new ones and it’ll definitely pay off.