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Posted by Shashi on January 15, 2014

Does your company need a loyalty program? Absolutely. There is no question that loyalty programs are an integral part of the new marketing landscape, and a key to success.

Growth of Loyalty Programs

The concept of the loyalty program really gained traction in the 80’s when American Airlines introduced the frequent flyer program which was quickly imitated by many of its competitors. By the 90’s there was a common consensus that loyalty programs were the future of the hospitality industry; they were right, and then some.1 Today loyalty programs are simply expected from banks, airlines, hotels, and retail stores. More and more restaurants are providing loyalty programs, along with the countless businesses that have affiliated themselves with multi-vendor programs such as Air Miles. In fact, in the U.S. alone there are over 2 billion loyalty memberships, with the average household enrolling in over 18 programs2. Here in Canada, we are just as loyal, with the average Canadian adult taking part in 8 loyalty programs at any give time.5

Importance of Loyalty:

So why is customer loyalty important? The rule of thumb is that it costs 5 times more to gain a new customer than it does to nurture a current one. Beyond that, the most loyal 15% of customers account for 55-70% of a company’s total sales.3 Loyalty programs contribute to a customers bond with the company; increasing the likelihood of repeat purchase, willingness to pay more, and inclination to refer new business.1

Also, it is important to note that customers are more likely to communicate with your company via social media when they are also engaged with your loyalty program4. This is important now more than ever, when social engagement can make or break your company.

Types of Loyalty Programs

There are two types of loyalty programs, one is the multi vendor model, where many different vendors offer the same loyalty program, and points are transferable. This model does well to get customers to try new products, because customers who sign up with company A, may try company B simply because they also offer the same rewards programs. This model, however, doesn’t build loyalty to your business4, and doesn’t provide many of the benefits that the second model does.

The second type is the stand-alone model4, where a particular brand or store location has it’s own rewards program which is unique to them. This model creates an exit barrier as the points are non-transferable and therefore customers will be more inclined to shop at a particular store in order to accumulate points and reap benefits; therefore building loyalty. This is the most effective model for loyalty programs, as it provides far more benefits for your company.

Benefits of Stand Alone Model

There are many benefits to implementing a loyalty program, beyond just obtaining customer loyalty. The first benefit is the opportunity for concealed price reduction4, where customers perceive an added value by gaining points, but the company does not lose immediate revenue by way of discounts.  For example, instead of offering your product at half price, offer it at double-the-points; customers see a benefit without your company losing revenue.

There is also the invaluable access to market data which the stand alone model provides. Having your own loyalty program provides you with easier, and cheaper access to market information about your specific customers. First you gain information such as age, gender, email address and home address upon program registry. In addition, you gain a resource that can track the purchasing habits of that particular customer such as what products they purchase most, and which store locations they prefer. You now have the information to provide targeted sales to program members. Finally, by monitoring what sorts of rewards they are claiming (i.e. trips, appliances, equipment etc.), you are then gaining information about the psychographics and interest of that segment of the market.

With this added psychographic knowledge, your company will be able to improve your overall marketing strategy by more specifically targeting the types of consumers who are interested in your product.

Conclusion: The Key to Success

There are tons of rewards programs out there, but not all of them are leading to company success, often due to poor program management. 44% of consumers have had a negative experience with loyalty programs2, 85% of members have not received communication since signing up2, 81% of members don’t even know what benefits their loyalty program offers2.  It is extremely important that your loyalty program is handled strategically, and designed by experts to be as customer friendly as possible. The program should not just be a sales promotion, but a tool to develop a lasting relationship with customers. The time to build your loyalty program, and develop lasting customer relationships is today!

References:

1: Journal of Hospitality Marketing & Management. Progress in Loyalty Program Research: Facts, Debates, and Future Research.

2: http://blog.neolane.com/conversational-marketing/11-startling-stats-customer-loyalty-loyalty-programs/

3: http://www.crmtrends.com/loyalty.html

4: The International Review of Retail, Distribution and Consumer Research. Loyalty program types as drivers of customer  retention: a comparison of stand-alone programs and multi-vendor loyalty programs through the lens of transaction cost economics

5: http://strategyonline.ca/2013/08/13/comparing-loyalty-programs-in-canada/