Most loyalty programs require that customers take action each time they make a transaction or engage with your brand. That, inevitably, creates a lot of disuse, even resentment. As a customer, I am being asked to do an action (remember and swipe my plastic loyalty card, find and present my paper punch card, type in my phone number, check-in on my phone that takes effort with only the prospect of a future reward. It’s no wonder that nearly 60% of loyalty memberships go inactive within the first year according to Mintel (Loyalty Marketing – US – September 2010) and that over 30% of reward value goes unredeemed according to Colloquy http://www.colloquy.com/files/20…). Earning rewards in loyalty programs is a hassle; so, for both the sponsor and the customer there has to be attractive value.
Great loyalty programs have the power to become a customer-centric profit machine, but they also have the potential to create massive disuse, profit drain through wasted company resources, and disappointment. There’s a lot for any organization to consider when developing, managing, and leveraging a loyalty program. Some years back, my colleague Peter Clark, editor of The Wise Marketer and co-author of The Loyalty Guide, identified 30 things that an organization can do to make their loyalty programs valuable for both the customer and sponsor. Here, in summary format, are 10 of Peter Clark’s 30 factors that make loyalty programs pay:
1. Focus on acquiring data, not just repeat visits
Smart sponsors use loyalty programs not to buy repeat visits but to garner information from their customers in order to learn more about them: who their most profitable and least profitable customers were, what they wanted, and what changes or offerings would be most likely to make them truly loyal.
2. Target customer acquisition more accurately
A loyalty program should attract new customers to the business. How effectively it does so will depend on how exciting and how valuable the rewards seem to be to the target audience. Acquiring customers is essential to any business, but it can be expensive if compared to nurturing existing good customers. But it should not be the central focus of the loyalty program.
3. Move customers up the spend bands
By grading rewards (for example, offering extra points for exceeding a specified spend threshold in a time period), customers can be moved up from one spend level to the next.
4. Intelligent deselection of the least profitable customers
It can be more profitable to lose bad customers than to gain new ones. ‘Cherry pickers’ (customers who buy only your discounted lines and nothing else) cost you money, as does any low-spending customer. They cost more money to service than they generate. Designing a loyalty program that rewards better customers without rewarding this segment at all gives these less-desirable customers less reason to stay.
5. Win back profitable customers that have defected
In the book Customer Winback, written by my colleague Jill Griffin and me, it was reported that there are several reasons why customer win-back has a greater chance of success than acquisition. You have advantages with lost customers that you don’t have with prospects, including: information about their past purchase history; where and how to reach them; and their preferred set of online and offline communication channels.
6. Increase Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) is increasingly being recognized as one of the most important measures of the worth of a customer. It takes into account not only the customer’s value now but the expected value over their projected lifetime as a customer. It is arguably the best way a marketer can demonstrate unequivocally that a program is working: the CLV of targeted customers will rise. Being able to identify customers through a loyalty program means being able to monitor long-term customer lifetime value, and being able to identify the demographic, sociographic, and even purchase profiles that define the most profitable customers – and that knowledge enables you to target and develop more of them.
7. Build real customer relationships based on relevance
Building relationships is crucially important but not always as straightforward as it might seem. It has been said that relationship marketing is powerful in theory but troubled in practice – an unpalatable concept but probably one with which many marketers could identify. Building a relationship with customers can lead to improved behavioral loyalty and thus to increased bottom-line profits. If you examine the human and emotional elements of a long-lasting relationship you’ll find several elements, all of which can be approximated by careful collection and analysis of loyalty program data. The key element, trust, can be built up by always excelling at customer service and problem correction, and by providing consistently good products and services that suit the customer’s unique needs. Surprise and delight can be achieved by delivering personal offers for the most profitable loyalty program members, such as birthday discount shopping days.
8. Set fairer tiered pricing policies
There was a time when manufacturers recommended a price for each item, and retailers simply charged that price. Any differentiation then was purely on convenience, ambience, product range and quality of service of the retailer. But the data from a loyalty program can help formulate pricing structures. If enough best customers are happy to buy a product at a particular price there seems little point in reducing that price simply to attract cherry-pickers. The effect of changing prices can also be studied – for example, which customer segments buy significantly more or less. To help with differentiation, some retailers reduce the prices of key products to attract new customers (hoping they will buy other products as well as the reduced-price ones). Other retailers try to “buy loyalty” to low pricing (EDLP or Every Day Low Prices). Yet others use Profit Up Front (PUF) pricing, where the customer pays to be a shopper but gets low prices all-round. Recently a fourth way, called ‘Access Pricing’, has emerged, allowing customers to use loyalty points to ‘buy’ extra discounts on selected items in store (e.g. US$9.99 for nappies, or US$3.99 plus 600 loyalty points).
9. Intelligent response to competitive challenges
A good loyalty program’s ability to tie purchases to individual customers allows quick and accurate identification of customers who defect when new competition opens nearby. They can then be enticed back with customer-specific special offers.
10. Improving product range and stock selection
Knowing what best customers buy frequently helps choose which lines to stock on an ongoing basis (at current levels), which lines to reduce or offer seasonally, which lines and products to offer as promotional items, and which lines to expand on.
For additional details, and the remaining 20 factors, I’d encourage everyone to check out Peter’s full article: http://www.thewisemarketer.com/features/read.asp?id=89 I’d also suggest taking a look at my CustomerThink loyalty program blog from early this year, in which the mini-trend for program elimination was addressed: http://customerthink.com/loyalty-programs-we-don-t-need-no-stinkin-loyalty-programs/
