Loyalty Programs

Why is a Loyalty Program Important to Local Businesses

Is your local business using a loyalty program?

Loyalty programs seem to be everywhere these days. From major airlines to local dry cleaners, it seems like wherever we go a company is offering us the option of joining their rewards program or loyalty club.

What Is a Loyalty Program?

To my surprise, a good definition of loyalty program (LP) is hard to find. Considering the amount of focus and resources directed towards loyalty programs in modern business, one would think better definitions would be available. 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
  • “Loyalty Programs are essential for local business and restaurant success. We build an entire loyalty funnel for businesses that is designed to draw in new customers and retain existing ones” Source: 900lb. Gorilla Marketing

Since the existing definitions are so weak and since I cannot very well have a post entitled “What Is a Loyalty Program” without defining the term, I decided to take a stab at creating a more comprehensive definition myself.

Digital Loyalty Programs

Loyalty Programs Today

Many readers might remember S&H Green Stamps as the primary rewards program of the pre-Internet era. I vividly remember getting those ever-familiar green stamps from the grocery store as a child and filling up those ridiculous books to get, well… stuff. However, though a rewards program, the S&H program was not truly an LP, since it stretched across retailers and was not exclusive to any one store or brand.

Modern loyalty programs are generally tied to specific brands, such as Starbucks Rewards, or groups of related brands such as Hilton Honors. As can be seen in the chart below, the prevalence of loyalty programs also varies greatly by industry.

Loyalty Program Statistics

Customer loyalty programs do not just seem ubiquitous, they are. According to the The Billion Member March: The 2011 COLLOQUY Loyalty Census (pdf), the average household is signed up for 18 loyalty programs, yet are active in only 8 of them.

The COLLOQUY study also notes the incredible value of loyalty programs and estimates the amount of rewards given or sold in 2011 to be $48 billion in the U.S. alone.

Some other statistics show how prevalent, how powerful, and how empty loyalty programs can be.

  • 3 out of 4 Americans have at least one retail loyalty card
  • 85% say they have not heard from the program since signing up
  • 81% say they do not know the benefits of the program or how/when they will receive the rewards

Source: CustomerThink

  • 84 percent of loyalty program members are likely to choose the program retailer over its competitor
  • 71 percent feel their loyalty programs deliver benefits that are important to them
  • 49% of loyalty program members said that they never or rarely take advantage of loyalty program perks when shopping online

Source: Loyalty360

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.

The reality is that, even when contracted through a third party, customer loyalty programs require an investment in labor and capital that is significant for almost any organization. And while these programs can be very effective, they are but one path to increasing customer loyalty.

Any business considering a loyalty program should not only consider the costs and benefits of the program but also the opportunity costs of company focus — focus that might be able to increase customer loyalty just as much if applied to Voice of Customer programs, Customer Experience Optimization, or just good, old-fashioned, kick-butt customer service.

For more information, check out these guys. 900lb. Gorilla Marketing Loyalty Funnels