Does your company  offer a loyalty program or are you considering offering one? If so what makes one customer loyalty program more effective than another? What kind of program should you develop and offer? Should you go it alone or join a coalition? Explore the possibilities.

No matter what business you’re in there are only three ways to grow any business.

  1. Increase the number of your customers
  2. Persuade your current customers to buy in larger volumes
  3. Encourage your current customers to buy more often from you

Two of the three ways to grow your business concentrate on your current customer base. If your business relies on referrals to increase the number of customers then all three ways to grow requires focusing on the current customer base.  No way around it. You must dedicate investing in your current customers to grow. The implication? Every company needs to develop Relationship Marketing programs especially with your key customers.  By Relationship Marketing, we mean something broader than the  “loyalty points” programs commonly employed by many companies.

customer loyalty programs

Loyalty programs have been around for more than 100 years. Many people may believe that loyalty programs began with firms such American Airlines, when in reality companies actually began trying to win the hearts and minds of customers long before that. One of the early efforts to encourage customer loyalty was the S&H Green Stamps program, which began in the 1930s. For our readers, in this program, consumers received tiny stamps when they made purchases from participating merchants, glued them onto pages of booklets, and redeemed them for products when the accumulated stamps. These stamps served as a form of alternative currency that had attained a certain value.

According to Jupiter Research, more than 75% of consumers today have at least one loyalty card, and the number of people with two or more is estimated to be one-third of the shopping population. What is the value of investing in developing and managing a loyalty program? Maritz, a market research and consumer loyalty program consulting and implementation company, found that members of loyalty programs spend more.

Research by Xavier Drèze (Wharton) and Joseph C. Nunes (University of Southern California’s Marshall School of Business) reveals for loyalty programs to be effective they must be

  1. designed to offer differentiated products and services to customers based on their purchasing patterns and profitability. Programs are simply based on quantity discounts or paying for patronage, they will not endure.
  2. create tiers of customers. Customers endowed with status feel much more distinctive and apt to spend more if they know that there is another class of people hose endowed with silver status, for instance below them.

These five attributes seem to be in common among successful loyalty programs

  1. Simplicity. Customers are shielded from the program’s complexity. Customer receive simple options and rules to follow.
  2. Global. The global nature associated with loyalty programs has sparked multi-partner, coalition programs and loyalty networks (see below). Coalition loyalty programs offer a wide range of marketing advantages (e.g. shared marketing, lower costs, cross-partner customer acquisition) which will also become greatly more important over time. Loyalty networks are becoming increasingly popular because of the sheer range of partners they offer. Loyalty networks take full advantage of the new international expansion trend, with many already having partners in multiple territories.
  3. Connected to CLV. Successful loyalty program drive customer lifetime (CLV).  In order to enhance CLV you need to know your customers’ needs and wants. Marketers are now looking for predictive analytics to help identify and better understand customers’ wants, needs and priorities. An attribute of a successful loyalty program should be the ability to gather the data to support the development of predictive analytics.
  4. Relevant rewards. Rewards are a critical attribute of a successful loyalty program. Rewards differentiation is blurring. The changing demographics are driving changes in rewards.
  5. Data:  Loyalty programs should provide valuable data that enable you to improve your marketing mix. For example, it should also help you formulate pricing strategies. Data from a loyalty program should help you determine new products and services. And a successful loyalty program can be used to cross-sell and up-sell to customers. A loyalty program provides a good way to study the effects of changing prices, offering new products or product offers.

You’re sure you want to create a loyalty program. The next step is to decide what type.

There’s no one size fits all loyalty program.  Different customers have different needs. Notice that we didn’t say different companies have different needs.  We said different customers have different needs. Customer-centric company build customer-centric loyalty program.  Here’s a quick review of the five common types of loyalty programs.

  1. Appreciation: This type of loyalty program focuses on giving customers more of a company’s product or service or a discount toward more of a company’s products or services as a result of a customers continued transactions and frequency of purchase.
  2. Rewards: In this type of program, customer’s are rewarded to additional purchases or some other behavior. The rewards are often  products or services not related to the company’s products.
  3. Partnership: Companies who market to each other’s databases allow loyal customers of all participating partners to choose rewards from any of the partners.
  4. Rebate: Loyal customers are given money back when they buy more and/or meet certain purchase thresholds.
  5. Affinity: Offers are based on customers interests designed to build long-term high value relationships and generally does not include rewards.

Both the value of your customers and their personas are among the factors to consider to determine which one or ones of these program may be appropriate for your customers and by extension your company.

Six Ideas for Adding Spice to Your Loyalty Reward Program

OK, so you bit the bullet and decided to create a loyalty reward program. Besides using loyalty reward programs to encourage repeat business from customers, you can also use these programs to help address a number of business issues and opportunities. Here are six ideas that may give you some fresh thoughts for your program.

  1. Indicate to program participants that participation also provides an opportunity for them to have a voice in future products. Incorporate product preference research methods into your loyalty program and share the results.
  2. Provide different levels of awards based on the degree of investment and involvement by participants. As their involvement and investment increases, so will their rewards. Whenever possible, try to tie the rewards to customer needs and wants. Do they need more training as the products they purchase increase in complexity? Are there additional resources they could use access to?
  3. Consider a preferred-customer club that offers both tangible and intangible benefits for customers whose purchases contribute to the largest share of your profits. Some of the benefits might be priority support, special seminars you host or tickets to special events.
  4. Communicate your business goals to customers (referrals, purchases of a newly introduced product, etc) and ask them to help. Build a special promotional offer for members of your rewards program who help with achieving these goals.
  5. Create a have it your way program which allows elite customers to specify products/services and how much they’d be willing to pay for them and build these custom packages for them. This will help keep customers from looking for a better deal elsewhere.
  6. Incorporate a community program that enables best customers to work jointly with you on charities that contribute to their communities. You provide the funds and they provide the elbow grease.

Consider a Loyalty Coalition if You Aren’t Ready for a Solo Act

Research suggests that loyalty coalitions will be one of the next major developments for future loyalty marketing initiatives. A coalition is essentially an alliance of people, factions, parties or nations that unite. A loyalty coalition is when three or more companies band together to share the branding, operational costs, marketing expense and data ownership for the purpose of enhancing loyalty among a common customer base. The advantages of a loyalty coalition are that you can make the membership and rewards more attractive, costs are shared among the program owners and by combining the customer databases there is a larger group of customer opportunities. Rewards can be bigger and more varied.

customer loyalty rewards

Four factors should be taken into account if you are exploring creating a loyalty coalition.

  1. Size: How big does the coalition need to be to have critical mass. First matters here too. Generally, the first coalition program in a region has the market advantage. Once customers sign up with one program, it is very difficult to get them to change to another program.
  2. Partners: Who you partner with is critical. Who are you must-have partners? Who will own the data derived from customer participants? Secure partners that have a stake in the same market as you is key to quickly capturing a significant proportion of customer’s spend. Give some thought as  to where the customer loyalty will really lie, with the program or with each partner? It’s likely that any partner dropping out of a coalition program will lose some of its customers, particularly if replaced by another company in the same sector.
  3. Rewards: One of the main advantages of a coalition program for the customer is that they can earn aspirational rewards more quickly. The more opportunities the customer has to use their membership, the more engaged and loyal they become. Be sure your rewards across the coalition are attractive.
  4. Communication: Leverage the entire communications channel. As a group you should have a large enough budget to develop ongoing relevant and personal communications that leverage the entire communications mix.

We encourage you to pilot a coalition program on a small scale before launch.

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