Loyalty Program

Merchant Warehouse |

January 15, 2013

Loyalty programs deliver rewards for customers whose buying behaviors benefit a firm. These programs seek to cultivate both high-volume purchasing and a positive attitude toward a brand. The Chicago Tribune reports that the average American household joins 18 loyalty programs and saves about $622 per year in rewards. Since 2000, American memberships in loyalty programs has more than doubled, rising from 973 million to 2.09 billion.

A loyalty program springs from the idea that businesses can spend less to milk more business from existing customers than they spend to acquire new customers. Getting more from existing customers means either obtaining a larger average transaction for every customer purchase or encouraging regular customers to buy more frequently. Retailers often refer to the "80/20 rule," which was popularized by former American Airlines CEO Robert Crandall. Eighty percent of a company's business, according to Crandall, comes from 20 percent of the customers.

Types of Loyalty Programs

Barry Berman, a professor at Hofstra University, categorizes loyalty programs into four types. The first type is a percent-off program: The customer joins the program and receives a certain percentage off of purchases. An example of this is the Barnes & Noble Membership program, which delivers 10 percent off of all items for a $25 annual fee. Berman states that percent-off programs are unlikely to encourage more purchasing because discounts off of small transactions make little material difference to the customer. Also, if a percent-off program isn't tiered, meaning that the customers who spend the most receive no special incentives, then the program will encourage neither more buying nor frequent shopping.

Another type of loyalty program is the "Buy n Get One Free" program. This type of program is often employed by haircut chains and fast food restaurants. After a certain number of purchases, the customer receives a free item or service. However, these programs lack tiering, and competitors often neutralize these programs by offering a similar discount structure.

Tiered rewards programs like those employed by airlines reward customers differently for different levels of purchasing. Berman praises these rewards as more effective because, in businesses with largely interchangeable products or services, they encourage repeat purchases and provide the customer with a materially significant benefit. A top-tier customer for an airline receives not only a large number of frequent flier miles but also VIP treatment at an airline "Gold Club" or something similar. Customers see significant benefits, which makes reaching the upper tier appealing.

A final program involves incorporating a full-fledged customer relationship management (CRM) system. While these systems may be expensive to deploy, they allow businesses to closely monitor customer buying behavior and to send customers targeted promotions. Typically, a business makes money by sending out promotions that encourage customers to try high-margin items. When customers are absent from the business for a time, the firm can send special offers to entice them back to the brand.

Focusing on coupons and discounts encourages constant price cutting to keep up with competitor offerings. The most successful loyalty programs focus on getting to know the customer and on soliciting actionable customer feedback about the shopping experience. Also, no loyalty program can substitute for a solid reputation and effective branding by a company.

Sources

http://articles.chicagotribune.com/2011-05-13/news/sc-cons-0512-karpspend-20110513_1_rewards-credit-cards-rewards-programs-loyalty-programs http://faculty.haas.berkeley.edu/robinson/Papers%20DOR/Customer%20Loyalty%20Programs.pdf http://www.destinationcrm.com/Articles/Editorial/Magazine-Features/Lollipop-Loyalty-49184.aspx