Customer loyalty programs: should your business have one?
Customer loyalty programs come in all shapes and sizes. From sophisticated airline frequent flyer programs with a plastic membership card that can be loaded with cash in multiple currencies and earns points on purchases from select retailers — to the coffee shop with a simple cardboard loyalty card requiring a physical stamp after purchase (buy nine coffees, get one free!).
No matter the format, they all have one aim: to incentivise customers to buy more, and more often.
This is a worthy goal. However achieving this goal through a loyalty program must be weighed against the costs of setting up and operating a scheme.
Large organisations like airlines and grocery retailers have the financial capability to invest millions of dollars into a loyalty program. Small to medium companies cannot invest that sort of money. So what are the options?
Partner with a large organisation
The biggest loyalty programs are set up by large companies that establish a program eco-system where customers can earn and ‘burn’ (spend) points by shopping with other retailers and service providers — of course only where a product or service is non-competitive to the program owner.
Active participants in these schemes love to earn additional points by buying from partners as well as the program owner. Note that in this scenario partners must pay the program owner for the points earned by the customer for each purchase, at a concessional rate struck in the partnership agreement. So when special offers are made, such as double points, each purchase may cost the partner twice the normal rate.
The other side of points is ‘burning’ them with a program partner. In this case, when a sale is made using a customer’s accumulated points, the program owner pays the partner for the item or service purchased at the normal retail price or an agreed discount.
Another solution for online retailers is to join an existing program that provides discounts on future purchases. An independent loyalty provider provides the technology and contracts with an e-retailer to invite its customers into the program after an online transaction is completed. If the customer signs up with a credit card, they pay a monthly fee to the loyalty provider as a ‘member’ of their program. Each time they buy from the e-retailer, or one of the many merchants in the same program, they use the existing discount offer then receive a voucher for a future discount. The more they buy, the more discount vouchers they receive. For the merchant, the more members who sign up from their website, the more commission they receive from the loyalty provider.
Piggybacking on an existing scheme provides a low cost and low touch way to incentivise customers to buy from a business. The success of this strategy relies on there being a significant overlap of customer types between the program owner and partners. The downside is the type of customer it attracts may not provide a high lifetime value, or you might find people are points shoppers and constantly shift their patronage to partners offering the best points deal.
Implement a CRM
A Customer Relationship Management (CRM) system can serve as a passive loyalty program through its ability to track and analyse purchase patterns without the customer knowingly making reward-based purchase decisions.
This strategy raises a strong distinction that must be made between ‘loyalty’ and ‘reward’. The latter term relates to the tangible benefits of shopping at a particular store or service provider, such as earning points towards receiving a discount or gift with purchase. The term ‘loyalty’ describes a customer who, regardless of price and promotions, purchases repeatedly from a provider due to the perceived intangible benefit or value derived from that provider. These customers are usually described as brand loyal, and a lot of time and cost has already gone into establishing this relationship.
Once upon a time, CRM systems were far too expensive for SMEs to implement. Nowadays a cloud-based CRM can be setup for a modest amount, usually on a payment plan from about $20 per month. Very small businesses can even start on a free version with limited functionality, but it’s a good starting point to learn what it can do for a business.
For a CRM to effectively deliver insights, it must be able to store and report on sales data. The categories of data that are essential to know include purchase value, type, frequency, time, payment method and other variables that may be pertinent to the business. This data is then analysed in the context of customer segmentation data such as age, gender, location, travel preferences, family characteristics and more.
Analysing the data to create offers that are based on prior purchase patterns is the key to leveraging a CRM. A good system will provide email management, including sending customised offers and ‘trigger’ emails automatically sent when a customer meets a pre-determined spend threshold over a period of time.
Other loyalty tactics
Gift cards are a simple way to influence buyer behaviour. They can be sold to customers at face value or a discounted price; linked with a purchase as an incentive; or offered as part of a seasonal sales event like mother’s day or father’s day. Tracking the usage of a magnetic-strip card requires some investment in technology, unless a point-of-sale (POS) system can process the discount. Whenever possible, it is worthwhile to do some analysis of gift card usage to learn what works so it can be repeated or improved upon. There is also a benefit to card issuers accruing from those cards that are never redeemed.
E-newsletters are a staple method of communicating with members of loyalty programs. In the absence of a loyalty program, e-newsletters can be a source of customer intelligence to learn what incentivises people to buy. Measuring the performance of e-newsletters over a suitable time period will provide insights that can be used to enhance a range of factors such as pricing and product mix, whilst also revealing customer profile data such as location and basket size. There’s a wide choice of email distribution platforms, from free to enterprise-grade, and the chosen technology will influence how sophisticated a business can get with its email marketing.
The fundamental purpose of a loyalty program is to achieve business growth by better understanding your customer’s purchase behavior, then implementing sales strategies to capitalise on this knowledge. Identifying purchase behaviour usually requires technology that collects and analyses sales patterns — that may be specialist loyalty software, a CRM, or even a POS system.
Some key questions a business should ask before deploying a loyalty program include:
- What’s the best way to acquire customer insights so customised offers can be made?
- How much investment in technology should be made to collect and analyse customer data?
- What is the most effective way to encourage lapsed customers to buy again; to reward high value customers; and to turn low value customers into high value ones?
The best program is adaptive, being both reactive and proactive based on customer behaviour. In that context, find out the most efficient way to predict and analyse your customers, then put in place a plan to capitalise on the information.