Customer Loyalty Programs: The Ultimate Guide
by Stephen Davis, VP, Integrated Insight
Published November 24, 2020
Loyalty programs have become pretty commonplace for retailers in today’s market. It’s estimated roughly 7-in-10 adults are a member of at least one loyalty program.1 From simple punch cards to elaborate point structures, you can find them in just about every industry.
Loyalty reward programs are powerful tools for businesses. Offering perks for loyal customers improves retentionand encourages new customers to engage.
Let’s first answer some common questions about loyalty reward programs. Then we’ll jump into tactical components and strategies to help make sure you’re getting the most out of it, regardless of the type of program.
Determining the correct program to implement can make a difference in the value of the loyalty program for consumers and your business. There are three key goals loyalty programs aim to meet:
1. Increase customer retention.
One of the key targets of a successful program is the ability to retain customers. According to a study by Marketing Metrics, the probability of selling to an existing customer is at least three times higher than selling to a prospective customer.2 So maximizing retention means an easier sell.
2. Drive incremental purchases.
A successful program should be structured to incent more purchases among loyalty members in a way that doesn’t “give away the farm.” More than 60% of loyalty program members report modifying their spending to maximize loyalty benefits.3 So achieving this goal is attainable with the right structure in place.
3. Better understand customer behavior.
Loyalty programs provide more than one “win-win” for businesses and consumers. In addition to providing more value for customers and more revenue for businesses, loyalty programs also provide critical insights on customer behavior. Convincing customers to participate in a program provides a way to learn more about them, including what they like and how they shop. Gaining clear insight on loyal consumers provides opportunity for meaningful engagement, which results in a better customer service experience.
It has become an expectation, not a differentiator, that companies put the wealth of data consumers share with them to work on their behalf. In a business environment that has become less personalized towards the consumer due to technology, tracking consumer habits presents an opportunity to engage customers on a personal level once again.
In recent years, companies have taken this a step further by tracking purchases of customers and creating customized offers for those who use services. For instance, the CVS ExtraCare rewards program tracks purchases and prints coupons on receipts based on transaction history. Data from Bond Brand Loyalty shows that 87% of participants in loyalty programs are interested in having purchasing behavior and activity monitored in order to receive personalized rewards.
DO LOYALTY PROGRAMS ACTUALLY INFLUENCE CUSTOMER BEHAVIORS?
The answer is “yes” if the loyalty program provides true value to the consumer and is executed well.
– Over 70% of consumers say they would be more likely to recommend brands with good loyalty programs.4 This means the ability to extend the brand to new customers.
– Work by Oracle suggests that members of loyalty programs spend ~$42 more at traditional retailers than non-members across most industries.5 Incremental spend means more share of wallet for your business over competitors.
– Roughly 90% of consumers say companies with excellent customer service are more likely to earn their repeat business.6 Using customer loyalty programs to improve customer service can have significant downstream impacts on revenue performance.
WHAT TYPE OF LOYALTY PROGRAM SHOULD I USE?
Let’s break down a few of the most popular loyalty programs that businesses use to increase customer base and encourage incremental purchases. There are benefits and limitations to each, so certain types of programs may work better for your business depending on products sold and available technology.
1. Punch Cards
Punch cards are a tried and true loyalty program tactic. But the days of carrying around scraps of paper with unique punch holes are behind us. Today, nearly all consumers would much rather interact through modern technology.7 In recent years, punch cards have gone digital as businesses have published apps. Even those companies that have not published their own apps have been able to use third-party apps for their rewards programs.
Going digital with punch cards offers a few advantages. In addition to eliminating the need for keeping track of paper punch cards, a digital approach can reduce fraud by eliminating the ability for a customer to punch their own card and take advantage of the business. Additionally, it can lower cost to businesses in the long run and allows business to collect data to profile customers – one of the key goals of a loyalty program. Digital programs provide real-time data with each use, whereas punch cards only provide insights once customers complete earn all punches and have earned a reward.
The goal of the punch card style program is to incent incremental purchases with the offer of a free or greatly reduced purchase in the future. However, setting a fence around those reward items can help make a punch card even more efficient. For example, rather than allowing a customer to get a broad discount on their 11th purchase – create a structure so that the award after 10 purchases is an array of potential items, or discounts, fenced to specific products. A loyal customer is likely to use an indiscriminate discount on a product they’d already purchase. However, offering products that need a boost or are not frequently bought by customers can help incentivize trial purchases of other products you sell and avoid dilution.
Points systems are one of the simplest loyalty reward structures. Customers spend X number of dollars to receive Y number of points, which can then be used as a currency at your business. The points system is great for capturing many types of customers because it is based on the dollar amount that is spent. This means that all customers receive the same incentive relative to the dollar amount spent.
The key to a successful points program is setting a structure that transparently communicates how customers earn points, what their value is, and what they can redeem. Being transparent about the entire structure upfront builds trust and helps customers see why the program is a benefit for them.
3. Paid Subscriptions and Memberships
Paid subscriptions and memberships create a system in which only people who participate (pay money) for a service or privilege can access products or deals offered by a company. Companies like Sam’s and Costco use these memberships and offer huge discounts for products by selling in bulk. Online retailers, such as Amazon, also use this system in which members have access to special benefits and services, such as free shipping. These memberships are often profitable because they have low cost for customer acquisition while giving substantial benefits to customers. This allows these companies to attract consumers to buy subscriptions or memberships at a high volume.
It’s easy to see how a paid membership could pay off for a retailer. Receiving money up front regardless of usage is attractive, but that’s not the end goal. Retailers with paid loyalty program memberships have to leverage the relationship to pull members into higher levels of spending, but when faced with strong savings, there is little benefit for customers to shop elsewhere.
4. Credit Cards
Many larger businesses pair with credit card companies to create cards which have added incentives for spending at a brand’s location. While a typical credit card may offer 1-3% cashback at retailers and restaurants, these cards often offer upwards of 5% cashback. This brings in customers as they are fundamentally receiving a discount from purchases at the brand, though they can spend the money received through cashback perks anywhere.
The real value of brand credit cards for a business though are the referral payments for getting a customer to sign up for the card. Though this can be very attractive, it typically only pencils out for major retailers with a national brand.
Picking a loyalty program method will depend on the nature of a business and technology capabilities. But in nearly all instances, a loyalty program can be designed with the right value proposition to drive desirable behaviors.
Stephen Davis has expertise in economics, forecasting, feasibility and pricing, delivering insightful and prescriptive strategies that are sustainable over time. Prior to joining Integrated Insight, Stephen was Sr. Analyst for Food and Beverage Revenue Forecasting at Walt Disney Parks and Resorts where he produced actionable forecasts for weekly food and beverage spending, identifying guest behavior changes impacting the business and areas of opportunity for incremental revenue. Prior, Stephen was a member of the Resorts Forecasting team primarily focused on occupancy and ADR forecasts for three Disneyland hotels, and providing insights that helped optimize the incremental value of promotional offers.