Do loyalty programs really work? Can a loyalty program change customer’s purchase behavior and get them to spend more money with a company? Can loyalty programs reduce the likelihood that customers will move their business to a competitor? The answer to all three questions is yes. There is, as you would guess a caveat.
Marketers must first understand what loyalty marketing can and cannot do for a business. This article starts by defining loyalty marketing and then applies the definition to today’s current environment for loyalty programs and outlines the four key elements of successful customer loyalty programs.
First, let’s start with the definition of loyalty marketing. Loyalty marketing is defined as the, “Discipline of identifying and nurturing the yield of best customers through a long-term, reciprocity, value-added relationship. “
There are four key elements in the definition: discipline, nurturing, yield and reciprocity.
Discipline: Loyalty is not about short-term promotional tactics or a points program that is launched today and forgotten. It is needs to be a set of ongoing customer interactions that consistently exceed the needs and expectations of the customers.
It sounds so simple, this idea of building a relationship, but in practice, it’s an ongoing evolution that requires constant diligence, care and reshaping along the way. Just as a brand begins to understand their customers through data, purchase behavior and ongoing shopping patterns, it never fails that the customer then evolves too. Understand right away that relationship building is a constantly moving target and will require resources and dedication to make it work in the long run.
Some see the chart below as a list of challenges marketers face. We look at them as a list of opportunities and mistakes to avoid.
Nurturing: Companies need to proactively engage their customers to grow more profitable (or strategically improved) long-term behaviors of customers. To often companies get bogged down with sales promotions and don’t stop to put the customer’s needs at the center of their strategy. According to Forrester’s research, State of Loyalty Programs, marketers are failing to engage members. Forrester’s study found that on average, only 45% of customers enroll in loyalty programs and only 35% of them redeem awards. This means about only 16% of the customer base is actually using the loyalty programs.
Action Steps: There is a real opportunity in 2015, for loyalty marketers to:
- Focus efforts and resources to gain the greatest ROI.
- Version messaging by customer segments to meet customer needs and inspire incremental purchases.
- Leverage customer insight to improve business process.
- Communicate. Communicate. Communicate. Have a communication strategy to actively engage new member and to grow the customer relationship.
- Create a differentiated value proposition and customer experience to engage customers and improve retention. Understand who is earning rewards, who is not and who earns and doesn’t redeem. Program benefits are not compelling if they don’t impact customer behavior.
Yield: By cultivating the customer relationship we expect that there will be a product of our efforts. This can be measured in growth, frequency of purchase, transaction size, profit per customer. Depending on your business goals, you may also want to measure customer satisfaction, retention, referrals, new member enrollment, active member participation and reward redemption.
Action Steps: If you’re developing a new loyalty program, define your business objectives. What do you want to achieve. Then, plan for how you will measure success. If you’ve had a loyalty program for a while, ask yourself, “Is my loyalty program strategy aligned with our business goals?” If not, start with clarifying business goals, given that loyalty programs can produce a variety of benefits. Next, reengineer your program’s reward structure, and create incentives powerful enough to change buying behavior but not so generous that they erode your margins.
Reciprocity: You have a mutual dependence, action, or influence. It is a give and take relationship. A customer spends money, provides personal data and hopefully becomes a potential advocate of the organization. The company gives the customer recognition, uses the information to better meet the customers needs and may reward them for their loyalty.
Action Steps: Deliver value the way the customer wants it delivered. Use a Customer Experiential Benefit Strategy to align and deliver value that is meaningful, timely and mutually beneficial to the customer and ultimately the company as well. In developing your program, we recommend a mix of the five types of benefits.
Who is Customer Insight Group?
Customer Insight Group, is a Colorado based loyalty marketing agency leading the way in helping companies engage, keep and grow profitable customer relationships.