Loyalty schemes: What’s the point?

Many retailers offer a loyalty card to customers to keep them coming back to the shop. Loyalty schemes can help give your customers an emotional connection with your brand with every transaction: deepening loyalty, and encouraging them to spend more.  However, it’s essential to choose a program that will resonate with your customer base, or your business could miss out.

Loyal customers spend more money in shops than new ones.  Plain and simple.  A recent study by Harvard Business School found that a customer’s 6th purchase was, on average, 40% larger than his, or her, first: with the 8th being 80% more. Loyalty pays.

Loyal customers don’t just help your business because they spend more, however. According to Bain and Co., a 5% increase in customer retention can increase a company’s profitability by 75%. And, if those numbers don’t make you sit up and listen,  a Gartner Groups study showed that 80% of a company’s future revenue will come from

just 20% of the existing customer base. Good old Pareto in full effect!  Lee Resource Inc. also discovered that recruiting new customers will cost your company 5 times more than keeping an existing customer.

So, loyal customers spend more and cost you less, but they also persuade their own friends to buy from you. Considering that over 70% of buyers make decisions based on a personal recommendation from a friend, or colleague, loyal customers are a very valuable asset to your business.

“In order for your loyalty scheme to be effective, you need to think as much about the improved experience for the customer, as the financial benefit.”

The problem for most businesses, however, is how to make people loyal. There are many “loyalty programs” out there, but they won’t do the job without the right structure or incentives.  Capgemini discovered that 77% of loyalty programs based only on “transactional behaviours”, (earning points from purchasing), commonly fail within two years of launch.

What can you do to make your customers more loyal?

Well, if you’re going to go to the effort of making a scheme work,  you need to know what is more likely to appeal to your customers. Loyalty schemes should offer a range of benefits – not just a discount. Bond Brand Loyalty carried out a survey involving over 28,000 US consumers. Their study uncovered the top 10 reasons that make a good loyalty program from the customer’s perspective. These were:

  1. Meets consumer needs
  2. Brings enjoyment to participating
  3. Improves brand experience
  4. Easy redemption
  5. Program consistent with brand expectations
  6. Program rewards/benefits appealing
  7. Level of effort needed to earn redemption
  8. Time to earn desired rewards/benefits
  9. Amount accumulated per $1 spent
  10. Ways rewards/benefits can be earned

These benefits are a mix of experience and financial rewards. The top 5 are all experiential, which is good for the retailer, as it opens up the opportunity to build loyalty without giving away margin. So, in order for your loyalty scheme to be effective, you need to think as much about the improved experience as the financial benefit.

What kinds of schemes are there?

There are many options out there, but the reality is, you need a scheme that’s going to work. What we do know is that your scheme needs to offer a reward for purchase, and some experience benefits.

Let’s consider the reward for purchase to start with

With any loyalty program, you’ll need to be able to manage the redemption aspects of the transaction. How much can I give away?   The key is getting the balance right between making the scheme appealing to participants, and not damaging your bottom line.

There could be a good deal of admin involved and you’ll need to run it through your sales system – recording what a customer has spent and what that earns them.  A good ePos system should be able to do this for you.

“80% of a company’s future revenue will come from just 20% of the existing customer base.”

There’s no magic bullet but it would appear that schemes which make rewards easier to understand, and obtain, win out. This includes those that provide regular rewards. These don’t have to be huge either. Research has shown it is better to receive £5 two or three times more than receiving £15 in one lump. So, work out whether this can be done for your store – X points for Y spent. This may represent something like a 5% discount that can be redeemed over time.

Two points to consider here.

1 – If you’re running the loyalty scheme, you can’t offer big discounts as well. It should either be one or the other at the point of sale.

2 – Redeemed vouchers are more profitable than initial discounts. You give the discount on additional spend, and not the initial sale. So, while customers are earning 5% discount, it’s off an additional purchase. This may enable you to be a bit more generous with numbers.

Whatever you choose to do, the key thing is to make sure the scheme is transparent, and allows customers to redeem in small chunks.

Now to the experience-side of the scheme.

Running the loyalty program with points and discounts alone, is probably not going to work in the long run. To create customer loyalty, you need to add experiential benefits, too.  Again, there’s no silver bullet and each business will be different. However, I would consider additional benefit(s) for a being a member of the scheme, and then further experiences that can be earned by loyal customers.

“If you’re running the loyalty scheme, you can’t offer big discounts as well. It should either be one or the other at the point of sale.”

Some basic benefits could be as simple as communications in the form of a newsletter, with perhaps instructional content for loyal customers. You could provide free product with each purchase or different packaging to loyal customers, to make them feel just a little bit special.  Anther option might be to add in a service, or comfort offering such as free coffee, or filtered water.

Moving forward, you could add to the experience by offering specific events and activities to loyal customers only.  How about free lessons, or a knowledge-based activity. Other options might be free preview nights for sales and promotions, or even a special subject related activity:  for instance, an invite-only golf competition, or training evening.

Whatever you do, it’s important that you have a plan, and apply as much thought to the experience side of the loyalty scheme as the nuts and bolts of  redemption.

 

Phil Barnard is Chairman of Crossover Technologies and European Partner of Golf Datatech. Follow him on Twitter @philbarnard or LinkedIn.   

http://www.crossovertec.co.uk  http://www.golfdatatech.com

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