Customer loyalty

Customer loyalty programmes remain popular among companies, not least because of the conventional wisdom that there is greater value in retaining an old customers than in acquiring new. Yet there is also a high failure rate of apparently unsuccessful programmes. Despite a straightforward concept, in practice loyalty schemes can be hard to get right. Challenges include clarifying business goals - given the variety of benefits such programmes can produce - and creating incentives good enough to change behaviour but not so generous as to erode margins.

by Harvard Business Review
Last Updated: 23 Jul 2013

Five possible business benefits are identified. First, to keep customers from defecting by creating barriers to exit - for example, a mobile phone service. Second, to win a greater share of wallet: where consumers use multiple suppliers - whether air travel or credit cards - a loyalty programme can encourage the consolidation of purchases. To compete with similar schemes, programmes should give higher rewards for greater levels of expenditure.

Third, to encourage additional purchasing: loyalty programmes can create incremental demand for purchases that otherwise wouldn't happen. Multi-tiered programmes offering additional benefits at, say, silver, gold and platinum levels seek to achieve this. Similarly, schemes giving a 10th cup of coffee free can lead to acceleration of purchases.

Fourth, to obtain insight into customer behaviour and preferences to improve targeting of promotions. Tesco is often cited for its expertise in data mining: it is said to print some 4 million variations of vouchers in its quarterly Clubcard mailing to scheme customers. However, this benefit can be overstated. Finally, programmes can even turn a profit from selling 'points' to other businesses to use as rewards for their customers. But this involves the complexity of effectively running a standalone business.

Logically, loyalty programmes should be designed to serve the specific goals identified - a distinction many programmes don't seem to make. The authors identify components that are particularly important to design well. Customers prefer programmes that provide many redemption opportunities - where the loyalty threshold is set at a low level. Companies, by contrast, worry that low thresholds are not effective at locking in customers. A compromise is often the optimal solution.

Awarding customers bonus points when they sign up can be a way of getting momentum going and so make them loyal to the programme - research shows that the further individuals get into a scheme, the more they use it.

'Treat' rewards, such as holidays, can deliver more value than utilitarian rewards, such as household goods.

Offering customers the ability to redeem points in combination with hard currency can also increase the benefit to the consumer without undue cost to the company - so improving the value the business gets out of the scheme.

Your loyalty program is betraying you
Joseph C Nunes and Xavier Dreze
Harvard Business Review, April 2006

Review by Steve Lodge.

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