It doesn't take a hyper-competitive marketing landscape to realize that customer acquisition is just the beginning of a sustainable business growth strategy. The key (challenge and opportunity) is in the transformation of first-time buyers into loyal brand advocates who choose your brand consistently over the innumerable alternatives. Sustaining customers that endure, drive repeat business, and provide valuable data insights are the cornerstones of a successful loyalty program. It is no surprise that it is with Loyalty programs that a customer's lifetime value increases along with a simultaneous reduction of acquisition costs.
Loyalty programs are structured marketing tactics that offer customers rewards, special incentives, or discounts with the sole intention of attracting and retaining customers. The more a customer engages with a brand or retailer, the greater their spending and the higher the reward they receive. Their purpose is two-fold
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Create value for both customers and businesses by rewarding their patronage
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Provide the company or brand with considerable consumer information and purchase data that can be used to create future marketing strategies and future plan products and services to sell to customers
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If a recent Harvard Business Review is to be believed, it requires 5 - 25 times more to acquire a new customer than to retain an existing customer; then it is only rationale that behind every loyalty program is a fundamental insight that existing customers generate more revenue with lower overhead than the expense cost and efforts for a new customer. Don't get us wrong; we did say at the beginning of this article that customer acquisition is just the beginning of sustainable business growth; it’s just that the middle of sustainable business growth is keeping all those new customers - happy, engaged and loyal.
What are the mechanics and implementations to make a loyalty program work.
While the mechanics of a loyalty program are to track customer purchases (via punch cards or mobile apps, etc.) and reward consistent patronage, the implementations may vary across markets, categories, and customers. Rewards come in varying forms and values. From early access to priority access to free merchandise, enhanced services, free shipping, expedited shipping, member discounts, other exclusive offers, accumulated points-based rewards, tiered programs, or just straightforward discounts that provide instant savings.
The benefits are undeniable for both customers and businesses simply because every customer wants to extract additional value from their purchases (younger customers favor mobile-first/gamification elements, value customers prioritize immediate savings, premium customers value exclusive and personalized experiences), while business customers desire simplified and quick processes.
What is notable is that while loyalty programs originated in the hospitality and retail sectors, they are not limited to them anymore. Banking and Finance, Travel and Tourism, Entertainment, OTT, and Subscriptions, etc, have all found their way toward introducing and developing their own loyalty program.
A good loyalty program encourages repeat purchases.
A great loyalty program shortens the interval between purchases.
From a business perspective, this increased purchase frequency offers a huge compounding benefit on revenues while simultaneously reducing both new acquisition costs and servicing costs. For businesses that have long sales cycles or high customer acquisition costs, a great loyalty program can become a lifeline. Furthermore, it has been noticed that most people are willing to trade personal information for loyalty program perks that when accompanied by data relating to purchases, frequencies, behaviors, and preferences, help businesses build robust and sophisticated consumer profiles that can be used to targeted marketing strategies, future product development, and enhanced customer service functions.
Turning customers into brand advocates continues to remain the holy grail for most brands. The effectiveness of word-of-mouth in a world filled with mistrust towards both traditional and digital advertising remains a ray of light, enthusiasm, and encouragement for brands and businesses as customers share their experiences on social media, encouraging more brands to build better branded experiences that are not just worth sharing and also worth becoming a part of a community. Experiences that differentiate themselves from the sea of confusingly similar and sparingly cheaper products and services that flood the marketplace today.
The different types of Loyalty programs
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Point-based System - a simple and familiar system that awards points in relation to the value of purchases. Customers can later redeem rewards or discounts against this point. Starbucks's Rewards program is the most notable brand that follows this approach.
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Tiered Loyalty Program - is usually a gamified approach used to create aspirational status levels that further encourage customers to spend more so they upgrade or level up to have access to premium benefits
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Paid membership programs - This model generates a predictable stream of revenue and is made popular by brands like Amazon, etc., that charge annual fees to gain access to exclusive offers, pricing, products, early access, etc.
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Value-based loyalty programs - unlike traditional or transactional rewards, value-based programs focus on creating customer experiences that are not only shared but are meaningful. They don't offer basic discounts but curate experiences that build stronger connections between the brand and its customer
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Cross-brand loyalty programs - are those programs that allow customers to earn or redeem rewards across multiple businesses that share a common loyalty program. This way, the cost of customer acquisition is shared across businesses and, therefore, considerably lower.
Steps to creating a Loyalty Program
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Defining the business objectives
- Identify and articulate with clarity what your business aims to achieve through the loyalty program (is it increasing purchase frequency, raising average transaction value, reducing customer attrition rates, or capturing more comprehensive customer data or building multi-channel customer engagement etc). Ensure that the program delivers exactly what you want it to deliver.
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Understanding your customer base
- The most effective loyalty programs are built on a deep understanding of customer preferences, values, styles, behaviors, and biases. What kind of rewards will motivate your customers?, How do customers prefer to interact with your brand?, Which tactic or program mechanics give the least friction?, What are the emotional benefits of your program? Etc. Ensure that your program is customer-centric to the desired results
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Designing the mechanics that are simple and transparent
- Complexity begets complexity. When designing the mechanics for your loyalty program, keep it simple, keep it transparent. Customers need to be able to quickly understand things like - How they earn rewards, what those rewards are worth, how and when can they claim them, how they can climb to higher tiers etc
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Creating and maintaining the right balance (for both the customer and the business)
- Creating a sustainable exchange of value between customers and businesses is critical for the continued success of any loyalty program. Programs that do not add value or give value to customers will most likely not see too many of them wanting to sign up for your program. Similarly, programs that give too much away to customers become unsustainable. Knowing what are the director costs of rewards and incentives, the administrative and technology expenses. Projected revenue increases from the new behavior etc should be created and managed.
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Leveraging Technology where necessary
- Technology brings with it numerous ways to scale up and automate processes, thereby adding considerable value to the customer experience and even to business intelligence. However, choose the right technology (for example - Mobile apps for convenient engagement, data analytics for optimization, automation for reducing administrative overheads, email marketing for personalized communication, etc), so that it serves the program objectives while enhancing the experience and operational efficiency.
Key Metrics to measuring the success of a loyalty program
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Customer Redemption Rate: Indicates how effective and attractive your rewards/incentives are. A high redemption rate indicates how active participants are in your program
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Customer Retention Rate: Tracks the percentage of customers who continue to engage with the brand over time.
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Customer Lifetime Value: Calculates the total revenue generated by a customer throughout their relationship with the brand
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Participation rate: Measures the proportion of active customers against total customers
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Engagement rate: Reflect the program's effectiveness by evaluating how active customr interact with your rewards and promos.
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Repeat purchase rate: Tracks frequency or repeat purchases
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Net promoter score: Gauges the likelihood of customers who will promote your brand to new customers.
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Average spend per member: Tracks whether loyalty customers spend more than regular customers.
Common pitfalls of Loyalty programs.
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Lack of clear objective
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High costs and low profitability
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Low customer adoption and engagement
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Overcomplicated loyalty program design
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Irrelevant rewards
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Poor Differentiation
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Low relevance and effectiveness to evolving customer needs
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Overmarketing or under marketing the loyalty program
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Data inaccuracy
Conclusion
Loyalty programs will continue to evolve as long as both customer expectations evolve and technology advances. The future of successful loyalty programs are those that blend traditional loyalty and emerging capabilities (such as Integrating AI, Augmented reality, Voice-activated interfaces, cross-brand ecosystems and blockchain-based systems for rewards.
Loyalty programs represent a strategic marketing initiative that is customer-centric in design and rewards value exchange that benefits both businesses and their customers. Loyalty programs go beyond discounts, rewards, simple retention strategies and tactics, and data collection but to also include enhancing purchase frequencies, customer advocacy, community building, and competitive differentiation. Research has proven that loyalty programs are instrumental in changing customer spending patterns and maximizing benefits. Despite what future technology brings, the fundamentals of loyalty programs will remain the same - to recognize and reward customers who contribute significantly to a business's success.
Related Reading: Blending AI's efficiency with human emotional intelligence, Overcome the Generational barrier and Connect with Customers, Navigating Local Customs and diverse Cultures, Leveraging Activism for Loyalty, Creating Communities to drive purpose and growth, Marketing Truths in a World of Cynicism, Performance Marketing for Effectiveness, Packaging Designs that Sell, The Power of Music in Campaigns, Negotiation Strategies for any situation, Augmented Reality Marketing, How to Sell with Emotions, Crafting Your Customer Journey Map Masterpiece, Public Relations that Works, Immersive Customer Experiences with Experiential Marketing, Humanizing AI, Staying Culturally Sensitive, Retention with Loyalty Programs,