9 - Loyalty

Loyalty pertains to the expected future behavior of a customer, that they are committed to continuing to purchase a brand. Most notably, it does not pertain to past behavior: that a customer has purchased from you in the past, even repeatedly, is not a reliable sign that they will continue to do so, and taking it for granted that they will do so may decrease their intent to purchase.

Companies are recognizing the importance of rewarding and valuing loyal customers, as the cost of retaining their business is significantly less than that of prospecting for new customers. Not only are your competitors constantly seeking to lure your customers away, but customer loyalty is generally low in certain categories - one study finds 79% of casual apparel and 70% of grocery consumers say they are always seeking alternatives to their current retailers (this far exceeds most other product categories).

Point-based reward systems are a common approach to gaining an ongoing stream of business. They must be carefully balanced to ensure that the program is financially attractive to the prospects, but at the same time the value of giveaways must remain well below the profit made from their business. But they are not a novelty: one study found that there were two billion membership accounts in the US, the average household is a member of 18, and participation has increased by 16% in the past two years.

It's also been suggested that loyalty programs do not necessarily increase consumer spending. The goal is to up-sell or cross-sell a loyal customer to gain more revenue from them, but this doesn't always happen - in grocery and casual apparel, less than half of program participants spent more.

Meanwhile, the basic costs of operating loyalty programs are high, between operational costs and the discounts provided, and there is the problem of freeloaders, who seek to get the benefits of the program without paying in.

A particular concern for merchants in low-margin categories or those who lack significant economies of scale is that the travel and credit card industries, who have much larger margin, have set expectations fairly high. If you cannot offer similar treatment through your rewards program, it will seem miserly by comparison to what they are accustomed to receiving.

Small and low-margin companies may attempt to skirt the problems of rolling their own program by latching onto a larger system. The author refers to the Nectar system, popular in the UK, which is shared by a wide range of companies.

Another strategy is to offer rewards with greater perceived value that are specific to the merchant, such as discounts on store purchases. Consider the CVS "ExtraCare" program that rebates 2% on purchases and an extra dollar for every two prescriptions filled. CVS also gives program members the ability to accrue points in the U-Promise program, which is an independent platform that accrues credits for college tuition that is leveraged by various brands and retailers.

There's also some consideration of "rolling ownership" products in which a member buys back old or used merchandise by extending a discount on new items. This seems particularly worthwhile for high fashion (who don't want their brands on the racks of the local thrift store)

The retailer GameStop offers store credit as well as rewards points to their customers who trade in old games and equipment, which has been highly successful. The store reports that nearly half of the firm's sales are attached to a club membership, and club members spend three times more than non-members. There are also two levels of membership, one for free and another that costs $14.99 to join (for which the member gets discounts, a magazine, and exclusive offers) and has found the paying members to be "much more committed" to the brand.

Loyalty Roundtable

The author presents a mash-up of interviews with three "leading experts" in loyalty programs.