Businesses operating in mature markets have a unique dilemma- they have to constantly look for innovative ideas to stay close to customers and differentiate themselves from competitors. The proverbial sword of low margins and fixed costs hangs over their head. And there’s also the threat of the low-price players. When price cannot be a differentiator, companies have to look for other differentiators.
One such advantage can be offered through customer loyalty programs. They don’t just discourage existing customers from switching stores, but also give businesses an edge during a price war. When done properly, loyalty programs can generate up to 20% of a company’s profit. No wonder, US companies spend around $25 billion every year on loyalty programs.
How did Loyalty Programs Start?
A lot of research conducted around the 1970s indicated that suppliers who formed a better relationship with customers tend to have ‘better customers’. Further research also indicated that better customers bring better business. It slowly began as a marketing strategy for small and medium businesses that used their database to monitor and manage customer behaviour.
Modern Day Loyalty Programs
There are plenty of loyalty programs, but most of these can be slotted into two different categories; Standalone and Coalition.
Standalone: The most common loyalty membership today is the standalone program where customers get rewarded for doing business with the company that offers the program. Points can be redeemed only within the range of products offered by the program owner.
Coalition: More than one company participates in this program. Customers are rewarded for doing business with all the participating companies. Loyalty points can be redeemed within all the products offered by the participating companies.
How do they compare against each other?
There are advantages and disadvantages associated with both these programs. Benefits of the coalition program include;
a) Helps attract new customers: Companies participating within the coalition program get to share and thereby attract new customers. And that too at just a fraction of the cost normally incurred on marketing and advertising.
b) Costs and risks are shared: Costs to set up and operate the program are shared between participants. This also applies for risks if the program fails to take off.
c) Ideas and practices can be shared: As partners, businesses get to share their ideas and practices through promotions. The organizing contractor often arranges meets to discuss promotion strategies and ideas.
Disadvantages of the Coalition Program Include:
There’s a reason why coalition membership programs aren’t as popular as their counterpart. The greatest disadvantage lies in the fact that they leave the customers confused about which brand to choose.
a) Difficult for brands to maintain individuality: Although brands are being packaged together, they’re also competing against each other. They have to struggle to maintain their individuality.
b) Unclear information on customer database: The customer database is the most important factor in deciding promotions and allotting budgets for the program. This database is controlled by the coalition promoter who doesn’t disclose it to avoid misuse. But without knowing and analyzing customer behavior, companies have to devise their own mechanism to derive customer data.
c) Problems during redemption: In a typical coalition based loyalty program, different kinds of brands may participate. Customers who’ve collected reward points cannot redeem them as they wish. This is because the redemption value of different brands would be different, and it would be low for high end brands.
Advantages of Standalone Programs:
If retaining customer loyalty is the main focus of a reward program, then standalone is the best.
a) Program can be identified with a single brand: Customers need not be confused about choosing from multiple brands. They can identify the program with a single brand, thus making brand promotion an easy task.
b) Exclusive access to customer database: Unlike coalition programs, companies choosing a standalone program have exclusive access to customer database. This helps them analyze their promotion strategies and even budget accordingly.
c) Consistency in strategizing and marketing: The program is designed exclusively for the participating brand. The company has complete control over every aspect including the rules and regulations related to the program. They even get to control communications related to the program. This ensures consistency and reliability.
What do customers want?
The problem with any good customer strategy is that every company wants to copy it. Almost every company wishes to or has already launched a program. Sadly, most of these fail miserably; not because of a fault with the concept, but because it isn’t based on careful judgment. Every loyalty program should include;
a) Rewards that customers can relate to: The reward program should offer instant rewards and not expect people to wait for a long period until the points can be redeemed. Customers are attracted to a program for rewards, but only temporarily. In the long run, what matters is that the effort taken to maintain relations with the customer.
b) Never forget the ultimate aim, i.e. to sustain customer loyalty: Rewards are undoubtedly the end result of every program. But they shouldn’t be the ultimate motivating factor. It is about maintaining customer’s loyalty and preventing him/her from switching stores.
c) Program suited for different segments: The program should be customized for people in the targeted category. It should identify their needs; study their purchasing behaviour, etc.
Common loyalty programs include offering reward points for air travel, fast food chains, etc. Standalone programs promise all of this and much more.
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