The Guide To Loyalty Programs: Why You Need It and How To Succeed

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Everyone is familiar with the concept of loyalty programs. Hotels, airlines, and grocery stores have the most well known loyalty programs. While most people feel they understand the concept and how it works, not everyone understands why it works or why a business should have a loyalty program. In addition, people don’t always understand the role technology plays in loyalty programs and how it can drastically increase the effectiveness of a loyalty program. That’s why right now, I’m going to tell you everything you need to know about loyalty programs and why you need one.

The world of loyalty programs

Today, more than one billion people worldwide are enrolled in loyalty programs. Industries such as airlines and hotels rely on loyalty programs to manage their customer relationships.

  • More than 125 million people worldwide are enrolled in airline loyalty programs.
  • About 76 percent of all U.S. grocery retailers with 50 or more stores have a loyalty program.
  • Almost 50 percent of the top U.K. retailers have loyalty programs.
  • About 75 percent of Americans belong to at least one loyalty program.

These are pretty crazy numbers. But it shows that loyalty programs are alive and well and that consumers are not afraid to enroll in them. Especially Americans.

What exactly is loyalty?

In Oracle’s report on designing next-generation loyalty programs, Oracle defines loyalty as “a positive belief, generated over the course of multiple interactions, in the value that a company and its products and/or services provide, which leads to continued interactions and purchases over time.”

Loyalty is focused on long-term customer relationships. So an organization should be focused on how their loyalty program entices a customer to stay with them for a long period of time. A strong element within this is minimizing the willingness of a customer to switch to a competitor. A loyalty program that is done well, should make it a difficult decision for a customer to switch to a competitor.

The goals of a loyalty program

There a several goals that nearly all loyalty programs are focused on. Number one is to generate sales. But besides generating sales, loyalty programs should also have goals that help both the company better serve its customers as well as, help the company grow. These goals include

  • Improving knowledge of the customer
  • Leveraging that knowledge to better market other products
  • Increasing customer retention and purchase frequency

Each individual business needs to focus on figuring out exactly what they want their loyalty program to accomplish before building it. Every industry and business within each industry, serves their customers differently. This means that each loyalty program needs to be custom-tailored to suit its customers. This will help a loyalty program enroll more customers as well as, become a valuable asset for the company.

What do we want loyalty programs to accomplish?

The short answer is profits. But there is much more too it than that.

A loyalty program that is properly built with clear goals and provides value to the customer can be extremely beneficial to the business. Areas such as customer knowledge, product and service differentiation, customer retention, and profitability can greatly increase with a proper loyalty program.

Here are the four cornerstone’s that a business should focus on in order to gain the most benefit from a loyalty program.

  • Customer Knowledge
  • Customer Retention
  • Differentiated Service and Brand Equity
  • Improved Profitability

Now let’s elaborate on these cornerstones

Customer Knowledge

With a loyalty program that provides good value to the customer, customers will not only want to join, but will also be willing to give you their information in exchange for a better experience. Gaining customer knowledge is much more important in a B2C business as B2B businesses already have information on their customers(not saying B2B is not important, just that B2C has more angles). These B2C businesses can use their customers data to give them personalized offers and form a much better relationship with them.

Customer knowledge also benefits businesses in terms of their market knowledge. The ability to have access to information like what products your loyalty customers purchase together, gives you more insight into exactly which one of your products drives customer loyalty. This will help businesses become much more successful.

Customer Retention

A well done loyalty program should also increase customer retention rates. If a loyalty program provides good value to the customer, then it will cost the customer (either in money, time, benefits, etc) too much to switch to a competitor. The higher these costs, the more likely the member is to remain loyal.

This is an area where a lot of loyalty programs go wrong. Many businesses focus too much on mimicking their competition’s loyalty program rather than making theirs something that stands out from the competition’s.

Many loyalty programs offer the same thing has everyone else. This is a waste of money for the business and a waste of time for the consumer.
Many loyalty programs offer the same thing as everyone else. This is a waste of money for the business and a waste of time for the consumer.

Three ways to make a loyalty program standout:

  1. By leveraging in-depth member profile and transaction data to create unique offers and product/services that a competitor, which does not know as much about the member, cannot match.
  2. Providing targeted service consistently across all channels
  3. Having the loyalty program integrate with the customer experience(must be a digital loyalty program).

By being unique and valuable to customers, businesses create a win-win situation where both the business and the customer understand the value they are receiving.

Differentiated Service and Brand Equity

Another great thing about loyalty programs is they enable businesses to compete less on price, and more on value. Businesses never want to be in a position where they are competing solely on price. A loyalty program can help deter that from happening.

Businesses can refer back to their advanced customer knowledge that they gained from their loyalty program and use this to provide unique personalized products to their customers. This makes them not only stand out from their competition, but also increases their brand value and their customers loyalty.

“To prove this point, 83% of hotel guests say that personalized service and attention to their needs provides value. It is “value,” rather than price, that defines a good deal for these customers,” according to a survey commissioned by Wyndham International.

This of course means that providing real value to customers is a cornerstone of a good loyalty campaign.

Improved Profitability

Profitability is of course the main goal of a loyalty program. There are a few different ways a loyalty program can help improve profitability.

  • Profitable customer retention
  • Higher prices paid for unique products/services
  • Increased average purchase size
  • Decreased marketing and systems costs
  • Decreased unsold expired inventory

As discussed previously, customer retention is a huge part of a loyalty program and a huge part in gaining profitability. According to Frederick Reichheld of Bain & Company, a 5 percent increase in customer retention results in a 25 percent to 100 percent increase in profitability.

Implementing a digital loyalty program

Now at this point you understand why a business needs a loyalty program, the goals of a loyalty program, and the benefits of a loyalty program. But now comes the most important part of them all, implementing a loyalty program and accomplishing all of the goals of the loyalty program.

I am going to go back through the cornerstones of a loyalty program that I just told you about, and give you ideas on how to accomplish every single one of them through a digital loyalty campaign.

Digital Loyalty Program- Customer Knowledge

Gaining insight into customers can be difficult depending on what type of loyalty program a business is running. An airline has a much easier time tracking someone’s travel habits through a frequent flyer number than a restaurant does trying to track someone’s preferences through a paper loyalty campaign. This example points out directly as to why digital loyalty programs remain king when it comes to customer knowledge.

Data, data, data.

To increase customer knowledge, businesses need data. Traditional loyalty campaigns don’t offer a good way to collect information on each individual customer. Digital loyalty campaigns offer the ability to have real-time analytics that allow businesses to stay up to date on their customers purchasing habits. You can track how often customers enter the store, what they purchased by linking the loyalty card to the transaction, as well as see how long until a customer reaches a reward for their loyalty.

Another good thing about digital loyalty programs when it comes to customer knowledge is that an analytics tool compiles the data for you. No need to try and break it all down and interpret it yourself. These analytics will provide your business with the data that it needs to make educated decisions based on customers purchasing habits. I view customer data as one of the most important tools for marketers. And if you had the right team I’m sure your data could even be incorporated into a CRM tool and help your business build very valuable customer relationships. Remember, knowledge is power. Especially with your customers.

Digital Loyalty Program- Customer Retention

This is one of my favorites when it comes to digital loyalty programs. As previously talked about, customer retention is about creating so much value, that it costs the consumer too much to switch to a competitor. So with a digital loyalty campaign, you have the ability to create much more value than with a traditional loyalty campaign. But, a business has the chance to create a tremendous amount of value if they incorporate their digital loyalty campaign into the mobile wallet. Here’s why.

People are already on their phone, so this is where your business should be. By placing your loyalty card in your customer’s mobile wallet, you have an advantage that your competitors cannot beat. Allow me to elaborate.

Mobile loyalty programs allow for the easiest opt-in. Customers can opt in a mobile loyalty program simply through a URL and adding the pass to their mobile wallet. Businesses can broadcast this URL directly to a customer’s phone through a beacon and Eddystone-URL. This is extremely simple, effective, and it is the future.

So now that they’ve opted-in, your goal is to increase the cost of switching which means providing more value than the competition. Now that the mobile loyalty program pass is in your customer’s mobile wallet, you can push updates to them letting them know about an offer that is tailored specifically to them. So instead of this offer being caught up within their email, it is now on the lockscreen of their phone.

These tailor-made offers that the customer actually uses, because they didn’t get lost in their email, create the ultimate win-win situation. This is key when developing customer retention. But now that they’ve got the offer in their mobile wallet, we don’t want them to forget to use it because that doesn’t help create our win-win situation. This is where a beacon comes back into play.

The mobile loyalty card is paired with a beacon at the register and will present itself directly on the member’s lockscreen when they are near the register. This way they never forget to use an offer and become much more loyal because of it. Another way to do this is by having a NFC enabled loyalty card like Walgreens. This way when the users goes to pay with Apple Pay, the loyalty card can be scanned through the NFC terminal. Check out the video below to see it in action.

Making it easy

As I pointed out, some of customer retention is based on making things easy. And this is where the mobile wallet thrives. Customers can easily opt-in, easily receive new offers, and easily redeem the offer through a beacon notification on their lock screen. I felt the best way to emphasize this experience would be to show you. So check out the video below to see all of this in action.

Digital Loyalty Program- Differentiated Service and Brand Equity

I touched on this a bit throughout my last two cornerstones. This brings me upon another point. When building a loyalty program correctly, many of the cornerstones will become intertwined and work together to reach multiple goals. So you should find that increased customer retention is also increasing the value of the brand and so on.

But for differentiated service you should focus on personalization. Customers perceive personalization as a form of value and they are willing to pay for it. So by gathering the data provided throughout your analytics software you can provide custom offers to your loyal customers. Amazon is awesome at giving people “suggestions based on recent purchases”, this is something many people appreciate because it’s useful. This also increases the average purchase size which is extremely important in increasing profitability.

Tip: Thanking a loyal customer for stopping by is an awesome way to show your appreciation and make them feel valued. This of course, can be done through an email, but you would really stand out by sending a lock screen message to their phone showing your appreciation.

Personal relationships are one of the advantages to a mobile loyalty program.
Personal relationships are one of the advantages to a mobile loyalty program.

Also remember this quote

“While consumers agree that price is important, they’d choose a slightly higher rate for added service.”

-Forrester, April 2002

At the end of the day, if you are doing your loyalty program correctly and paying attention to what the analytics are telling you, you should know your customers better than anybody else. Use this to your advantage and make your business as personable as possible and provide as much value as you can. It’s something customers really enjoy.

Digital Loyalty Program- Improved Profitability

Earlier I laid out five ways a loyalty program will help create a higher profitability. We’ve covered the first three by creating good customer retention, giving customers high value which increases the amount they are willing to pay, and by giving them personalized offers, we have increased purchase size. Now for the last two:

  • Decreasing marketing and systems costs
  • Decreasing unsold expired inventory

Luckily, digital and mobile loyalty programs can help solve both of these. For the first one, a mobile loyalty program will have a much bigger impact on reducing costs because everything will be digital rather than having to produce plastic cards. It will also help reduce marketing costs because the mobile wallet channel is free.

Yes I said it, FREE. When the mobile loyalty pass is in their mobile wallet you can send a push notification directly to the home screen notifying them of the most recent offer. This is cheaper than any other form of marketing and it will actually be seen by your loyalty members. When I think about it, I can’t think of anything else a marketer could possibly ask for.

And of course, pair up your new marketing channel and start pushing your unsold inventory. Redemption rates of mobile coupons are much higher than the industry average and can even reach up to 50 percent redemption. That will definitely help move unsold inventory.

The power of digital loyalty programs

Overall, we know that a loyalty program can be an extremely powerful tool. Set goals, separate yourself from your competition, focus on the cornerstones and you will have a very good loyalty program. If you want to make a big impact, make a mobile loyalty program and harness the features of benefits I showed you. You’d be surprised the impact it has on customers.

Let me know if you have run any loyalty programs and what your experience was like. I’d love to hear about it. Be sure to check out the videos throughout the article as they are great supplements to the content and feel free to comment with questions or observations.

Source for the information in this article: Ensuring Customer Loyalty: Designing Next-Generation Loyalty Programs

Want a digital loyalty program? Check out your options here and here.

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  • Chase Blakeley

    Very insightful. I like how you broke down the value of digital loyalty programs into 4 cornerstones with different points of emphasis for different businesses.

    For another great example of an automated customer loyalty program, check out chase.beakn.com. There are endless applications to be uncovered with the rapid developments in beacon technology.

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