Why Loyalty Programs? Should You Invest in a Loyalty Program?

In all these years of loyalty consulting, there is one question that I always encourage that the clients ask of themselves - Is investing in a loyalty program the right decision? The ones that ask this question are the ones that have the right approach and the right success parameters defined for it. On a recent loyalty design study, the CEO asked why he should have a loyalty rewards program when he has a pretty successful CRM program running. Here I discuss five points you need to consider while evaluating whether having a loyalty program is the right move. Have also listed reasons why you should consider Loyalty beyond a CRM program.

1. Consider the space that you play in. Are you providing a service or product that is not easily differentiated?

If you are competing in an industry where differentiation is difficult to create, loyalty programs can provide that fertile ground for setting yourself apart. They allow to make a new promise to the consumer that is tangential to the product or service, but is still inseparable from the product in evaluation terms. Hertz had demonstrated this with their 1-step drive out of the parking lot service feature for best customers.

Loyalty Programs are an extension of the brand promise whereas CRM programs are more like tactics. A Loyalty Program fits your product or service like a new skin. It is a long term promise and hence it lends itself the quality of being part of a brand's DNA. The perpetual aspect of loyalty programs allows for them to be presented to the consumers as a feature, which allows multitudes of differentiation from competition's offering.

2. Consider the discounts that consumers get. Are your consumers looking for value constantly, and the fact they do that is not aligned with your brand's strategy?

Loyalty programs are designed to appreciate the right consumers for the right behaviour. You can offset discounts with loyalty rewards. The appreciation when presented correctly can add up to significant value in the consumer's mind. Loyalty program benefits are a passive way of communicating value to a consumer, while with CRM programs the primary tactics are more often promotions and offers, which translate into a direct hit on the bottom line. Barnes and Noble had deployed this when they launched a paid membership card that offered member discounts.

If your plan is to move the consumer away from discounting, loyalty programs can be a great way to provide value and it does not impact the brand image adversely.

3. Consider if you are serving a fast or fickle consumer. Are gains in your business defined more by impulse buying, fads or fashion, and less so by function or performance?

Loyalty programs do create a bond between the consumer and the enterprise, but this bond will not sustain itself when it is against the core needs of the consumer. Loyalty programs perform much better when purchase decisions are more evaluation based and there is a set of purchase criteria that are stable. But if the purchase decision is driven by impulse or newness, loyalty programs are less effective. Entertainment or restaurant industry is one such space - here to the variety seeking customer long term loyalty is less attractive. Hence an Eazydiner or the Entertainment club in Australia make more sense.

4. Consider if you would like to differentiate between consumers. Are there operational benefits to creating a consumer segmentation based on the value they provide to you?

Loyalty programs allow you to communicate a segregation that is acceptable to all - your consumers, stakeholders and your teams. Nobody will fault you for treating consumers differently, and you may be able to draw different levels of processes, service levels and treatment for different consumer groups, in a way that is in the interest of your enterprise. This is not possible through CRM programs, because the segmentation cannot be communicated formally to the consumers. Airlines programs have done this really well.

5. Consider if you need more data on your consumers. Is your marketing budget bleeding because of poor targeting?

Loyalty programs are marketing tactics that bring the consumer closer to the brand. With permission based marketing defined on a good segmentation strategy, a brand can get closer to the consumer in a way that allows for reduced marketing spend on the big ticket marketing expenses. You might also find that good targeting and relevant treatment helps raise the hurdle for existing consumers. It helps cultivate consumer inertia.

Next post will touch on how you evaluate a rewards program - performance factors and what should be the ROI hurdle?

Your comments and feedback on this post are most appreciated.

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