Are you hoping to turn occasional customers into more steady, loyal repeat buyers? Perhaps you are already giving some thought to creating your own loyalty program.
I look at loyalty programs as special kind of pricing strategy, where the pricing incentive is being used to affect the behavior of consumers. It is like dangling a carrot – a discount or gift that hopefully will give them a reason to return.
But keep in mind that there are many, many businesses out there with loyal customers, who have no loyalty programs at all. Their customers are loyal simply because these companies are doing their jobs well and giving good value along the way.
That means you should not just assume a loyalty program will do all the work of creating a loyal customer base. But there are times when it could play an assisting role.
So let’s look at scenarios when a loyalty program does or does not make sense, and follow that up with some good guidelines for those starting out.
When a Loyalty Program Makes Sense
There are times when a loyalty program does make good sense.
To use it for ongoing research.
Suppose you have some kind of retail business where people come in and out of your shop, where you never catch their names, phone numbers, or any relevant information about them. You might as well be inventing your business from scratch every month, as you’re resting on a prayer that they could disappear any moment.
Having your customers sign up for a loyalty program gives you a chance to learn more about them through market research, especially if you take the opportunity to ask them such questions.
It effectively gives you a “fan base” to draw on for making key changes to your business, e.g. should we add a café inside the store? Should we change our hours? These more loyal customers will care about your business, and what changes you make, so giving them a say will improve your chances of successful decision making.
To gain more engagement with customers.
Once you have a base of loyal customers, you can get a higher level of engagement as well. For example, you might ask them for photos of them using your product, get reviews from them on the products, or invite them to events. In this way, you can get to know them much more deeply, which will also boost loyalty, with or without gifts and loyalty bonuses.
To create laser-focused marketing.
Once you have a loyal base, you can use it to plan how and where to market to these customers more effectively. You can email them about certain products, use them to launch or trial certain products, give them premium items (hats, t-shirts or something ) that makes them feel a part of your club, and effectively gets them promoting you to their family and friends.
When a Loyalty Program Could Hurt You
There are also times when starting a loyalty program could make things worse for your business.
When you are losing market share.
If your business has been on a downward slope (especially one unrelated to economic forces, and where competitors seem to be doing fine or growing), you may think a loyalty program could turn things around.
The problem is, a loyalty program is a kind of give-back of a little bit of your profit. So, if your profits are already shrinking or in trouble, a loyalty program will likely accelerate your demise, because you’ll be giving away something you do not already have.
A loss of market share is inevitably an indicator that it is time to change your overall strategy – in other words, you need to find or create a real competitive advantage, not a price give-back. After all, loyalty programs are easy to imitate, and if people are not loyal to you already, they likely won’t change their minds for a 1 – 2% give-back.
On the other hand, a 1-2% less margin on your business will represent a huge loss to your bottom line, because a price change always runs straight to the bottom number, the net profit. Best to avoid giving away any profit, especially when you don’t have it to give.
When you are giving away something you don’t sell.
It is important that you keep programs simple so that your customers can understand what they will get by joining. Ideally, people should get more of the product or service you sell, or they should get cash back, in order to keep their interest.
Many loyalty programs do give cash or products they do not produce or sell directly themselves. What happens then is that they are giving away dollars at full value (because they had to buy the bonus items), instead of giving away dollars at only the cost value (just the materials). This is the way to make a loyalty program far more expensive than necessary.
What’s worse is that when that person gets the extra bonus items, your business is essentially promoting some other company’s goods or services, instead of your own. Those items might be wanted or unwanted. If they are wanted, then you’ll send that person to the other business for more. If they are unwanted, you have made a bad impression on your customer. Why be part of a loyalty program that gives away unwanted items.
Essentially, it is a missed opportunity to showcase more of your own business’ capabilities.
Loyalty Programs: 7 Keys to Success
All this comes down to a few simple strategic tips for loyalty programs.
- Do it to get engagement. Brand your program creatively, and explain it to your customers in such a way that they know they will be on the inside track of new products, changes to the company and so on. Then you must strive to make them feel included in all the cool new things you do.
- Make sign-up fast, easy and with an incentive. Rather than trying to get a person to sign up at the till (or when they are in a hurry to check-out online), give them a way to do it when they are not in such as rush – and make it very quick to join. Later, once you have built some trust, you can probe for more detailed information.
- Keep rewards simple. Make the rewards very clear – amounting to some kind of service or product that you already can get at a cost much lower than what you now sell it at; this creates a high perceived value of the reward.
- Don’t give too much. Do the math on your program so that you’re not giving away more than 1% of your profit margin on the program. Make sure you’re getting something for that program, and email address or phone number, so that you can have the opportunity to boost engagement, do research and connect with them.
- Think of it as sampling. If you can, think of a way to give your customers something different, or something they can share with a friend – e.g. a gift for themselves, and one for a friend, or consider a product they would not have thought to try. This will help you grow your customer base, and broaden the purchases made.
- Don’t over-sell. Once you start engaging, don’t do it too often – 1 – 2 times a month is lots, and make it as specific to them as possible. For example, one week after they bought something from you, asking them “what did you think of the (item)?” or “We know you love (brand), so we wanted you to know we just got the fall shipments in, and they’ll be available to purchase starting Monday.” That’s good service; plus these kinds of things can be tied to reviews.
- Make your customers feel special. The real key is to make your customers, especially the ones on your loyalty program, feel special. That means you have to keep them included in what you’re doing, let them have a say before making major changes, listen to their suggestions, and if wherever possible, get to know them by name and perhaps even face. Remember that in the world there are many, many lonely people, and if you can make a person feel good when they walk in the door, they will certainly want to walk in the door more often. And if you really know them by who they are and where they live, the little loyalty gifts you give will be that much more thoughtful and relevant; making people in the program really know you care.
Conclusion
Loyalty programs should not be used to save a sagging business, but they may be used effectively for engagement and ongoing research with customers. Remember, a small change in price through a loyalty program (say 1% less) isn’t going to change a customer’s decision about where they buy. But if it is used as acknowledgement that they matter to you, it can have a much greater impact.
Recommended Reading: How to Create a Loyalty Program
If after reading this blog, you want to move forward, we strongly suggest you check out “Loyalty Programs: The Complete Guide” by Philip Shelper et al. He has some great insights on getting them done right!
We’d love to hear your thoughts on loyalty programs – please get in touch if you need more strategic guidance. We’re here to help!
