How do we make loyalty programs work? In an era where we have over 5-10 loyalty cards in our pocket, the challenge is to determine how to make loyalty programs make a difference in increasing market share and brand affinity amongst members. I have always found this an increasing challenge for brands, as most often I find customers have the option to enter into competing loyalty programs within the same category of companies and earn points.
When does one display loyalty really? I for one believe that when in a situation - "everything being unequal" - price, dissatisfied with service a couple of times, relatively stuck with lack of choice, may not always be the best-in-class product in its category etc., a customer irrationally prefers one product or service over the other and this is a true test of loyalty.
What makes customers do so are really the levers loyalty programs have to work on and make it a part of their program privileges.
WSJ has interesting article on loyalty programs which reaffirms my thinking on loyalty programs:
The biggest problem with loyalty programs, we would argue, is that most retailers adopt a one-size-fits-all approach: They use monetary rewards to encourage repeat purchases. But product discounts won't change buying behavior in the long run in shoppers who value things like personalized service, convenience or shopping pleasure more. These types of consumers may change their behavior to access the price promotion, but they likely will revert back to their regular brands or buying habits shortly thereafter, resulting in, at best, a temporary change in sales and market share.
Indeed, the proliferation of loyalty programs offering the same kinds of rewards has destroyed a key reason for them in the first place: differentiation.
Here is how to build a loyalty program with the best chance of paying off:
- Group customers according to purchase motivations.
To create customized loyalty programs, companies need to understand what drives various clients to make purchases. To get this information, they can survey shoppers on their purchase motivations, analyze the data customers provide on loyalty-program enrollment forms and review shoppers' transaction histories.
- Determine if customers perceive a loyalty program's rewards to be valuable.
Shoppers will change their buying behavior in response to a reward if they judge the value of that reward to be higher than its cost -- the obligation to make a future purchase or to give out an email address, for example. An important step in designing rewards, then, is to make sure customers perceive them as being valuable.
- Increase intrinsic rewards; decrease extrinsic ones
Intrinsic rewards are those that match up with a consumer's natural purchase motivations;extrinsic rewards are those that sit apart from a person's normal shopping goals.
- Weigh other factors that may influence the effectiveness of reward types.
Reward types can become more or less compelling, depending on the type of product or service being sold. Intangible rewards such as beauty advice and special services are more effective when the product or service being sold is expensive and requires some thought and effort to purchase -- luxury goods, cars, and cosmetics are good examples.
When everything is unequal, will your customers put the purchase option on your product or brand, inspite of having a loyalty program? Take a hard look and evaluate.