What is a customer loyalty program?
An ideal customer loyalty program is intended to connect with the customer at an emotive level, building a relationship and promoting advocacy. A customer loyalty program is crucial for businesses to differentiate themselves in a crowded marketplace. Today businesses, particularly retailers, have entered a phase of leveled playing field where location is not the only differentiating factor. Businesses are getting pushed into increasing dynamics of low margin and high fixed costs. This situation is bound to result in a price war and strip profits from established businesses.
So what do you do?
Loyalty programs are a great way to differentiate oneself from the crowd and save businesses from the customer churn and enhance overall value offered to the customer. It is common to see loyalty programs as a tool to bring in repeat business, however businesses should seek to keep the namesake and create loyal customers & brand fanatics; not just repeat customers.
What are the benefits of customer loyalty program?
Customer Retention – Customer retention rate is an important statistic to calculate actual bottom-line customer numbers. A business with a 60% customer retention rate is losing 3-4 times as many customers a business with 80% retention rates. Customer retention also has some hidden advantages like it allows the customer and the business to understand each other better. Firms are able to analyze customer behaviors, able to bring out best offers, basket mix and savings. This allows businesses to segment their customers and satisfy them better with individual needs and preferences.
Customer Acquisition – An exciting and valuable reward for customers on loyalty programs has capability to attract new customers, but this should not be over emphasized as there are more cost effective and better methods to reach new customers. However the point made is that differentiation of business can be perceived very strongly by the potential customers with an effective loyalty program.
Customer up-segmentation – Spend thresholds for better reward brackets, like moving customers from one spend level to another, helps significantly in enhancing sales. Best Buy's "Elite" program does this effectively.
Dropping unprofitable customers - It is known to be better in terms of cost to lose bad customers than gain new ones. Customers who only buy the discounted lines and avoid premium range completely are the ones whom you might want to drop from loyalty programs for example. These customer profiles can cost more money than they generate. A well designed customer loyalty program ensures not only rewarding the better customers, but also minimizing payout to not so profitable customers. This is helpful to retain the customers from whom we generate the most profit.
Win back lost customers – The chances of converting a lost customer are greater when enrolled in a loyalty program. This can easily be enabled through the loyalty programs “call back” the customers who have not been inactive for a period of time. The point is that we know about a defected customer much more than a new prospect and chances of conversion of a defected customer is much higher, than a new one.
Building relationships and advocacy – The sole purpose of the loyalty program among others should be building a relationship with the customers. The customers want to be recognized, offered better value and kept in the knowledge of best offerings. A "Brand Fanatic" is the most active profit generating customer, and also helps the business in spreading “word of mouth” advocacy of the Brand.
Reduce costs on promotion and advertising – Because you have prior knowledge of your customers, the loyalty program has ability to create a highly targeted segment of customers and this helps in bringing in significant savings on promotions and advertising costs.