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Do Customer Loyalty Programs Work Anymore?

Rod Kelloway - Wednesday, August 20, 2014

In a bid to strengthen relationships with customers, companies often embark upon a customer loyalty programs. But just how effective are these programs? Given their popularity (every company under the sun seems to have a VIP membership card these days), it can be often be difficult to achieve any kind of cut-through or competitive advantage with a customer loyalty program.

In fact, a recent study by McKinsey of more than 55 companies across America and Europe, suggests that customer loyalty programs don’t pay dividends. According to McKinsey, companies that have a visible customer loyalty program actually grow at the same rate (or even slightly lower) than companies without one.

Despite these figures, well-thought-out and properly implemented customer loyalty programs can drive long-term value. Customer loyalty programs that actually work all tend to have a few things in common:

They build partnerships:

successful customer loyalty programs are often those that have a broader value proposition, and are implemented in partnership by multiple brands. For instance, one of the reasons that flybuys, Australia’s most popular loyalty program, is so successful is because customers can collect points at multiple retail outlets. The program covers Coles, Telstra, Target, Kmart, LiquorLand, Jetset, Budget, and even Best Western.

They address their customer’s pain points:

to have any chance of success, customer loyalty programs need to address, and solve, the problems of their customers. They need to provide real benefits, a tangible reason to join. Amazon does this exceptionally well. By becoming a member of Amazon’s customer loyalty program (which costs $79 per year), you are afforded free, two-day shipping.

They reward expenditure:

the best, and most engaging customer loyalty reward dollar spent at the cash register, in lieu of any other factor (such as frequency of visits). Priceline’s Sister Club does this really well: members earn one point for every dollar they spend. Once a Sister hits the 100 point mark, she gets a 3% discount. Once she reached the 100 point mark, the discount increases to 4%.

They offer multiple redemption schemes:

truly great customer loyalty programs recognise that their customers are all different, and value different types of rewards. As such, they offer different rewards and options for point redemption. The Woolworths Everyday Rewards scheme is quite effective when it comes to this. Members can redeem points for a $20 gift card every three months, use points towards Qanatas holiday services, or cash points to purchase more than 3,000 different products.

They focus on benefits specific to each customer:

we all know that companies with customer loyalty programs capture data on us; what we buy, how often we buy it, when we buy it. So, why not use this data to tailor customer loyalty programs, particularly if your customers are online shoppers? Offer customers discounts or two-for-the-price-of-one offers on items that they regularly purchase. Chances are, your customers will remember discounted prices on frequently purchased items, and buy from you specifically for them.

They have tiered membership layers:

giving extra rewards to your biggest spenders can be extremely lucrative. Your most generous customers feel looked after, and even more inclined to part with their hard-earned cash. And your other customers might even spend a smidgen more, in order to move up the tiers.

Above all, before you consider introducing a customer loyalty program, you would be wise to fully cost it (including development, marketing, and any ongoing costs). Once your cost analysis is done, compare the costs with a realistic assessment of the benefits of the program. These benefits should be real business benefits (like bottom-line improvement), not simply the bolstering of relationship marketing. If the benefits outweigh the costs, then implementing a customer loyalty program that integrates the six key factors above should be quite successful.

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