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Hardly a day goes by when you don’t visit a store, restaurant or supermarket and have an employee ask, “Do you belong to our loyalty program?” Loyalty (or rewards) programs have become ubiquitous. A fact of life in American business. Accordingly, it is helpful to ask what the role of a loyalty program should be in a company’s marketing and customer relationship management efforts.
We can define customer loyalty as a trust-based relationship between a company and the customers it serves. This relationship is developed by consistently executing the company’s value proposition for its customers over time.
Given this definition, the one thing we can say about a company’s rewards-based loyalty program is that it does not create customer loyalty. In fact, it has absolutely nothing to do with loyalty. Rather, these loyalty programs are simply a way of “buying” repeat purchase (i.e., “Shop at my store, and I will give you a discount for doing so.”). Truly loyal customers come back to you because they want to—not because you pay them to do so.
While, in our opinion, the role of loyalty programs has been substantially overstated, we truly believe they have an important role to play in a company’s marketing mix.
In my research into customer loyalty across a large array of consumer and business-to-business clients, I have found that:
- A company’s highly satisfied customers (i.e., a five on a five-point satisfaction scale) are approximately 40 percent more profitable than that company’s satisfied customers (i.e., a four on the same scale)
- Companies that correctly market to their highly satisfied customers can increase their value by an additional 30 percent. Each member of this subset of a company’s highly satisfied customers is thus worth over 80 percent more than a satisfied customer (1.4 x 1.3 = 1.82).
In my experience, concerted and refined efforts to target existing highly satisfied customers represent the single best marketing opportunity a company faces. And you can transform your loyalty program from a sunken cost into significant growth opportunity by focusing this initiative on your best, most loyal customers.
Through a well-designed market segmentation study, a company can identify those segments of its customer base that have the greatest percentages of highly satisfied customers. This same study will also identify the key motivations (and needs) that make these customers visit your stores (restaurants, hotels, etc.) on such a frequent basis. Through careful information collection and data analytics, you can classify the current members of your loyalty program into these various customer segments, with special attention paid to those key segments with the greatest percentages of highly satisfied customers. This will allow you to use your loyalty program to develop targeted communications and marketing programs designed to appeal to the key motivations and needs that drive visit and purchase behavior among these highly satisfied customers.
A few years ago, we were approached by a national restaurant chain client that was seeking to get more value from their loyalty initiative. They correctly surmised that they were not realizing an appropriate return on the investment they had made in the loyalty program. They were being stymied by a classic prisoner’s dilemma: No one in the restaurant business really wants to offer these rewards, but no one can afford to be the only one on the block not offering them. They wanted to know if there was any way to extract value from their program.
We had already performed a market segmentation study for this client and found three subsets of highly attractive customers for them. Our suggestion was to incorporate five simple questions from our segmentation survey into their enrollment form that they used for their loyalty program. Thus, after providing our client with the standard information to enroll in the program (e.g., name, email address, etc.) they asked the customer to “take a minute and tell us a few things about yourself.” The customer then answered the five questions that had been included in our segmentation study. These questions allowed our client to classify each member of their loyalty program into one of four groups: each of the three target segments we had identified for them and a fourth that was simply all other program participants.
They were then able to use this information to send targeted marketing offers designed to appeal to the critical purchase motivations and needs of each of their three top market segments. For example, one of this client’s targeted segments was customers who came to their restaurants because they were looking for unique food items they could purchase nowhere else. Using this information, every time our client introduced a new item, they would send an email to the customers in their database who belonged to this segment, informing them of their new product and offering them a coupon to use on their next visit. With this tailored approach, our client transformed their loyalty program from an “electronic punch card” into a key component of their marketing mix and helped increase visit frequency among the segments that meant the most to their business.
There is an important lesson to be learned here. Companies that use their loyalty programs to appeal to their highly satisfied customers will strengthen their relationships with this group and drive profitable growth.