Do You Need a Loyalty Program?

The most recent Loyalty Census from Colloquy pegs loyalty program membership in the US at more than 2 billion, up 16% from 2008. Perceived value of points earned through loyalty programs is estimated to be $38.83 billion. With this much activity going on, you may be tempted to offer a loyalty program for your business too. But do you really need a loyalty program? I’d like to address this question in this post. Let’s start by taking a look at the pros and cons of having a loyalty program.

Key Advantages of Having a Loyalty Program

• It encourages consumers to concentrate their purchases in your company so that they can reach a reward faster.
• It increases switching cost so that consumers who have already earned points through your loyalty program are less likely to jump ship to a competitor.
• Compared with other promotions such as price discounts, a loyalty program incurs delayed promotional cost, because consumers make purchases first and get rewards later only after they have accumulated enough points.
• Related to the above cost issue, not all points earned through a loyalty program translate into reward costs, as there will always be some consumers who never reach the reward threshold or who never redeem their points.
• A loyalty program offers a way to capture consumer transaction history and can lead to more in-depth understanding of your customers.
• If you have a sizable business such as an airline, a loyalty program can be a revenue source as you can sell program currency (e.g., miles, points, etc.) to partner businesses.
• A loyalty program, when properly designed, can make your best customers feel appreciated and become more loyal.

Key Disadvantages of Having a Loyalty Program

• A loyalty program can be expensive to implement, unless you are doing a basic punch card based “buy 10 get 1 free” type of program. Also unlike one-time promotions, a loyalty program is typically a long-term commitment and therefore needs financial support over time.
• Loyalty program points can represent significant financial liability and may increase risk to your business. (Note: This can be alleviated by setting an appropriate point expiration policy.)
• Your best customers may like you enough to want to buy from you any way. So having a loyalty program may be giving away your profit margin unnecessarily. My own research shows that existing heavy buyers barely change their behavior after joining a loyalty program.
• The long-term impact of a loyalty program on true customer loyalty is not well-established. Consumers may join your program purely for the financial incentive and will abandon you if your competitor offers a better program.

Questions to Ask

To decide whether your business should have a loyalty program or not, I suggest you ask yourself the following questions:

1. Do your customers typically buy from more than one company? If not, your financial gain from a loyalty program may be minimal. If they do typically buy from multiple businesses, figure out if they are likely to concentrate their purchases to one company. Some products are inherently variety seeking products (e.g., food), and a loyalty program may not be enough to make consumers monogamous.
2. Are your best customers attracted to you by your unique product/service offerings? If so, you may not need to add a loyalty program, which will only eat into your profit margin.
3. Do you have the analytic and management capabilities to make the most out of a loyalty program? A loyalty program can generate a gold mine of consumer data and can allow more customized and effective marketing programs. But if you plan on just turning on a loyalty program without actively managing it, many key benefits of a loyalty program will be lost.
4. Are you a business hub in your community? If so, you may be able to sell your program points to other businesses in the community so that they can issue your program points to their customers. This can generate additional revenue for your business.

If you find that having your own loyalty program is not the best way to go, sometimes it makes sense to buy loyalty program points from other businesses so that you can still reward your repeat buyers without breaking a bank.

Have you ever looked into having a loyalty program for your business? What affected your decision one way or another? If you already have a loyalty program, has there been any situation where you regretted your decision? Please do share your lessons and insights so that we can all make better decisions in the future.

Good things are better shared!