Customer loyalty programs are designed to reward your best customers. Many business owners choose to implement a rewards program in order retain their current customers and turn new customers into returning customers.
Traditional loyalty programs, such as frequency programs, points programs, and cash back or rebate programs, have plenty of advantages for small businesses. Because these programs give customers an incentive to purchase from you again and again, they offer opportunities to up-sell or cross-sell. In addition, such programs have been shown to increase brand awareness and generate a positive return on investment.
However, there can also be some disadvantages. Before you launch your own loyalty program, it’s important to examine both the pros and cons to determine if a rewards program can deliver the results you have in mind. Here are a few to consider:
Pros
1 – Improved Customer Retention
Loyalty programs make customers feel appreciated and valued, which makes them want to continue to do business with you. Retaining customers by rewarding them for repeat purchase behavior is arguably the number one reason why businesses establish a loyalty program and, therefore, the greatest benefit.
There are plenty of numbers to support the positive impact of customer retention on a business’s bottom line. According to Inc.com, current customers spend 67 percent more than new customers. Statistics have shown that increasing customer retention by just 5 percent boosts profits by 25 to 95 percent.
Coupled with the fact that it is six to seven times more expensive to attract a new customer than it is to retain an existing one, it’s no surprise that 65 percent of marketers use a customer loyalty program to boost customer retention and incentivize additional purchases.
2 – Brand Differentiation
Another benefit of having a customer loyalty program is it can help to distinguish your business from your competitors. Customers are often presented with an overwhelming number of choices for a single product or service. A rewards program can help a customer choose your business over one that doesn’t offer any type of incentive and differentiate your brand from others that are similar.
3 – Direct Communication with Customers
A rewards program offers businesses a direct line of communication to their customers. This makes it easy to build brand awareness and increase loyalty by providing valuable information on a regular basis. Be sure to share announcements about new products or services, events, and promotions as well as rewards program updates and special offers. The more your customers know about what your business has to offer, the greater chance they will not only keep returning, but they will share the information with friends and family.
4 – A Wealth of Valuable Data
As soon as a shopper signs up for your loyalty program, you begin recording information about them in your company’s database. This data allows you to learn a great deal about the customer’s behavior, buying habits, and preferences. Companies use this valuable information in numerous ways, from tailoring their offerings to specific groups of consumers and measuring the results of special promotions to assisting with inventory management and pricing.
A well-designed loyalty program also allows companies to segment customers and distinguish profitable customers from unprofitable customers. You can then focus on rewarding and retaining only those customers from whom your company generates the most profit.
Cons
1 – All Rewards Programs Look Alike
Loyalty programs are nothing new. Businesses have created thousands of programs nationwide and many of them have similar purchase requirements and member benefits. With the average household actively participating in more than nine reward programs, customers can be overwhelmed. This makes it harder for businesses to generate excitement for their program unless they create something unique and distinguishable.
2 – Loyalty Comes at a Price
Rewards programs can be expensive. Discounts are discounts regardless of how you package them, and they are going to affect your bottom line. Let’s say a typical $50 sale results in $10 in profit. Offering a 5 percent loyalty discount will result in a 50 percent decrease in profits. In the end, what appears to be a small discount can have a significant impact.
That said, 75 percent of U.S. companies that have loyalty programs generate a return on investment. If your discounts are balanced and your program is effective at increasing repeat purchases and average order value, you should be able to recoup any losses.
3 – Data has its Limitations
Loyalty data often provides a limited picture of a consumer’s overall purchase behavior. For instance, it cannot track purchases from other brands and stores. Some of your most loyal customers may be too uncomfortable to share sensitive information in order to get the incentives of the program.
Perhaps most importantly, the data may not be an accurate reflection of customer loyalty. This is because a frequent buyer is not necessarily a loyal one. He or she may be buying your product or service simply because it is convenient or the right price. Certain customers may be making repeat purchases solely for your program’s rewards, not because they have an affinity for your company.
Customer loyalty programs clearly offer benefits to both your customers and your business. Keep in mind that not all loyalty programs are successful. Some lead with the wrong value proposition or fail as a result of poor implementation. Understanding the pros and cons can help you avoid mistakes and develop a program that will generate business and be truly rewarding for your customers.
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