07 May Why do Loyalty Programs exist?
Most companies agree it costs more money to attract new customers as opposed to retain existing ones. Loyalty programs have the ability to positively impact the company’s bottom line but are often considered as cost drivers. This is reinforced by the typical transaction-based loyalty programs, where a customer is rewarded with discounts.
Loyalty programs are often assessed in two ways: Does it have a positive impact on churn or does it increase the customer lifetime value (CLV)? The CLV is mostly calculated as shown on image:
To most marketers it is clear that great loyalty initiatives also have the power to differentiate a brand and prevent commoditisation of its offerings. This might not be straight forward to the company’s CFO but loyal customers can also generate additional business value, such as:
1. NPS & Referrals;
2. Social media exposure;
3. Frequency of interaction (engagement);
4. Insights to generate Business intelligence;
5. Permission to share data;
6. Ratings and reviews;
7. Upselling and cross selling
Focus on Tenure
Resent research* suggests there is an increasing emphasis on customer lifespan (=tenure), as opposed to spending, as a desirable loyalty behaviour. This could be in recognition of the increased competitive pressures resulting from digitalisation.
Entertainment and telecommunications provider Sky introduced a reward programme that recognises tenure. Sky VIP has four tiers of membership, with the highest tier recognising customers of longer than 15 years. Sky’s Head of Customer Loyalty, Rob Chandler, said:
“It’s about us looking after them [customers], not demanding their loyalty.
The tenure framework really gives us permission to do that
because it’s all about how long we’ve been together.”
UK retailers Tesco and Sainsbury have updated their loyalty programmes to reward longterm use and deeper engagement, as opposed to levels of spend.
Other Trends in Loyalty
Customer loyalty is on the decline, a 7% drop since last year, per a global study by Verint Systems, with attrition higher among digital customers. Consumers prefer to engage with brands digitally, but ironically this makes them the more prone to switching providers.
Research by Nielsen & PWC supports the fact that customers expect to be recognised beyond their spending habits, and value emotional benefits almost as high as monetary ones. It recognises the increasing importance of the relationship history in reward programs, where rewards are allocated on more than just a spend/transaction basis. The Table below summarizes these trends:
Customers expect flexibility in terms of how rewards are accrued. Mobile optimized programs like those provided by Starbucks & Sky demonstrate the type of flexibility that is sought. Organisations need to think about loyalty moments, i.e. at what point in the customer journey an award should be made.
*Source: Digital Strategies and Best Practice in Loyalty Programmes (2018, Mobile Market Development)