Loyalty programmes are probably one of the oldest and well-known marketing strategies existing to retain customers.
One can imagine that as far back as the Roman times, merchants and sellers introduced their own version of loyalty programmes to encourage customers to return, as well as reward their best customers. Thousands of years later, loyalty programmes are still going strong, and now come in the form of point programmes, cashback and new partnerships.
But are loyalty programmes really that effective? In this article, we cover the various pros and cons of implementing a loyalty programme for your business.
Pros of loyalty programmes
Higher customer retention
One of the main reasons loyalty programmes are put in place is to increase customer retention and make customers more loyal. According to Bain & Company, current customers spend 67% more than new customers. Not only are they more likely to return and purchase more products - therefore increasing sales - but it means less money spent on customer acquisition. It is a well-known fact that it’s seven times more expensive to acquire a new customer than to retain a current one.
With the appropriate incentives, a loyalty programme encourages current customers to keep buying and can also attract new customers without spending a lot extra on customer acquisition. For example: if a current customer loves the loyalty programme and gets a reward for referring a friend, your loyalty programme has just acquired a new customer. This helps increase brand awareness, lowers acquisition costs and of course, increases customer retention.
More customer data
One benefit modern-day loyalty programmes have over the centuries-old Roman ones is that we now have digital - and digital means data. Punch cards are great - but you can’t learn more about your customers and personalise your offers. With digital loyalty programmes, companies can now gather data on consumers’ buying habits. The more they shop with you, the more you will learn about them and therefore the better you can tailor your services.
One example is customer segmentation: once you gather enough details about your customers, you can then segment your client base into various demographics. This allows companies to participate in precision targeting, and offer incentives that are much more relevant to the consumer. For example: you have segmented your customers and one of the segments is mothers. On Mother’s Day, you can offer these mothers a unique and specific reward that only they can use when shopping on that day. Not only will the targeted population feel more appreciated, but they are much more likely to convert and repeat purchase.
Easier to upsell
Loyal customers are a lot more valuable and easier to sell to than one time customers. With a loyalty programme, you can identify the customers that you could potentially upsell products to. If they love your product and participate in your loyalty programme, they’ll be the perfect “warm” lead for a new product or service. This helps increase their customer lifetime value and also decreases the money spent on customer acquisition.
We’re already seeing a trend towards upselling and increasing customer lifetime value and away from individual sales. Thanks to data analytics, consumers prefer sticking with a brand that knows them well and serves their specific needs. Consumers now want to buy products from brands they identify with and align with their values. Loyalty programmes are a great step to helping enforce a stronger relationship with the consumer.
Cons of loyalty programmes
Potential financial impact
At the end of the day, loyalty programmes do cost money. If the calculations are not completed adequately, loyalty programmes can be a drain on a company’s finances - even a small discount can significantly impact profit. Before implementing a loyalty programme, companies should be willing to invest in research and cashflow forecasting - this way they can be sure the programme makes financial sense.
Make sure to track the data, measure the metrics and set objectives. This way you can be certain the loyalty programme works for you rather than against you.
Lack of differentiation
There are many loyalty programmes out there and most look all the same. It is a very competitive market, and it’s increasingly becoming a race to the bottom. According to Colloquy Loyalty Census, the average person in the US participates in 18 loyalty programmes!
Although loyalty programmes are a good way to stand out overall, they still need to be unique and interesting enough to encourage the consumer to keep on participating. The more intuitive and simple to use the programme, the more likely it is the consumer will keep on using it.
Lack of a complete picture
Loyalty programmes will teach you a thing or two about customer habits, but you still won’t get the complete picture of how your customer behaves. Some customers may not be truly loyal and only participate in the programme to gain rewards - while others will be real customers who actively engage in your product and services. Marketing tactics can be introduced to help identify loyal customers; one example is to use a tool to help you identify which customers are also shopping at your competitors’ stores - this will give you a better idea of which customers are more loyal than others.
Having said that, there are certain tools that help businesses build customer retention all while gathering much more relevant data. With Recash, companies can easily offer cashback through the customer’s bank card - no need to issue an extra card or take part in an expensive partnership. And since Recash is AISP registered and implements the Open Banking directive, customers can easily consent to share their financial data. This opens a window of opportunity that no other loyalty programme can offer: seeing which competitors your customers are shopping at.
There are many advantages of using loyalty programmes, and the disadvantages can be sidestepped if the loyalty programme is implemented carefully and makes financial sense. Want to get started with a loyalty programme? At Recash, we keep it simple and risk-free: offer automatic cashback to your customers, gather the relevant financial data and only pay once you turn a profit.