A research paper from the Center for Corporate Change that questions loyalty programs finds that (emphasis mine):
customer loyalty programs which (i) directly enhance the product/service value proposition, or (ii) broaden the availability of the product/service, or (iii) neutralize a competitor’s program, may be worthwhile.
But they also suggest that (iv) it is probably a mistake to introduce a frequent-buyer program if you are selling a parity brand in a competitive market.
To understand the implications of this statement, the findings are non customer-centric. The paper highlights the reasons for the increasing interest in loyalty programs and debunks some widely-held beliefs among marketing managers about the loyalty of their customers:
(a) a significant number of customers want an involving relationship with the brands they buy,
(b) a proportion of these buyers are hard-core loyal and only buy the one brand,
(c) these hard-core loyal buyers are a profitable group because they are numerically large and are heavy or frequent buyers,
(d) it should be possible to reinforce the loyalty of these buyers and encourage them up a “loyalty ladder”, and
(e) database technology can be used to establish a personalized dialogue with customers which will bring about moves up the loyalty ladder
These are myths. Organizations introduce loyalty programs expecting to maintain sales levels and the corresponding profit margins, and, even better, cross-sell other products, and acquire incremental sales with existing customers.
These goals will need a reality check to make the programs an effective use of marketing dollars. The research found that an organization's most loyal customers, I'd call those the 10% vs. the 20% cited, also buys from a competitive brand.
Loyalty is not exclusive.
When loyalty is a tactical brand move vs. part of a strategic plan
Therefore the program is based upon tactical motives -- seeking to differentiate a parity brand, trying to preempt a competitor either form introducing a loyalty program or the entry of a new parity brand in the market.
Research conducted in Europe, Japan and the US market over 20 years found that 10% of buyers become customers. Even then, this 10% is also loyal to other brands.
Think about the credit cards in your wallet, your airline mileage programs, and the products in your refrigerator -- and you'll find that you do have a couple of favorite brands as well.
The research results also suggest that the marketing mix of a brand (its product/service formulation, price, promotion, and distribution) determines its market share, and once this settles down, then the level of brand loyalty is strongly correlated with market share.
Say you want to change the buyers choice process from one purchase to repeated purchases -- building relationships is a strategic move, it requires long-term commitment and funding.
[table from the report]
You can be more profitable in a niche brand, for example, because you may be able to have higher margins. Loyalty may also be the product of volume -- more people buying, more buying again. Which is why distribution deals are such a big deal, if you'll forgive the pun.
You could also have psychological, functional, or economic customer value. However, if the value is to the program and not the product, what happens when the program changes?
When it comes to pricing structures, loyalty to the product is essential. What makes a customer buy at a higher price? Perceived brand/product value. Think about Apple.
Also, if the incentive is the primary reward, when it gets taken away all you have is a "me, too" brand. As well, the reward should support the value proposition and positioning of the product.
Would a loyalty program be an effective use of marketing funds? Typically, the costs of frequent flyer programs run at 3% to 6% of revenues. As way of comparison, many airlines allocate 3% to advertising.
Add-on customer loyalty programs have the same effect of add-on social media presences to brands. When not integrated with the value proposition of the product, and when the customer experience is different, they are not going to work so well.
See other research by ACI Worldwide saying that half loyalty club members rarely if ever use perks online.
Has your brand hit parity with customers?
[hat tip to Beth Harte for the report]
[image from instrumental conditioning wiki]