Customer Loyalty programme – good or bad?

What is a customer loyalty programme?

Customer loyalty is where your existing customers return to you time and time again with repeat business. It’s usually because they love your brand, love your products/services and are really happy with the experiences they’ve had with your business.

Over the last several years, we’ve seen more and more companies using customer loyalty schemes or programmes to reward their existing customers, and to encourage them to keep coming back for more. A good example is that of coffee shops. They give you a card and every time you buy a coffee you get your card stamped. When you have 10 stamps on your card, you get a free coffee. Some programmes give you cash-back or use a points system, but they are all basically the same, with the same reasons for using one.

Why use a customer loyalty programme?

They are great for small businesses because they give your customers an incentive to give you repeat custom. Some loyalty programmes reward customers for introducing a friend (and they get a reward if that friend becomes a customer).

These programmes also increase your brand awareness and can help generate a positive return on investment. But, as with any scheme or programme, there are the downsides as well as the upsides. I thought I’d take a look at the pros and cons, so you can be in a better place to decide whether a customer loyalty programme might be good for your business.

The Pros

Customer Retention

According to the advisory firm, Bain & Co, increasing customer retention by just 5% can boost your profits by 25%-95%, so looking after your existing customers is vital for the good health of your business and profits.

Customer loyalty programmes also have the benefit of making your customers feel like their custom is valued and they feel appreciated. This, in turn, makes them want to carry on doing business with you. And it makes financial sense to introduce such a programme as, according to Inc.com, existing customers spend 67% more than new customers. So, the benefits to both the customer and your business is potentially huge to boost customer retention and give them an incentive to buy more.  

Direct communication with your customers

Your customer loyalty programme means that you have access to a direct line of communication with your customers. This makes things a lot easier to build your brand awareness and increase that loyalty by providing them with regular and relevant information. You can collect their email address as part of your loyalty programme and can share news about new products or services, events, any promotions you might be running, as well as any updates to the loyalty programme.

Customers who feel valued and ‘in the know’ about a business they buy from, will not only keep returning to you, but they will tell their friends and family, which could give you new connections and customers.

Data on customer trends

Having the contact details, such as email, of your customers, and the records you keep of sales from each of those customers gives you valuable data. Customer data gives you an overview of your customers’ buying behaviour. You know what their preferences are, you know their buying habits, such as when they are more likely to buy something. This not only helps you with knowing what works and what doesn’t, if you sell products it can help with your stock and knowing what to stock more of. It also helps you with your advertising and promotions planning and helps your marketing, as you can measure the results of special promotions, new products etc.  

It can also help you to segment your customers and find out which ones are profitable and which ones aren’t. This can help you decide which customers to target with new products or new promotions, as you can target the ones that are more likely to buy from you.

Brand differentiation

Loyalty programmes help your brand and can help distinguish you from your competitors. As a customer myself, I know that I am bombarded on a daily basis with an overwhelming number of choices for a particular product or service. The minute you type anything into a Google search, it seems to be picked up by your social media pages and you get loads of adverts about the product you’re looking for – you also suddenly get a barrage of spam emails about the same. I don’t know about you, but I find this extremely irritating! I’d rather stick with a brand that I know and trust.

A loyalty programme can help your customers choose you over the competition and the fact that you offer an incentive to be a loyal customer, this differentiates your brand against the other businesses with a similar brand to yours.

It can also help you in slow seasons, when business is not going very well. Take an airline for example, in the summer they sell loads of plane tickets as people jet off for some summer sun. But in Autumn and Winter, business can be a bit slower. So, they do special low prices on airline tickets to incentivise customers to get away in the slower seasons, at a much reduced price. This keeps the airline ticking over.  

The Cons   

All loyalty programmes look the same

Loyalty programmes are not a new concept and many businesses have the same kind of incentive scheme running. They have similar purchase requirements and benefits for the customers. With the abundance of loyalty programmes around, customers could feel overwhelmed by the choice, and this can make it harder for businesses to generate excitement for their programme. So you need to create something unique and that stands out from the others…this is not easy.

Loyalty costs money

Creating a customer loyalty programme does cost money. Any discount you give is going to affect your profits. Even a small discount can seriously impact your profits. For example, say you give a 5% loyalty discount. A product that costs £50… is £40 in costs and £10 in profit. If your customer buys that product for £50 with their 5% discount, they will pay £45. So, from your business point of view, you still have to pay your £40 costs, so your profit will be £5 – this is a 50% decrease on what you normally earn. You could help this by putting a timeframe on the discount – 5% off for the next month. The losses you suffer could be lessened by the increase in business from that customer.

Your loyalty programme has to be worth the time, money and effort you put into it. If it is proving to produce more repeat business, it could still be worthwhile financially, especially if you’re selling more to a loyalty programme member than normal. It’s just something to be aware of.    

Is the behaviour you witness actual loyalty?  

It’s hard to tell if your customers are loyal to you and your brand, or whether they just buy from you out of habit or because you’re closer than anyone else who does the same. We often look at a frequent customer and think they are loyal, but loyalty is an emotion which can’t really be measured. So how do you get around this?

This is where you can use marketing tactics to find out just who is loyal. You could reward customers for referring family and friends, or for writing a good review. This will show who is actually willing to stand up and vouch for your brand, stating the reasons as to why they like it.  

Another way to keep that loyalty to your brand is to include customers in your advertising – what better way to advertise your product, than to use a photo of a real customer using your product, or talking about the excellent service you give.

Data does have its limitations

As well as being a good thing, data does also have its limitations. For one thing, it doesn’t give the full picture of your customers’ overall purchase behaviour, as it can’t know what they’ve bought from other brands or shops. You also can’t tell from data if a customer is buying from you just because it’s at the right price and others may give repeat business just so they get the benefits of a loyalty programme.

You could survey your customers to find out more about their loyalty, but some will be reluctant to provide information about where and what they buy elsewhere. They might even feel offended by it.

Conclusion

There are clearly huge benefits to having a customer loyalty programme, but it’s important to be aware of the downside too. And not all programmes are successful, as the marketing and implementation is crucial to their success. However, they can help you generate more business and be rewarding for your customers.

Look out for next week’s blog, when I talk about how to promote your customer loyalty programme.

In the meantime, would you consider running a loyalty programme for your small business? Maybe you do already. I’d love to hear your thoughts on all aspects. Please comment in the comment box below.

Thank you for reading!   

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