Do Customer Loyalty Programs Really Work?

by Don Capman, President, J.D. Associates

“Customer Loyalty” is certainly the buzz these days in retail. Loyalty programs extend to almost every retail vertical market with few exceptions. So if loyalty programs are so ubiquitous, why aren’t they more successful?

First of all, what is a customer loyalty program? Generally speaking, a customer loyalty program is a concerted marketing effort to attract and retain customers as well as to increase customer shopping frequency and the dollar value of their purchases. Customer loyalty programs come in all sizes and flavors with benefits ranging from immediate discounts on purchases to “point” accumulation which can be used in the future for free or discounted merchandise. Most serious Point of Sale Systems are capable of integrating with various types of customer loyalty programs. Unfortunately, many retailers believe that if they install a customer loyalty program at Point of Sale, they will experience immediate and dramatic success. This is rarely the case. A long-term customer loyalty strategy must be implemented and regularly monitored for effectiveness. When developing a customer loyalty strategy certain considerations deserve attention.

1. Who are you trying to target? To answer this question, you need to run a report on your best customers. They aren’t necessarily the customers you see most frequently in your stores. Often, customers who are perpetual bargain hunters show up at your stores on a regular basis to see what you are “giving away.” They seldom buy at full price and, when they do buy they often have a higher-than-average return rate. In fact, they’re probably costing you money. A “Best Customer – Worst Customer” report will give you all the information you need and help you tailor a customer loyalty program that will be attractive to your best customers.
2. How do you make your customers aware that you offer a customer loyalty program? Several weeks ago I visited my local card and gift shop and something dawned on me. Every time I went to pay for my purchases, a clerk would quickly ask me if I had a Hallmark reward card. Usually, in a rush to get out of the store, I would invariably say no, and I would be on my way without anyone asking me if I would like to sign-up for one. Finally, the last time I made a purchase at the store and was asked if I had a card, I took the initiative and said, “No, but how do I get one?” The clerk courteously gave me a brief form to fill out and issued me a key chain card. She still never told me what benefits I would get by using this card, and again, because I was in a hurry and customers were waiting in line behind me, I never asked. So I am walking around with a card that has “mystery” benefits anxiously awaiting the tchotchke I will get after my 10^th purchase.
3. Are you offering rewards that are desirable to your best customers? Once you have a list of your best customers, study their buying habits and try to come up with some common denominators. What types of merchandise do they buy and how often they frequent your stores? With this information, you can segment your best customers and even customize their rewards according to their preferences. For example, since I am a male reward card holder who frequents a local pharmacy for toiletries, I really don’t want a “bounce-back” coupon offering me a free tube of lipstick after 10 purchases. I find these types of rewards not only annoying but insulting.
4. Is it easy for your best customers to make use of your loyalty program? Grocery stores were one of the first retail vertical markets to offer customer loyalty cards. The most common rewards in a grocery store are immediate discounts on selected items and “bounce-back” coupons good for discounts on future purchases. When a major grocery store chain in the northeastern United States decided to offer a loyalty program, they issued keychain loyalty cards to all customers. Well, God forbid that you should drive a different car one day and take the keychain that didn’t have the card because you were refused the loyalty discount. This infuriated most customers and finally the store stopped requiring the physical presence of the card. Customer loyalty is supposed to be a reward not a punishment.
5. Do you reinforce the value of being a rewards card holder? Every time I make a purchase, I should be reminded of the benefits of being a loyal customer. If it's an immediate savings, the sales associate should let me know how much I saved even if it's printed on the receipt. If the reward is in the form of bonus points that are going to result in a future gift or discount, the sales associate should tell me how many more points I need to reach my goal. If I’m close to my goal, I may even make another purchase on the spot just to reach my reward.
6. Do you keep the customer loyalty program fresh and meaningful? Many stores begin a customer loyalty program with an enthusiastic blitz. Staff and customers get excited and sign up customers by the droves. Often, prizes or bonuses are given to the staff member who signs up the greatest number of customers. As often, after the initial blitz is over and the prizes are won, customer loyalty programs languish and are put on the back burner to die a slow death. To be successful, you need to look at customer loyalty programs as living, breathing organisms that need regular replenishment and stimulation. Periodic events for members, mail or emails to alert members about new merchandise or special “member-only” sales, signage throughout the store that makes it evident of the benefits or being part of the program are all part of keeping the programs alive and profitable. The staff needs to be provided with regular and meaningful incentives to recruit new members and keep them fully committed to the program.

While software add-ons for loyalty programs are great tools that will help you track long-term customer value, those tools will only be as successful as the additional on-going efforts that keeps these programs meaningful. Loyalty is something that cannot be taken for granted but must be earned every day. Retail statistics commonly agree that it costs 4-6 times more to attract a new customer than it does to retain an exisiting customer. Keeping this statistic in mind certainly seems to justify the expense and work that is put into a well thought out and dynamic strategy designed to increase and maintain customer loyalty.

ABOUT THE AUTHOR

Don Capman is the former President and co-owner of J.D. Associates, one of the largest distributors of retail POS software in North America. J.D. Associates is now One Step Retail Solutions.