Loyalty consultants know that when it comes to developing an effective loyalty program strategy, brands need to be aware of both the pros and cons of loyalty programs to ensure they are going in with their eyes open.
First things first, what is a loyalty program? It is a structured program that rewards customers for repeat transactions and for completing other desirable behaviours identified by a brand. Loyalty programs are implemented to retain existing customers whilst attracting new ones. There are various loyalty frameworks that can be used to achieve this, which our loyalty consultants have condensed down into 11 different types of loyalty program frameworks.
Loyalty programs have become increasingly popular in recent years and are widely used across various industries. For most brands, implementing a best-practice loyalty program is crucial to staying competitive and creating a more personalised experience for customers.
Although a loyalty program strategy can deliver significant advantages to a business in regards to achieving their strategic objectives, brands need to consider both sides of the coin to reduce risk and increase the chance of success.
What are the pros and cons of loyalty programs?
- Customer Retention: One of the primary benefits of loyalty programs is customer retention. A well-designed loyalty program can encourage customers to keep coming back, ensuring a steady stream of revenue for the brand. Customers who are invested in a loyalty program are less likely to switch to a competitor, even if they offer lower prices.
- Increased Sales: Loyalty programs can also drive sales by incentivising customers to make more purchases. Customers who are close to earning a reward are more likely to make an additional purchase to reach the threshold, as per the Goal Gradient Effect. Moreover, offering exclusive rewards and ongoing benefits to loyalty program members can encourage them to buy more frequently and in larger quantities.
- Data Collection: Loyalty programs can provide valuable data insights to brands. Brands can collect data on their customers’ preferences, purchase history, and spending habits. This data can be used to personalise marketing efforts and tailor offers to customers’ interests, resulting in more effective campaigns and increased sales.
- Customer Engagement: Loyalty programs can increase customer engagement by providing opportunities for interaction with the brand. For example, offering bonus points for social media engagement or leaving a review can encourage customers to share their experiences and promote the brand to others. This also provides the business with more avenues to utilise gamification to create a more engaging customer experience.
- Advocacy: A loyalty program can generate brand advocacy by creating a positive customer experience that fosters a deeper emotional connection between the customer and the brand. When customers feel appreciated, valued, and recognised for their loyalty, they are more likely to feel compelled to recommend the brand to others.
- Costly: Implementing and maintaining a loyalty program can be expensive. Brands must factor in the cost of the rewards, the cost of the infrastructure required to manage the program, and the cost of marketing the program to customers. If the rewards are too generous, the program may not be profitable, while if the rewards are too underwhelming, customers may not see the value in participating. However this can be mitigated through the development of an extensive commercial model where brands can easily assess how much value they can afford to give away to their members.
- Disengagement: Despite the potential benefits of loyalty programs, many customers do not engage with them. This can happen when brands fail to invest in strategies that keep customers engaged. Brands need to ask themselves, is their loyalty program simple to understand and engage with? Is it relevant to their customers? Is the value proposition strong enough? It is also crucial for brands to have an in-depth understanding of who their customers are so they can then succeed at offering relevant rewards and providing personalised experiences.
- Brand Dilution: Poorly designed loyalty programs can dilute a brand’s image. If the rewards are not aligned with the brand’s values or do not provide a unique experience, customers may perceive the program as a gimmick. Moreover, if the program is too complex or confusing, it can create a negative customer experience, leading to dissatisfaction and a damaged brand reputation.
- Customer Loyalty: Loyalty programs may not always create true customer loyalty. Customers may participate in a program solely for the rewards, rather than an emotional attachment to the brand. If a competitor offers better rewards or a better experience, customers may switch, indicating that the loyalty program was not effective in creating a genuine connection with the brand. This is why it is important to create a program that is emotional so that members feel a sense of belonging which in turn can help decrease brand switching. Additionally, the evolution of a brand’s loyalty program strategy is key to maintaining retention i.e., periodic reviews and audits that identify gaps and loyalty opportunities.
What brands need a loyalty program?
There is no one-size-fits-all answer to the question of which types of brands need to implement a loyalty program strategy to succeed. Whilst all brands can benefit from this, the decision to implement a loyalty program depends on various factors, such as the industry, the target audience, and the brand’s goals.
That said, some industries are more conducive to loyalty programs than others. For example, industries with high customer frequency and repeat purchases, such as retail, hospitality, and food services, are more likely to benefit from loyalty programs. Customers in these industries often make repeat purchases, and loyalty programs can incentivise them to continue showing loyalty to the brand.
However, industries with infrequent purchases, such as luxury goods or automotive, can still benefit from introducing a loyalty program to ensure that when the time comes to make a purchase, customers are choosing them over a competitor.
In a recent loyalty statistics report by Antavo, it was stated that “60% of consumers in Australia indicated that simply being a member of an organisation’s loyalty program had prompted them to change their spending behaviour in at least one of the following ways: increasing their purchasing frequency, more frequently choosing the organisation over competitors, being more willing to recommend the brand to others, or being more willing to pay a premium for loyalty points or enhanced loyalty status” (see here for the full list of 2023 loyalty statistics). This shows that no matter the industry, all brands can benefit from implementing a loyalty program.
How do you know when you need a loyalty program?
As loyalty consultants, we tell our clients about several indicators that they can can look for to determine whether it’s time to implement a loyalty program:
- Repeat Customers: If a significant portion of a brand’s revenue comes from repeat customers, it’s a good sign that a loyalty program may be successful in incentivising customers to continue shopping with the brand.
- Competitive Pressure: If the brand’s competitors are already offering loyalty programs (which most brands are), it may be necessary for the brand to follow suit to remain competitive.
- Customer Feedback: If customers are expressing a desire for a loyalty program or suggesting that it would be a valuable addition. Most customers these days have an expectation of getting additional benefits whether this is tangible rewards or receiving an elevated shopping experience (e.g., increased personalisation, superior customer support etc.)
- Sales and Revenue: If a brand’s sales and revenue are declining, a loyalty program can be an effective way to encourage repeat business and increase customer lifetime value.
- Customer Acquisition Cost: If a brand is spending a significant amount of money on customer acquisition, a loyalty program can help to reduce those costs by instead focusing on retaining existing customers.
In conclusion, there are various pros and cons of loyalty programs, but it is undeniable that they can be a valuable tool for brands to retain customers, drive sales, and collect valuable data insights. The cons that are associated with loyalty programs can be reduced through careful consideration of the design and ongoing management of the program. A well-designed loyalty program that aligns with a brand’s values and provides a unique experience can be a powerful driver of success.