Monday, May 23, 2011

Loyalty Marketing Best Practices

Loyalty Programmes
Loyalty programs are often part and parcel of a comprehensive customer relationship strategy. So in that vein I am producing section by section my loyalty marketing best practices posts, this is in response to both colleagues and blog followers requests.

  • "As a customer's relationship with the company lengthens, profits rise. And not just by a little. Companies can boost profits by almost 100 percent by retaining just 5 percent more of their customers" - F.P. Reichheld

Loyalty programs have been used in commerce for years, I understand they originated in Germany where price based competition was disallowed by governmental restrictions in certain industries. In the Britain of the 60s and 70s if you bought your groceries at certain shops the retailer gave you stamps to stick in a book. Once you had collected enough you exchanged the books for gifts. Green Shield Stamps and other trading stamps, as they were known, were more often found in smaller shops in the early sixties. Local grocers, butchers, greengrocers, fishmongers, chemists, bakers, tobacconists, confectioners, drapers, ironmongers and petrol stations all gave stamps. Big stores such as Tesco recognised the loyalty such a scheme engendered and signed up the scheme in 1961. For the retailer it was a way of encouraging customer loyalty. For the customer it meant free gifts. The gifts of course had to be paid for by somebody and it was the retailer who covered that cost to the stamp company. Whilst there were questions about retailers passing on this cost to the consumer the consumer magazine Which? published research in 1965 that found prices no higher in stores that gave away stamps.

The modern day loyalty program was launched in 1981 by American Airlines, and was quickly duplicated by other airlines and other hospitality industries including hotels, car rental companies, and credit card organisations.

Retail loyalty programs evolved when progressive retailers recognised that without a "customer identification tool," they were unable to recognise individual customers and reward them for desired behavior. This was in obvious contrast to banking and telecommunications industries, among others, that have a customer database as part of their regular service offering.

In general, loyalty programs are often developed with good intentions but unclear objectives. While retail loyalty programs have many purposes, the greatest value that is created for retailers is the ability to identify individual customers and to measure and understand their individual behaviors. This consumer behavior data far outweighs the "currency" value of providing consumers the opportunity to build a reward opportunity by shopping at one particular retail banner. This opportunity is often misunderstood by retailers and consumers alike.


The basic benefits of using a loyalty program to obtain customer information are summarised below:

  • - Shift - Acquire new customers
  • - Lift - Increase the spending of existing customers
  • - Retention - Improve the natural churn rate of customers
  • - Profit mix - Shift spending to higher margin products
These loyalty program benefits should form the basis for all loyalty program initiatives.