Loyalty Program Overview

Almost 80 percent of shoppers in the Europe now belong to at least one loyalty program and the trend is fast catching up in India but how well do they really work? The short answer: not as well as they might have been. We look at why, and analyze how advances in customer data collection are helping some companies to revise their Loyalty business strategies in different ways.

There are frequent shopping programs, frequent flyer programs, frequent mall cards and frequent petrol programs. There are points at the pump schemes, Service tax holidays and, some of them even donate to charities like CRY for people who use their Credit card reward points.

There are plastic cards, smart cards, thermal cards, magnetic strips Co-branded Credit Cards. Within the next couple of years players like Airtel, Reliance, are working on using 802.11 to Flash your mobile phone at a reader as you whiz through checkout, and you'll get a couple of rupees knocked off your bill.

Call it the loyalty craze. According to our Research, more than 80 percent of Europe consumers now have at least one loyalty card or program of some kind, and the number of people with two or more is estimated to be one-third of the shopping population and research suggests the loyalty card explosion is showing no signs of letting up anytime soon. Credit Card companies are offering programs by tying up with various Shopping establishments to offer discounts and lure the customers towards using their shops and Credit Cards.

While loyalty cards, Shopping Festivals and prizes have always been, first and foremost, a cheap way for businesses large and small to start tracking their customers shopping habits, more customers than ever now consider themselves entitled to special treatment, a marketplace psychology spawned in the 1980s by the airline industry's invention of frequent flyer miles, one of the first loyalty programs. Originally devised to generate better data on the most popular routes, the airlines broke what was a "one price fits all" standard and introduced a "some people are more special than others" psyche that has changed the global marketplace forever.

Do Loyalty Programs really work?

The short answer: not as well as they might have been. It's all in the execution. Some shopping establishments say their loyalty program is key to new revenue growth. Thanks largely to the data analysis of the data collected these companies have boasted retention rates and highest profit per customer in their respective industries even during tough economic times and cutthroat markets. But the majority of companies are still struggling to get it right.

Satisfaction versus Loyalty

There is still a yawning gap between the percentage of people who say they're satisfied with a business and those who consider themselves "loyal" to that business and who are intent on maintaining the relationship and continuing it into the future. Many companies have figured out how to deliver satisfaction, but they've not yet figured out how to earn loyalty anywhere near those levels. This loyalty gap can be particularly pronounced in industries where competition is harshest and growing.

Most customers continue to do business with the top retailers, but are less than pleased with the relationship they now have with them, while most customers are satisfied with the relationship they are not loyal. That means most retailers cannot count on their customers being loyal they are venerable to competition. Loyal customers talk up a company to their friends, family, and colleagues. In fact, such a recommendation is one of the best indicators of loyalty because of the customer’s sacrifice, if you will, in making the recommendation. When customers act as references, they do more than indicate they’ve received good economic value from the company; they put their own reputations on the line. And they will risk those reputations only if they feel intense loyalty

Where do most Loyalty Programs go wrong?

Most company loyalty programs don't slice data finely enough to distinguish between customers who would recommend a particular business to friends and those who would not. Knowing this could mean millions of additional revenue for companies. The tendency of loyal customers to bring in new customers at no charge to the company is particularly beneficial.

Many companies also tend not to do enough with their loyalty program data to make the customer feel special. Rewards programs cost companies, on average, between 2 percent and 10 percent of a customer's total spending at a given store. Once you have identified the top 20 or 30 percent of your customers, many companies tend not to market to the bottom tier because it's not economical, and end up leaving a majority of their customers frustrated or unable to accrue enough points to make participation in these programs seem like a real advantage.

But don't underestimate the value of trying. Food retailers, for example, lose up to 40 percent of their new customers within three months. One of the big benefits of a successful loyalty card program is that stores can quantify new-customer losses and introduce programs designed to retain or woo back the most profitable. "Without a loyalty card, one has no clue about the size of the inflow and outflow of new customers," What does this mean for the bottom line? Learning to play the loyalty card game better can help companies reap big cash rewards.

Data shows truly loyal consumers are 15 times more likely than high-risk customers to increase spending with a particular store. Profits rise as a customer's relationship with a company lengthens. Customer defections have a surprisingly powerful impact on the bottom line, when defections are cut in half, the average growth rate more than doubles.

It's not enough to have CRM. You need the hearts and minds of the customers to close the loyalty gap. IT needs to take the lead in loyalty programs because it's just about the only department that can coordinate between business processes, external data-analytics vendors and the executives who can translate output into action, What doesn't work anymore is treating all customers alike.