Why loyalty programs do not work?
Each new customer costs the company much more, than a regular one. Confused by involving customers and making them stay and the need to receive revenue from regular customers, many of the marketing professionals apply loyalty programs. Nevertheless, they still do not believe in it, they become convinced of their inefficiency and apply again new one. Why do loyalty programs not work? Let’s look through the looking glass the other way.
Not loyal participants of loyalty program
Around the world, loyalty programs have captured the awareness of marketers.
Some of the experts believe in their effectiveness, some of them are convinced of this, and some remain steadfast in their opposition.
Maritz Loyalty Marketing company, has been conducting research among loyalty program participants. As a result, loyal participants are 90% more likely to make purchases and spend two-three times more than other customers (Survey of respondents – 4,800 consumers, and an assessment of the experience of 83 leading brands in 15 categories). However, 71% of customers who ended a business relationship did so because of a poor customer service experience According to Forbes.
Well, could you think for a while: how many cards do you have for an honorary client of coffee-shops and restaurants, chain stores? How many discount flyer or promo flyer to the next purchase in your wallet? And of course, how many of them do you use, and how many times did you generously give such cards? Probably, there are just too many to count. And what is your benefit from earning points with your loyalty cards?
Maritz Loyalty Marketing says that the average American filled out the application form to 18 different loyalty programs. Also, only one third of them actually benefit. In other words, three quarters of loyalty programs fail in the first two years counting on customers’ money.
Why loyalty programs do not work? Here are a few reasons:
1. Cheap Loyalty Programs
The reason that customers are not loyal to your loyalty programs in the statement given at the beginning of the article is:
“Each new customer costs the company much more, than a regular one “
This is the heart of the problem – it turns out that we should spend more on marketing programs to attract new customers. And at the same time, we need to reduce the cost of sales support to regular customers. Surprise!
In a Boston Consulting Group study noted that loyalty programs often do not pay off. The company has found that sales should grow by 10% with 3% rate of revenue to justify spending for the costs of stimulating and operating the Loyalty program. The costs of the loyalty program can be significant and should be justified. There is such a statement in marketing, which explains a lot:
“Lack of marketing costs leads to unjustified costs.”
In general, it is not necessary at all that the program participants owe something to the company with such “loyalty” costs. For the reason that having a loyal tribe of happy customers depends not only on the amount of expenses.
2. What should the loyalty program participants do?
While launching loyalty programs, the marketing department or expert believes that the benefits of the loyalty program will force the customer to spend more and buy more often. Why do they think so?
- for the next purchase gets the 50% discount,
- Get a 10% discount if the amount of purchases for a month is 500 USD.
- for the next repair get discount 30%
Where do they get ideas like these:
- This customer should come to the store in the near future for a 50% discount!
- A 10% discount is significant and encourage customer for action!
- The next car repair may come quicker before the buyer forgets about the existence of this car service!
All these examples can tell us about the following series of problems:
- The company only interested in lump profit. The marketing department or specialist is curious by the company’s profit, but not the benefit of the buyer. They believed that sufficient reason for the customer to remember such brand is the case if the company shares some of its benefits with him. The reason why loyalty programs are not loyal to customers is well illustrated by the theory of the loyalty pendulum:
- If you want to get loyal customer (the loyalty pendulum swinging in your direction) – swing the pendulum away from yourself towards the client;
- Sooner or later, the most loyal customer will certainly forget to make an order if you do not swing the loyalty pendulum;
- If the pendulum of loyalty can be slowed down because of defect of the product or service, delay in dispatch or not delivered contract with the last shipment. Therefore, to ensure customer loyalty, you have to push pendulum a little more away from yourself to the client;
- If you experience with this unloyal client, swinging the pendulum for a long and continuous time will grab his attention in your direction.
- Consumption cycle. The problem is that the marketing department or specialist does not take into consideration the consumption cycle of the product. Even more, the time from the moment of purchase of the product or services, to the newly realized need for these goods and services.
- The purchase cycle. No, we don’t mean daily necessities and basic items. In case, if the buying cycle is long, then trade marketing activities are necessary between the cycles. It would thus contribute reminding of the need and the benefits of re-purchase in the future.
- Path to buy. The problem is that the decision to buy is not taken into account en route to their final purchase. There are no necessary arrangements of comprehensive marketing study of the market outlook for that may be required in relation to the entire product delivery route to the destination point.
3. Loyalty programs have the wrong goal
I know that these are only numbers, but they demonstrate that regular participants of loyalty program spend 15% more on each purchase than less loyal customers. While they buy 25% more often, therefore generating 50% more revenue per brand per year! And we will assume that the most active participants of loyalty programs are just regular customers who already provide regular purchase brand products, and so constantly visit this sales outlet. Their share of wallet is close to 100%. And what do we have now? Loyal customers marginality covered by loyalty programs is slightly increasing or even falling due to the costs of bonuses, points and other benefits.
Customers with not often purchases can potentially increase consumption. Therefore, they can receive little benefit from the loyalty program. But they don’t receive the necessary incentives, and loyalty programs do not work for them. You may think the numbers lies? Actually, no, seems like loyalty programs do not work for the wrong purpose, do not work in the target groups to which they should work.
4. One loyalty for all.
Founder of the loyalty program will be at risk to lose a significant part of the target audience, due to the loss of program value for the majority of buyers:
- by offering a single loyalty program for customers with different brand and purchase targets;
- with a different frequency earning of bonuses, points and other benefits;
- With lifetime value.
Using the same incentive model it is either extremely difficult to accumulate benefits, even more such benefits were not straightforward.
One of the studies of Capgemini Consulting company shows, that 44% of the discussions on brands’ social network pages have been twisted around not attractive or understandable incentive models for the target audience. The idea of mass marketing is another reason for their failures. Without taking into account the needs of the buyer, without awareness, without a purpose, or with a wrong purpose run loyalty programs does not have any reason.
5. Short-term Advantage or the lifetime value of the client?
Lifetime customer value (LTV) is more interesting for loyalty programs. ROI also would be instrumental in consideration the percentage of making a profit right now received in relation to investments attracted in the loyalty program. Nevertheless, the LTV will help to see the full picture of the benefits of the relationship with the target group.
You may remember that we were talking about wrong goal of the loyalty program. There is a strong believe that revenue growth is one of the important goals of the loyalty program. However, there is also the main task to connect the customer to the brand and the place of purchase just like tying him to his beloved chair. Also, this connection would allow measuring the frequency of purchases and the quantity of purchases with a branded product in the consumer basket.
Do you think that is it? We are nearly almost done, but not quite!
Involved in a loyalty program, the customer does not buy the competitor’s products or at the competitor’s sales outlet! Moreover, this important benefit explains:
- the infidelity of the arranged loyalty programs;
- the incorrectness of the ways of calculating its effectiveness;
- the incorrectness of the conclusions about the ineffectiveness of the loyalty programs being conducted.
There was a lively discussion about the applicability and merits of ROI of marketing programs. We have also serious doubts about the matter, which we will cover in the next article “No reason for doubt”.
6. A loyalty program is not about the client experience
Study of Rosetta Consulting shows that 35% of involved surveyed who are taking part in customer loyalty program believe that the loyalty program should involve marketing communications that are useful to the client and worthwhile. Customer feedback indicates a high level of satisfaction.
Marketing departments and specialists should understand their customers and clients on an individual level. In addition, they should benefit customers:
- improving their knowledge
- saving their time
- saving their money
The loyalty program should accumulate brand experience and deliver it through points of contact. The customers will return to their favorite products, it very well could be, to their favorite morning paper cups with coffee, even if the competitor will offer the tenth purchase for free).
7. Starbucks loyalty program
The Starbucks award program has existed for a long time. Over the years, the company realized that a typical bonus coffee card is not able to solve the needs of customers. The overall endeavor calls for greater coherence. Therefore, they organized a three-level loyalty program to the level of Gold Elite. Starbucks has chosen the right path, adding an element of prestige and layers of additional, personalized benefits associated with the status of Gold. However, the breakthrough happened when the company established a a holistic and sustained engagement with customers.
The award programs are weak without a system of reminders, without interaction and without regularity. The decision they made here in this case was taking out the point of contact from the coffee shop and make such contacts more personalized. Mobile application has combined it all. So when they finally got a system that worked with:
- tracking loyalty awards;
- the opportunity to communicate with the brand;
- online store;
- search engine.
And how did that work out for you? The Starbucks loyalty program evolved with the needs of the buyer with closer communication. As a result the company received a 26% profits increase and a 11% revenue increase.