MARKETING STRATEGIES: Using loyalty schemes to retain customers

There are different views on the effectiveness of loyalty schemes. Some say that you are simply giving away something to customers who will spend the money anyway. Others say that it is a reward for loyalty and the financial benefits to the customer are small.

I have also talked to retailers who have shown a six times increase in sales following the introduction of a loyalty card. I suspect the impact varies greatly with the product and market, and outcomes are somewhat unpredictable.

There is no question that loyalty cards are now a way of life. Whether it is the points you collect on your frequent flyer miles, points for your expenditure in your local supermarket or the clips you get on your frequent coffee card, they are hard to avoid.

Most pervasive of all are the credit cards linked to frequent flyer schemes or to some comprehensive rewards program. The big hotel chains have their own programs. Car rental companies have their own but may add a bonus with points to a frequent flyer program and so on.

In some cases, vendors feel compelled to join a program simply to level the playing field rather than because of a conviction that they will get a direct benefit. Others see a direct relationship between a loyalty scheme and their revenue.

Although, the more distant the reward is from the service or products offered by the vendor, the harder it is to see the direct benefit to the vendor. If the rewards are taken with an air carrier but offered by a retailer where the customer is unlikely to visit again, the link is somewhat tenuous.

Benefits to the customer

For the customer, one might argue, it is all upside. However, if the customer feels somewhat locked in by the scheme, one could argue that this could lead to some level of dissatisfaction. If I feel compelled to use one rental car company or one air carrier because of the investment I already have in loyalty points, I may come to resent the restriction.

Getting the balance right between the level of rewards and the revenue generated is somewhat problematic for the vendor. How many points should be issued, under what conditions, how will they be used and how long will they be valid?

We have seen serious consumer backlash when the rewards on offer change or when the conditions change. With a large consumer take up, it does not take long before the rewards liability itself is significant. Paying for the reward points is an expense and often these costs have to be borne by future revenue. There is no guarantee that someone with a large points balance will continue to buy, but the liability on the rewards program will still stand.

On the positive side, there is considerable consumer support. Consumers do recognise that it is a reward for loyalty and that the benefits do accrue for continued patronage. Schemes which double up points or have bonuses for cumulative spend are a further recognition of continued patronage.