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Retail loyalty reality: myths and tips

Sales and discounts can lure customers away from competitors; however, they also exert continuous price pressure and erode margins. TIM MOULTON looks at the benefits of retailer loyalty programs.

Retailers tend to side with historic best practices, even when research points in the other direction. Loyalty marketing, a concept that started with S&H Green Stamps in the US in the 1930s, has been around so long that much of the practice is now steeped in myth.

When it comes to consumer behaviours and preferences, there are numerous retailing myths that don’t hold up to current research. Here are five:

• Myth #1: Discounts are better than loyalty currency

Discounts can be popular but rewards from loyalty programs encourage return visits from high-value customers.

According to Canadian loyalty-currency management firm Points, program members spend more per purchase (54 per cent) when they are rewarded with loyalty ‘currency’ and 69 per cent will switch brands to earn their favourite currency.

While sales and discounts can lure customers away from other retailers, they also exert continuous downward pressure on prices. This, in turn, erodes profits.

In contrast, rewards programs are structured to stream revenues back into the business by attracting the activity and word-of-mouth influence of a loyal customer base.

As author Fred Reichheld noted in his book The Loyalty Effect, loyal customers spend more, buy higher-margin products and cost less to serve.

Additionally, a 5 per cent increase in customer retention rates can boost profits anywhere from 25 to 100 per cent.

Moreover, when retailers attract a steady stream of loyal, eager-to-buy customers, the data and information that can be unearthed from their transactions and preferences can lead to further success.

• Myth #2: Consumers want cash back, not travel rewards

Consumers treasure extraordinary opportunities and memories as much as they like cash. Convinced that consumers will always choose cash over points/miles, some retailers have abandoned rewards programs in favour of cash-back strategies.

However, studies have found that even though consumers will select cash when given a choice, they are actually more satisfied with rewards programs that result in a luxury item or experience.

These experiences are those that they otherwise would not have purchased for themselves such as concert tickets or an exotic vacation, and will foster the loyalty that brings consumers back again and again.

Pro tip: Make customers feel appreciated with rewards that create special moments.

• Myth #3: Loyalty programs only work for high-priced items

Bigger is not always better. Consumers like earning loyalty currency – points and miles – whether the earning rate is in big chunks or small increments. Our survey of 1,500 members in the UK and North America found that 68 per cent appreciate the ability to earn small amounts of points and miles.

Meanwhile 48 per cent set long-term goals for which they plan to earn incrementally.

Pro tip: Offer opportunities to do more with points/miles so that smaller balances have higher value.

"Studies have found that even though consumers will select cash when given a choice, they are actually more satisfied with rewards programs that result in a luxury item or experience"

• Myth #4: Consumers don’t want more marketing communications

The personalised messaging from loyalty programs actually helps eliminate communication clutter.

Members of loyalty programs behave like bank customers – they check their accounts frequently, keep tabs on balances and are constantly looking for ways to bolster their accounts. In fact, offers mailed to loyalty- program members have an open rate of 41 per cent compared to a 19 per cent industry average according to findings from SpotOn Data.

Pro tip: Keep communications relevant by providing key information such as limited one-time offers or bonus earning opportunities.

• Myth #5: Loyalty programs are too expensive

Creating a loyalty program can be a large financial endeavour that requires more marketing, technology and financial infrastructure than many retailers are capable of managing.

An option is to partner with an existing program with retailer benefits.

It gives customers the chance to build their balances in their favourite airline, hotel, etc and can also boost a retailer’s brand equity via affiliation with a name-brand partner. Partner programs bring new and potentially large customer base for visibility, marketing and outreach.

Pro tip: Search for partners that enhance your brand image and also extend your brand into high-potential customer segments.

Loyalty programs can help retailers who are struggling with stiff competition, empowered consumers, the constant pursuit of more customers and a need for increased revenue.

The first step toward loyalty program success is to build any loyalty strategy on sound business principles rather than gut feel.

Tim Moulton

Tim Moulton is vice president of Points, a global leader in loyalty currency management.

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