Do loyalty programs really work?

Loyalty programs are everywhere we spend money nowadays, from the grocery store to flight-booking portals. As customers, they’re an appealing incentive because they offer a chance to save on purchases we already intended to make. For businesses, they hold the appeal of increased customer spending and brand loyalty. But they also raise the question: are loyalty programs actually effective?

The short answer is yes, loyalty programs are effective, as they work in many ways to create a positive customer experience and help businesses increase their revenue.

Types of Loyalty Programs

Loyalty programs come in several main forms: points, tier, membership, and referral programs.

Points Programs

This common loyalty program involves issuing points for purchases made that can later be redeemed to lower the costs of other purchases. Points programs might offer promotions that incentivise additional shopping, like double-the-point sales. These are common in grocery stores like Naivis, but you can also find them at various other stores or service providers.

Tier Programs

Tier-based programs reward customers based on their spending habits by placing them into different tiers. Customers can move up to more valuable tiers by spending more. Each tier has exclusive offers and discounts for customers, incentivising spending more to move up to a new, more valuable tier.

Tier programs can also be combined with points programs. For example, Sephora offers customers a free membership with three different tiers. Each tier is given an exclusive discount that increases by 5% for each higher tier. Members can earn double, triple, or quadruple points during certain discount periods, depending on their tier level.

Kenya Airways also offers a combined points and tier program, allowing customers to earn points and access more exclusive deals and discounts as they move up tiers by spending more.

Membership Programs

With membership or subscription programs, customers pay to gain access to exclusive offers or deals. A popular example of this model is Amazon Prime. Anyone can shop from the online marketplace, but if they want to access better deals, like free shipping, they have to pay to become a Prime Member. Often, these loyalty models offer long-term savings incentives for frequent customers.

Referral Programs

Referral programs reward existing customers with incentives like extra points, cashback, or a discount on their next purchase for referring others to the business. Sometimes, they may also reward customers for leaving a review on a popular review platform or directly on the business’s website.

Referral loyalty programs not only encourage loyalty from existing customers but also help attract new customers. This type of reward program is also frequently paired with other loyalty programs like points programs.

Benefits of Loyalty Programs

Loyalty programs offer businesses high customer retention, increased revenue, and many other benefits we’ll explore below that make them well worth considering.

Increased Revenue

Loyalty programs can increase business revenue by encouraging customers to spend more to qualify for exclusive offers or discounts. For instance, with tiered programs, people spend more to move up a tier level and enjoy the perks of a higher tier. In addition, loyalty programs encourage customers to return to a business in the future, creating future purchases and more revenue for the company.

In the case of subscription or membership-based programs, the cost of customers signing up can be a significant revenue driver. For instance, Costco, the popular bulk shopping centre, garnered $4.6 billion from membership fees alone in 2023.

Improved Customer Relationships

When customers sign up for loyalty programs, they share data about themselves and their spending habits with the business. These details allow businesses to build much stronger customer relationships because they can create customised shopping experiences and reward options. For example, they can offer customers discounts on frequently bought items or offer exclusive deals on their birthdays.

These personalised incentives not only encourage shopping on the customer’s part but also make the customer feel more valued by the business, which increases their dedication and positive feelings towards the business.

Word-of-Mouth Marketing

Through referral-based programs, businesses reward existing customers for sharing their loyalty programs with others, spreading brand awareness more organically. This allows the brand to reach more people and create a positive association with the company since someone they know already uses and recommends it.

These factors help to establish the business as a worthwhile shopping destination by building a positive brand reputation and increasing brand awareness, all of which help increase the business’s bottom line.

Higher Customer Retention

Acquiring new customers as a business is an expensive endeavour that requires both time and money. Loyalty programs offer a method that can be used to increase the value of existing customers by incentivising them to come back to a business again and again. With loyalty programs in place, customers are more likely to shop at the company where they earn rewards than from another business where they don’t.

Stronger Brand Loyalty

Many of the benefits discussed here contribute to brand perception and help build brand loyalty. Brand loyalty, while similar to customer retention in that it keeps customers coming back to a business, has key differences. Customer retention relies on incentives like good deals or points systems, while brand loyalty depends more on a brand’s perceived value or quality in the eyes of the customer.

Loyalty programs offer businesses an opportunity to build many elements that contribute to brand loyalty, like quality customer service, community, and positive experiences. These elements solidify the feeling that a brand is of higher quality or value than others.

Conclusion

Whether bonuses benefit loyal users with exclusive rewards or points they can redeem to get items practically for free, the many forms of loyalty programs incentivise customers to shop from a specific brand. Likewise, they benefit businesses in myriad ways, making them a strategy well worth employing.

#FeatureByJamieSinclair