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How do customer loyalty programs work?

It is one thing to attract new customers, but it is quite another to keep them in the face of staunch market competition. Enter: Customer Loyalty Programs, known also as rewards programs, points cards, advantage cards or club cards. The market is awash with Loyalty Programs, with everything from your coffee takeaway to the local carwash offering points or rewards for your return custom. But how do loyalty programs actually work?

What is a customer loyalty program?

Loyalty Programs are specifically designed marketing programs that are structured to encourage customers to continue using the goods or services offered by a particular business. They exist in almost every sphere of the economy from airlines to retailers to leisure services. Usually, they take the form of a plastic or paper card on which purchases are recorded, but more sophisticated ERP systems (Enterprise Resource Planning) are able to track customer points digitally via customer numbers, mobile numbers or other tracking systems- and allocate points automatically. When presenting their identifying information, customers are either rewarded with a discount at the point of purchase or ‘points’ are allocated for future purchases or rewards once a threshold is met. Usually signing up to the system is facilitated by customers filling out a form and agreeing to the business or merchant using and keeping the customer’s information in order to allocate rewards.

What are the advantages for the customer?

By returning to a certain vendor over time, customers are rewarded for their loyalty. This can be in the form of select offers, discounts on future purchases, or even free gifts. More and more as consumer power increases customers are demanding such programs. With the robust market competition for consumer purchases, businesses can feel pressurised to offer such loyalty programs in order to keep up with the market. But are these rewards programs only about customer benefit?

Loyal customers

Certainly, a major aspect of loyalty programs is about retaining the customers that a business has worked hard to win over in the first place. Generally speaking, it is more expensive to market and persuade a first time customer, than it is to satisfy and maintain an existing customer. Usually running a loyalty scheme or program works out more cost-effective for a business than winning over new customers all the time. Moreover, most companies will run a loyalty program on top of existing marketing campaigns. That means that they will retain their existing client base while attracting additional customers on top- ultimately growing their business. Furthermore, active loyalty programs can act as a great incentive to new customers, who are persuaded by the long term benefits of loyalty and repeat purchases with a particular firm.

Marketing and product development insight

While maintaining an existing client base is a very important role for a loyalty program, it can be argued that the information that a business is able to harvest and use from a loyalty scheme is even more powerful. Especially in the case of fast moving consumer goods (FMCG) where customer accounts are not created and information about clients not gathered for the purchase (in the case of major grocery retailers for example)- a loyalty program allows a business to do just this: gather information about an, otherwise anonymous, consumer. It is a bit of a “tit for tat” scenario, where business and client enter into a deal with each other. The business gives rewards or discounts, in exchange for tracking a customers’ purchases and habits and harvesting personal marketing information about them.

Information is power. And in the case of business and marketing, this could not be more true. In order to sign up to a program, one is asked to allow the business to keep and use customer’s personal information (usually agreeing not to share it with third parties), and so businesses are able to collect information previously unavailable to them. How old are their customers, where do they live, what age are they? All these insights assist businesses in appealing better to their current target market, and also identify gaps in their current market base as well as new segments that are untapped. In addition, finding out the purchase habits of their existing customers is invaluable. With that information you can see who buys what, when they buy it, how much they but, and what else they buy at the same time. It helps you to understand how and when price promotions should be offered and to what level, and also enables a business to make use of targeted marketing campaigns. For example, businesses can send vouchers for different baby products to a customer who has previously purchased nappies to encourage them to trial new products in their business; or send a discount voucher for a newly launched face cream to a customer who has previously bought face cream in the store and is therefore more likely to be interested in facecare product information and offers. The opportunities for tailored marketing campaigns are almost endless when a wealth of data is available to a business.

Loyalty programs are a win-win for both customer and supplier. When run effectively they can provide real benefits to customers- that in turn increases repeat purchase for the business. When the data is effectively analysed and used by a business, the customer can receive targeted marketing offers that are of real interest to them, and the business has a whole array of market information at their disposal to increase current customer spend and attract new customers to the business.

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