Enrolling customers in a loyalty program is a common practice for retailers. The value proposition for a loyalty program is simple: the retailer gets to track customer data, the customer gets discounts or some kind of incentive for loyalty. Sounds like a win-win.
But, the reality is that customer loyalty programs are not as effective as most retailers think or expect.
Creating a customer loyalty can be an effective strategy for retailers, but to be successful you need to do more than hand out membership cards. You must focus on customer experience to create loyal customers.
Retail Customer Loyalty Programs: What the Data Says
In 2011, a Gallup poll showed just how ineffective customer loyalty programs were at actually activating a customer base. The research looked at a few different verticals, and “department stores” was most alarming:
Eighty percent of respondents said they have a primary department store where they shopped during the past 12 months, but only 30% of that group participates in that store’s loyalty or rewards program. About one in four (23%) of those participants are activated with their primary store’s program — or 7% of shoppers who have a primary department store.
That research is admittedly a bit dated, but a 2014 article presenting research from Colloquy tells a similar story.
Of the of the 22 loyalty cards per average household (2.6 billion loyalty program memberships in the U.S. in 2012), only 10 are used actively. And, they consider “active” to be “at least once within 12 months”.
That’s not really even that active!
What’s wrong with retail customer loyalty programs?
Statistically speaking, your customer loyalty program is not living up to your expectations. There are a number of reasons for that.
Loyalty programs can send the wrong message.
Writing for Entrepreneur.com, Pete Maulik discusses why 77% of rewards programs that focus on rewards alone will fail within two years:
Our research has shown that most companies have structured their loyalty programs in a manner that’s delivering the exact opposite of the mutually beneficial relationship consumers are seeking.
In other words, you are relating to you customer like a company; not like a friend or family member.
Loyalty programs can cost too much.
Many retailers fail to accurately calculate the costs of their customer loyalty programs. By providing incentives to customers, you are giving up something monetary for data. Make sure it’s worth your while.
Research by McKinsey & Company, cited by Neil Davy, shows that:
Companies that spend more on loyalty also have EBITDA (earnings before interest, taxes, depreciation, and amortization) margins that are about 10% lower than companies in the same sectors that spend less on loyalty.
One possible cause, also mentioned in the article, is that many programs only offer “forced discounts”. In other words, if you’re a member you pay the price you see. Otherwise it costs more. (Think about a grocery store.)
These programs are more a disincentive not to join the program than an incentive to be loyal. They tend not to have the positive impact on revenue that a truly loyal customer base would have.
Loyalty programs can be unfocused.
If you don’t have a focused, strategic plan for using a loyalty program to improve your bottom line, you’re not going to be successful. This is where many retailers fall short.
An article by Chuck Schaeffer on CRMSearch.com discusses the many ways loyalty programs focus on the wrong things, including:
- They are only run by the marketing team, and are not understood by the entire organization.
- Program managers fail to tie loyalty program activities to financial results.
- Programs only focus on profitable customer segments, ignoring those segments that represent a bigger opportunity for improvement.
- Retailers blast customers with unclear messaging about the value of the program.
These are all outcomes of organizational challenges with executing the loyalty program. When the retail company can’t manage the program intentionally and clearly, the result fails to meet expectations.
How to Actually Build Customer Loyalty
When executed correctly, retail customer loyalty programs can contribute to building customer loyalty. But, the true foundation of customer loyalty is an organizational focus on empowering employees to provide exceptional customer experiences.
Trust builds loyalty. Having customer expectations met (or exceeded) builds loyalty. Providing value to customers builds loyalty.
And, to do all of these, you must organize your company and technology around doing the following:
- Unifying the data that fuels your business (like product, inventory, and customer data)
- Empowering your employees to provide exceptional experiences, by ensuring they have the right information when and where they need it
- Streamlining the internal processes that affect customer experience (like shipping and sourcing processes)
- Integrating the different channels of your business (online and offline) so that they appear as one
Bottom line: build a company around customer experience. If you deliver, your customers will be fiercely loyal.
Increase Customer Loyalty By Creating Exceptional Customer Experiences
Don’t just create another vanilla customer loyalty program. Learn what it takes to build your organization around providing exceptional customer experiences. Build loyalty by wowing your customers.
What successes or failures have you had executing customer loyalty programs?