What Are Loyalty Programmes And Should I Be Using Them For My Business?

A loyalty programme or customer loyalty programme is a way for a business to reward its customers with discounts, special offers, and better deals.

These can be done on a regular basis, or on special occasions like holidays and celebrations.

If you want to find out more about holiday marketing, check out our article here.

The best loyalty programmes in marketing will offer enticing enough discounts to not only retain but gain customers. But they must also maintain a profit at the same time.

It can be a difficult balance to try and find, but when achieved, the benefits and rewards it can bring your business are endless.

So, how are loyalty programmes beneficial for your business? And what type of loyalty programmes are there?

Read on to find out.

One of the most popular types of loyalty programmes is one based on earning points. For every purchase spent at a business, you can expect points back in return that equate to the money spent.

These can often be that for every pound spent, you get a point back in return. For example, a £100 purchase earns you 100 points back.

However, the conversion rate for points into purchases is different. 100 points doesn’t equate £100 worth of vouchers, but likely £10.

The benefit of this is that you’re not operating at a 1:1 conversion, and therefore aren’t giving away the profits you’re making.

As well as this, a points based loyalty programme is likely to generate 3.5x more transactions per year, than any other type of loyalty programme.

A tier based loyalty programme is when a member earns different types of rewards based on the level or type of membership they have.

For example, a level one reward member may earn one discount per month. But a level two reward member may earn three discounts per month.

The more you purchase, the higher you will rank within your loyalty programme.

Not only does this allow you to better segment and differentiate between customers, making it easier to market towards them, but it’s also more appealing to customers.

When they are working towards a goal – increasing their level – they are more likely to purchase more and try harder to achieve this.

But, no matter the type of loyalty programme, how do they work? And what are the pros and cons?

Customer Retention

One of the most obvious reasons why loyalty programmes are beneficial to your business is because it encourages customers to return to your store.

Loyalty programmes and the rewards they promise are a great incentive to tempt customers back.

Not only have they had a good experience shopping with you the first time, but they also know that when they shop with you again, they’ll be rewarded for it.

This could be in the form of points, a discount, or special items; but in any case, it draws a customer back in, thus improving your sales.

In fact, according to Invesp, returning customers spend on average 67% more than first-time buyers. So not only are you gaining a second transaction, but it’s likely that this transaction will be a lot higher also.

These frequent purchases can eventually make up a large portion of your consumer base. And, subsequently, even make up a large portion of a loyal fanbase.

They’re Cheaper to Set Up Than You Think

It’s no secret that loyalty programmes used to be very costly.

Between marketing them, producing the loyalty cards, sending them out to customers, and paying for replacements – it wasn’t an affordable service to offer.

However, thanks to the digitisation of many aspects of eCommerce businesses, loyalty programmes have transitioned online.

This makes the cost of setting up and running them a lot less, given that you’re not having to physically create them.

According to StampMe.com, the average cost of setting up an app-based loyalty programme is less than $100 USD (around £75 GBP.)

When you consider how much it would cost to print loyalty cards and send them out to customers, in the long run, a digital loyalty programme is a lot more affordable.

As well as this, loyalty programmes cost very little to maintain also.

Asides from the standard costs of running an app and an email campaign (if this is the route you choose to go down), there are very few other costs that could potentially occur. Meaning, that it’s quite financially safe to set up.

Boost Your Sales

As stated earlier, loyalty programmes can encourage people to return to your business. As a result, this means that they are spending more because of the rewards they may earn.

However, loyalty programmes also have a direct impact on your average transaction value.

According to StampMe, the average transaction value of a Starbucks reward member is three times higher than a non-member.

Whether this is because they’re more eager for the rewards, or because that being a member means you like the business and therefore are more likely to patron it, there’s obviously a direct correlation between loyalty programmes and money spent.

As well as this, your sales have a direct link to customer retention also.

In a study conducted by CB4, they found that if your customer retention rates are only 5%, your resulting profits will also increase by 25-95%!

Because of this, if you’re looking for creative ways to boost your sales for your business, a customer loyalty programme is certainly the way to go.

You’re Conducting Your Own Market Research

Asides from the monetary benefits that a customer loyalty programme can bring you, your business can also benefit from the data amassed.

Loyalty programmes often work by requiring the customers to input their names, date of birth, location, gender, and a wealth of other information also.

Meaning, that you’re now in a position to be conducting your own market research.

Firstly, you’re able to understand your customer’s needs and more specifically target them.

Say, for example, that you notice that a large portion of your loyalty members are purchasing product A. When you take a closer look at their information, you find that a trend in this customer demographic is that all your loyalty members who purchase product A are aged 18-25.

With this new information, you know how to market to this demographic. You can send eCommerce promotional emails to your customer base with special offers and discounts, thus enticing them to return to your business and purchase more products thanks to the targeted marketing.

Loyalty Programmes are Everywhere

Whilst loyalty programmes, when they work, can be financially lucrative and beneficial to your business, they have some downsides too.

Mainly, that loyalty programmes are no longer special and unique. Rather, they’ve become the norm and therefore have lost their appeal. Forbes claims that over 90% of brands have a loyalty programme.

Meaning, that they’re less special.

What’s more, according to Brand Speak, 47% of UK customers believe that it’s not beneficial for them to be loyal to the brands they like.

Whether this be because the incentives aren’t that enticing, the requirements for the rewards are too high, or because there are just too many loyalty programmes, they seem to have lost their appeal.

The Extent of Customer Loyalty Can Vary

What’s more, not only have customer loyalty programmes become less special and enticing, but even when customers have signed up, that doesn’t necessarily guarantee their loyalty.

Think, how many loyalty programmes are you a member of? Can you guarantee that you use them all?

For the majority of people, they’ll be signed up to a loyalty programme that they don’t regularly use, or use at all.

In fact, Forbes says that the average consumer is a member of 14.8 loyalty programmes, but is only an active user of 6.7.

That’s less than half!

What’s more, only 18% of consumers use every loyalty programme that they are a member of.

But what does this mean for your business? Well, that you can’t guarantee that the people who sign up for your loyalty programmes are actually going to use it.

Meaning that you could be wasting money on marketing emails and promotional materials, as well as the cost of maintaining the programme, only to see a low return on investment.

They Have to be Very Successful to Make Up Your Bottom Line

Leading on from the potential for unspecific customer loyalty, another downside of customer loyalty programmes is that they have to be extremely successful in order to guarantee that you’re not losing a profit.

When you offer a discount, no matter how big or small, this will impact your profit margins.

Say, for example, that you are selling a product for £100. This breaks down into £80 for costs and production, and £20 in profits.

When you offer a £5 discount on said product, you’re now reducing your profit by 25%.

Meaning, that you have to make sure that you’re carefully balancing your discounts with your profits. Otherwise, you could be operating at a loss.

It’s clear that loyalty programmes, when successful, can be extremely beneficial for your business.

They can help with customer retention and brand loyalty, as well as boosting your sales and increasing the amount of repeat customers.

However, loyalty programmes require a lot to set up and can be both time consuming as well as risky.

If you don’t guarantee the return customers and thus the increase in purchases, you could be operating at a loss.

Now you have seen the advantages and disadvantages of customer loyalty programmes, will you be implementing one in your business?

And, if you already have one, how successful is it?

Let us know in the comments below!