Do rewards programs work? Is it worth it to offer discounts to your best customers? These are crucial questions for retailers to answer, especially in a time when traditional retail is threatened by the convenience of online shopping. But the answer is a little more complicated than a simple yes or no.

It's been documented time and again that loyal customers produce more revenue than casual shoppers. Take Starbucks, for example — the company's rewards program members represent only 18 percent of customers, but they account for 36 percent of sales, according to a recent report in Barron's. And industry studies have confirmed that members of retailer's loyalty programs in general generate 12-18 percent more revenue than non-members.

The trickier question is how to design a loyalty program that actually makes customers more loyal, spend more per visit, and increase their frequency.

More than just discounts
Traditionally, retail loyalty programs have focused on rewards that are primarily discounts — "spend X amount, and you'll receive an X percent discount off your next purchase." But not every customer responds to discounts. And unfortunately, because rewards programs have become so common, a poorly designed program can actually turn some customers off.

A recent survey by Accenture found 57 percent of loyalty program members do indeed spend more money with those brands — but when you look at the flip side, it means 43 percent of those same "loyal" customers spend on average the same amount or less. In addition, Accenture reports 23 percent of consumers either have no reaction to loyalty programs, or react negatively to them. So there is plenty of opportunity for improvement.

While discounting can be an effective tool to increase purchase frequency and volume, it won't work for every customer, every time. It may even negatively impact your margin if you are giving away discounts unnecessarily.   

What is required is a well-thought-out strategic plan that maps the rewards to desired outcomes and works as part of an overall loyalty and engagement marketing program that takes into account the entire customer experience. No amount of rewards can make up for a poor in-store or online customer experience or frustrating return policy. An overly complex program is also a deterrent.

First know your customer…
Designing a great loyalty program starts with understanding your customer — who they are, what their preferences are, why they buy, purchase frequency, and how they like to browse and shop. With this knowledge, the retailer can create different personas for many types of customers with varied behaviors and motivations. Today, technology enables brands to gather complex, real-time data from customers and use it to effectively segment and tailor offers that will matter to the customer, thereby driving increased brand loyalty and spend.  

An effective loyalty program includes a mix of rewards and engagement methods aimed at varying customer types. Some customers will be bargain-hunters, and they'll respond to discounts. But other customers will respond better to other kinds of perks and communications. Millennial shoppers, for example, tend to respond well to personalization, a connection to a cause, and access to exclusive offers and experiences, according to Accenture. Finding the right mix, and constantly evaluating, changing the reward offerings, keeping the program fresh and engaging.  These are essential to success.

…Then encourage the right behaviors
Understanding what your customers want is the first step. The next step is to figure out what kind of behavior you want to encourage. Do you want to push customers to buy more often, make larger purchases, try new products, buy during slow periods, refer friends to the program, rate purchases, share their experiences, or create content?

Design a program that nudges shoppers toward the behaviors you want. And, remember, it's human nature to get bored with more of the same, so innovate and surprise your customers by offering exclusive VIP or behind-the-scenes events. Consider collaborating with other brand partners to deliver unique rewards or a chance for customers to win a highly sought after experience.

Learn from the pioneers
Airlines and hotels, the first industries to create widespread loyalty programs, started with simple systems, offering miles and points for money spent. But they've since expanded their programs to offer different kinds of perks to different customers, taking not just price, but the entire customer experience into account. For example, airlines understand that more points for trips are not motivators for their high frequent travelers. Instead they want VIP treatment with pre-check and upgrades, preferred boarding and seating, and an expedited lane through security checkpoints. Consumer expectations have moved with these changes.

Most retailers, however, are still just offering discounts, falling behind these other industries and falling short of consumer expectations. But there are some exceptions. Ulta Beauty is one —– its loyalty program boasts 25.4 million members driving an astonishing 90 percent of its sales. Its program is based on a rewards point system at its core, but lets members earn bonus points not just for purchases but for a number of surprise and delight reasons, including birthdays, membership anniversaries, and brand engagement, and those points can be redeemed for any of Ulta's 20,000-plus products.

Foot Locker is another great example of a retailer loyalty program that doesn't follow the same cookie-cutter approach. Thanks to the brand's well-thought-out strategy and investment in all areas (front and back of the house), they've been able to differentiate themselves and deliver an outstanding customer experience. A good example of this is the Foot Locker Launch Reservation app, which lets consumers reserve soon-to-be-released sneakers tied to Foot Locker's VIP program to reward their most loyal and high-value customers.

The bottom line: A rewards program can be a highly effective mechanism for retaining your best customers and creating more profitable relationships. But in today's highly competitive market, rewards programs need to be more strategic, more targeted, and more meaningful to the individual customer to build true loyalty.

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