Loyalty programs are very popular with brands and customers these days. In fact 84% of Americans belong to at least one:

But what is it about loyalty marketing that makes so many brands pursue it?

Some of the most commonly-claimed benefits are: 

1. A more profitable customer base

2. Higher marketing ROI 

3. Higher customer retention/ Customer Lifetime Value

...all of which are widely acknowledged to drive increased revenue and profitability. Here's a breakdown of each of these:

Reason 1: A More Profitable Customer Base

Profitability is proven to climb as shoppers become more loyal. Recent research has added the nuanced understanding that programs have to focus on engendering loyalty from the right kinds of customers to maximize profitability from loyalty:

However this only makes it clearer that designing the right loyalty program is essential to fully realizing loyalty's promised benefits.

Reason 2: Higher Marketing ROI

The right loyalty program also allows retailers to offset rising customer acquisition costs, which most agree are rising:

This means that for many brands, acquisition-dominant strategies that worked in the past are increasingly becoming unsustainable.

Loyalty offers a better option. When brands use loyalty to retain more customers, they are able to allocate less to acquisition to get the same revenue, resulting in better MROI. Loyalty marketing can also improve the effectiveness of acquisition marketing: by using attributes of your most profitable and loyal customers, your acquisition efforts can also get smarter. So loyalty is not only a more efficient alternative to acquisition, it is also a symbiotic complement to it.

Reason 3: Higher Customer Retention / Lifetime Value

While marketing spend efficiency and symbiosis with acquisition are important benefits, the biggest reason loyalty marketing works is that it tends to drive higher customer retention rates and customer lifetime value, which are proven to increase profits.

Frederick F. Reichheld and Phil Schefter of the Harvard Business School famously stated that a 5% increase in customer retention can increase profits by up to 95%. This is because each retained customer also has (by definition) a higher lifetime value. In fact, the right custom loyalty program has been proven to increase customer lifetime value by 40% or more.

So Why Don't More Companies Use Loyalty?

That's a good question. Fact is, today there is still huge inefficiency when it comes to spend allocation between acquisition and retention marketing. Allocations frequently reflect a disproportionate percentage of spend on acquisition relative to the percentage of revenue actually generated from it. Although returning and repeat customers typically make up only 8% of the average retail customer base, they also typically represent 41% of revenue! Given this, brands who successfully shift investment from acquisition to retention tend to spend their marketing dollars far more efficiently - and become more profitable and successful businesses. And more are undertaking the shift today aided by the fact that the technology required to power loyalty has become cheaper, more powerful, and easier to implement than ever before.

What this means is that it is a very good time to be in loyalty and retention marketing and a less good time to be in acquisition marketing - unless you are in the business of making acquisition marketing a lot smarter. And if you’re a marketing or business executive looking to increase profitability in 2016, you might consider a shift toward loyalty and retention. 

What are your plans to make the most of your marketing spend next year? If you would like help improving profitability through loyalty, please contact us at [email protected] or www.aimia.com.

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