Customer Loyalty! That holy grail of brand managers!
A loyal customer is a gift that keeps on giving. The cost of retaining existing customers is just a fraction of that of acquiring new ones. This is so well-known that it is now considered axiomatic. More importantly, a loyal customer generates consistent and high revenues at a low engagement cost, and thus, is of immense lifetime value to the company. In addition, loyal customers often take on an evangelical role for the company and endorse the brand and its products and services to others, often at no cost to the company.
Customer Loyalty is a set of programs designed to encourage loyal customer behavior. In particular, Loyalty Management focuses on promoting repeat purchases by the same customer, whether of the same product, or of allied products and services, or even of other products offered by the company. In practice, Loyalty Management involves the design and implementation of processes – both, internal to the business, and where the business interfaces with customers - that enable loyal customer behavior. Lately, rewarding customers for a desirable non-purchase activity such as signing up for newsletters, endorsing the brand on social media, attending brand events, etc. have also been brought under loyalty management’s purview.
Satisfaction is a rating. Loyalty is a brand.
Loyalty Management execution usually involves crediting buying customers with “points” or coupons that can be accumulated in some limited fashion to be exchanged for further purchases, or cash credits against further purchases, or, in some cases, providing opportunities for aspirational experiences. A typical loyalty program is likely to be one or more combinations of these, arranged as tiered rewards programs with the higher tiers reserved for the more valuable customers.
Types of Loyalty Programs
Points Based Loyalty Program
The points based systems are based on the paradigm that for the money that you spend you earn reward points and the points can be accumulated over a period of time. Businesses allow redemption of points against either cash back or purchase of goods or some kind of merchandise purchase. This type of reward system is popular with retail, grocery, credit card companies. In the airline industry, reward points or miles can be exchanged for seat upgrade. Some businesses offer redemption points for donation and charity purposes.
Tiered Loyalty Program
In this system, the reward program is based on levels of loyalty. The more customers spend or more frequently they spend, the higher the levels of reward. The benefits, offers and discounts vary depending on the loyalty level. This type of reward program is popular with fashion, beauty, airline, hotel and credit card companies. The benefits here can include free upgrades, privileged checkin and lounge access facilities for airline customers. VIP passes in entertainment programs, early preview in case of the fashion industry are some of the ways benefits are offered. In case of B2B customers it could be higher discounts, upgrade in service options, extended warranty, to name a few.
Paid Loyalty Program
In this type of loyalty program, customers pay a nominal fee upfront to be an exclusive member and such members get recurring discounts on the goods and services or VIP benefits like free and/or priority shipping, early privileged preview before major sales. This is common with retail, grocery, beauty and salon services, food delivery apps. Amazon Prime is a good example of such a loyalty program.
Referral vs Loyalty vs Customer Advocacy
Both referral and loyalty programs focus on customer centric marketing. Both the programs focus on rewarding consumer behavior that is beneficial to business. However, there are important differences in the approach.
Referral programs focus on encouraging existing customers to bring in new customers. Referral programs help in acquiring new customers at low cost. Loyalty programs encourage consumer behavior to make more frequent purchases, increase the share of wallet and focus on customer retention and stickiness. Loyalty programs are ideal for businesses where there is high level of competition, low margins, high degree of customer flight. The value of rewards in referral is much higher compared loyalty rewards.
Customer advocacy programs focus on using a small set of loyal and passionate customers to act as brand ambassadors to advocate the product to a relatively large group of people typically using social channels. This is facilitated by action such as testimonials, reviews, sharing content and social posts. Referral programs reward customers to advocate the product or service to a select group of people that typically includes people in their personal and professional network. This is done through personalized 1-1 connection. The scale of advocacy marketing is much larger using a few sets of customers whereas referral programs try to get a larger number of customers to advocate for their brand which results in fewer leads per customer.