In this ever- evolving landscape of business, one constant force for driving success in any business is Brand Loyalty. It is the holy grail for businesses aiming at achieving profitability and sustainable growth.
What is brand Loyalty?
Brand loyalty is when a customer purchases from the same brand over and over again despite competitors offering similar products. For companies across all industries, attracting new customers is just one part of a successful growth strategy, but retaining existing customers and building a strong brand loyalty is even more important. Increasing customer retention by just 5% can increase profits by over 25-95%.
Therefore, a loyalty program is a customer retention strategy that motivates customers to continue buying from your brands instead of your competitors. Not only do they purchase repeatedly but also associate positive feelings with the company and have an emotional connection and trust towards it.
According to a survey by Accenture 57% of customers spend more on brands they are loyal towards. This is a concept much broader than merely giving discounts, or offers. In fact, 39% of loyal customers will spend more on a product even if there are other less- expensive options available.
A good loyalty program shows how afloat your business can stay in the long run, it is a way of sustainable business growth. It also helps to build a deeper connection with your customer base which also adds value to your brand. This therefore increases a customer's longevity.
Benefits of a good loyalty program:
1. Higher average order value.
2. Increase in customer retention rate
3. Cross- sell and up- sell opportunities
4. Higher engagement and stickiness with the company
5. Increase in LTV and boosts revenue
6. Encourages word-of-mouth marketing
7. Increases customer satisfaction
8. Differentiates a brand from its customers
9. Positive reinforcement of valuable customer behaviour
Types of loyalty programs.
1/ Point based loyalty program – is the most widely used technique to retain customers. Companies use positive reinforcement as a tool by giving more points to customers who engage more with their company. These points can then be used to avail rewards. An example of a company that uses this is Starbucks. They provide you with a star on every 300 rupees spent, and as you earn stars you can redeem them for rewards.
2/ Tier based – they are designed in such a way where the customers can unlock higher levels of tiers with higher spends and engagement. Companies usually have tiers like – gold, platinum, diamond. Eg – Ulta beauty. They have 3 tiers under which customers can avail various discounts based on which tier they fall under. As they go to higher tiers they are awarded with larger rewards
3/ Community based – This is a reward program designed to incentivise customers by building a community of value for them. These companies generally have premium communities that only exclusive customers can be a part of, but some companies also have memberships of communities for free Eg. Sports companies like Adidas (Adiclub) and Nike. They aim to build a community of fitness enthusiasts.
4/ Paid Membership based loyalty program – customers pay annual subscriptions or membership fees to be a part of a VIP member club and access special offers and rewards. Eg. Amazon Prime. They have various benefits for their subscribers, for example - free delivery, early access to offers and discounts.
Even though we have broken the types into 5 different categories, companies generally design programs that are a combination of 2-3 loyalty programs. For example, a customer earns points for multiple purchases that he/she makes and an accumulation of these points helps him upgrade to a higher tier and therefore will be eligible for higher rewards.
Qualities of a desirable loyalty program:
1/ Simple- Make is easy for customers to understand
2/ Beneficial- Provide clear value upfront – benefits must clearly outweigh fees
3/ Value driven- Provide more valuable and experiential benefits to long term customers
4/ Exciting- Display progress towards the next reward and keep the excitement high. Some elements which boost excitement are gamification, surprises, or VIP status.
A loyalty program must initially focus on giving customers more monetary benefits so that they are encouraged to engage more with the company, this enables habit formation. After a relationship has been established with the customer, focus can be shifted on value based, and experimental based benefits. The logic behind this idea is to nudge a new user to get accustomed to using the company’s products, and to ensure that an old user feels valued and appreciated.
One of the best loyalty programs is Amazon’s prime membership. They offer an abundance of benefits compared to the annual fees that they charge. As a result of the membership, a customer is more likely to place orders from Amazon itself instead of any of the competitors. According to a report, customers with a membership on an average spend around $1500 a year compared to non- members who only spend around $625 a year.
Building customer loyalty is crucial for all industries, but more important for industries that have a fragmented market. For example – E-com. Adding a loyalty program into the E-com platform can increase average order quantity by 319% (incentive solutions).
Another Example that we can take is of Tata Neu, it is a multi-purpose super app for travel booking, shopping, bill payments and other financial needs. You can earn NeuCoins every time you shop with any of the Tata brands, these coins can then be used to shop across various other brands that have partnered with Neu. So this way, the Loyalty program is designed to ensure a larger revenue stream into the company. Even though this might be a loyalty program of Tata Neu, the company is able to increase engagement and stickiness across many more of its brands.
Even though we might perceive loyalty programs to be a strategy used by the marketing front of a company, the finance of these programs cannot be ignored. Planning these programs by analysing its cost and benefits trade-off determines the success of them. Such a program can only be feasible if the company has thoroughly evaluated it’s working.
The first step of this process is to evaluate the desired behaviour of a customer and design the loyalty program in such a way that it nudges the customer to perform the activity required by the company. The process must ensure that the value created must clearly exceed the cost of the value delivered.