Loyalty programs: Relicts from the past?
The omnipresence of loyalty programs (LP) across markets shows that LPs have been one of the most prominent business trends of the last two decades. Besides their traditional stronghold among airlines and grocery retailers, loyalty reward schemes have spread among nonprofit organizations like museums, charities and sport clubs, among online and offline services, and even among utility providers and business-to-business markets. On average, two-thirds of Europeans belong to at least one LP. In the UK LP penetration reached 90 % and even 94 % in Finland, according to a worldwide Nielsen study in 2016. The 2017 US census by Colloquy reports 3.8 billion LP memberships, with the strongest penetration in the retailing sector to which more than 1.6 billion memberships belong. Beyond reinforcing customer loyalty and retention, LPs can help a retailer increase its share in a customer’s wallet and to cross-sell and up-sell additional products to customers. However, as the number of companies offering LPs soar, the battle for a “place in the consumer wallet” is intensifying, resulting in the fact that more than half of all the memberships that customers sign up for are eventually abandoned, according to Colloquy’s reports. This tendency, coupled with increases in investment costs necessary to leverage benefits from LPs, makes some managers question whether supposed gains from LPs are sustainable. These managers wonder whether investments in LPs should rather be replaced with new must-haves such as mobile marketing, gamification and social media leverage.
Beware of bombastic promises, but know that loyalty programs pay off
Popular press and CRM consulting firms in the last two decades have boasted about large differences in purchase levels and profitability between LP members and nonmembers, attributing the difference in purchase levels to the LP. The large difference in spending levels, between LP members and nonmembers, comes primarily from the fact that loyal, high-spending customers are more likely to become LP members. The true impact on performance that could be attributed to LPs is much smaller, although it is significant and positive. This impact comes from LP’s ability to increase spending and frequency of purchasing of LP members after they join the LP. In general, research evidence shows that retailers of FMCGs can expect from 6–25 % increase in sales and airlines around 4 %. Specifically, research among Dutch supermarket chains showed that loyalty-program membership on average increases share-of-wallet by 4 %. This effect is seven times smaller than the increase in sales that would be attributed to the LP if the underlying difference between members and nonmembers were not taken into account.