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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.

LPs are primarily attracting existing customers
One misconception to avoid is the belief that an LP is able to attract significant numbers of new customers who are otherwise less likely to shop with the retailer. LPs predominantly engage existing customers – those who feel they do not have to significantly change their standard purchase behavior to earn rewards. Customers most likely to join retailers’ LPs are those who already purchase, those who live close by and those for whom buying at the retailer is convenient anyway.  In any case, retailers should expect the greatest increase in purchase frequency and volume within a few months of the LP introduction.

The LP effect is stronger for medium and light buyers
Moreover, managers may be surprised to realize that the largest increases in purchase behavior may not come from their “best” customers and high spenders. LP members most likely to significantly increase their spending and share of wallet are customer segments that are often underestimated and perceived as less relevant: medium and light buyers. The explanation is straightforward: Heavy buyers and high spenders already devote a large part of their overall consumption in a category to their favorite company, so they have less room to grow their expenditures. Light and medium buyers may, in contrast, increase their share of purchases by switching from competitors or increasing their consumption in the category.

The future of loyalty programs: How to keep LPs worthwhile in the digital age
The core idea of leveraging information gained through loyalty initiatives remains stronger than ever. As LP membership penetration reaches all-time highs, customers demand more value from LPs. There are several ways in which LPs need to increase value to remain attractive in a more and more digital and highly competitive retailing space.

• Think beyond plastic cards
  What sceptics about the future of LPs may rightfully highlight is that the effectiveness of classic LPs as plastic cards is declining.  The future of LPs is linked to leveraging opportunities that mobile devices offer in increasing the convenience and communication with LP members. Digital transformation for LPs seems particularly important, because as many as around one third of LP members are willing to abandon an LP if it does not offer a mobile-friendly solution. In the future, the integration of LPs with digital payment systems like mobile wallets seems particularly promising. Such integrations would allow customers to seamlessly earn and redeem rewards when they are using a mobile wallet. The savvy LP retailer will go one step further and integrate their program and digital payment systems with real-time targeting of offers in the store.  Flexible redemption schemes would offer customers an opportunity to buy in the store with a combination of points and money and encourage redemption of rewards in real time. Starbucks and the UK supermarket chain Tesco, for example, have already implemented NFC technology successfully to integrate contactless payments with mobile wallet and their LPs’ earning and redeeming options.