Adding Value Through Customer Loyalty Programs – Priyanka From IIM Lucknow

“Customer is the King.”

Adding customer value has been the key to excel in the highly competitive environment that brands face today. Studies suggest that it costs the business more to acquire new customers than to retain the current customers. One of those studies states that the current customers spend around 67% more than the new ones. Loyalty programs have been designed to help retain those current customers and provide them more value so as to hinder their shift to another brand/product through increasing the switching cost (barrier to change). These programs are an integral part of the customer relationship management programs adopted by the organisations.

Loyalty programs have been utilized in the most creative and successful ways by most of the organisations, helping them to retain their brand share in the consumers’ minds. These programs not only reduce brand switching behavior but also help increase the spending of the existing customers and if carefully designed, can be utilized to shift the spending patterns from low margin to high margin products. Loyalty marketing is in itself a separate field of study where the focus is to retain and grow the existing customer base through various incentive programs.

Exclusivity is an important dimension that needs to be considered while designing these loyalty programs. Amazon’s Prime services work on similar lines. It is one of those brand loyalty programs where the consumers pay to receive the benefits and be treated with care and attention. This program offers services like free two-day delivery, one hour delivery for certain cities, free access to streaming services and the like, which helps the customers feel special and important.

Tiered systems also have worked quite well in the past. An example of this is the British Airways, which has three different categories of customers: Bronze, Silver, and Gold. Programs designed this way work well because everyone can enjoy the benefits and still aspire to get more of them. The lower level customers get lower benefits but are not altogether excluded from the pyramid, which in turn makes the customers brand loyal.

Flexibility is another dimension that companies use to increase their brand loyalty. An example of this American Express’ Plenti Program, which lets the customers pool their rewards with the various different retailers. This is quite appealing to the consumers and can also impact positively on the program as the company can leverage the popularity and loyalty of its associated partners.

How to measure the effectiveness of the loyalty programs?

1. Customer Retention Rate: This can be measured by analyzing the program and non-program customers to determine the efficiency of the program.

2. Negative Churn: Churn is defined as the rate at which customers leave your brand/product. Negative churn measures the number of consumers who either upgrade their services or start purchasing additional services.

The major dynamics of the customer loyalty programs revolve around differentiation, recognition, and instant gratification. The customer experience with the brand improves many-folds with these programs and incentives. Also, with the shift of the consumers to platforms like mobile purchase, the loyalty programs are evolving and need to be suited to these mediums.



About the Author:

Priyanka is a second-year MBA student at Indian Institute of Management, Lucknow and is a member of InsideIIM’s second student team. She is also a part of PRiSM, The Marketing Cell at IIM Lucknow.