Customer loyalty programs are all around us. Points, miles, cash back, member-only coupons, additional discounts, etc. These are all tactics to get a customer to be a repeat customer. They do work. I’ll admit, I’m a member of more than one customer loyalty program myself and I’ve used the rewards on several occasions in the past. But I see a few challenges with the these types of rewards programs aimed at increasing repeat purchases:
- They don’t differentiate a business from a competitor.
- There are many rules and restrictions for redeeming a reward.
- They focus on the reward rather than the purchased product or service.
How might we rethink customer loyalty? The intent of customer loyalty programs is to generate repeat purchases. Repeat purchases contribute to the customer lifetime value, which is worth more than maximizing the value of a single transaction. This is particularly true in industries that have a high cost of customer acquisition such as cell phones, cable/satellite service, or banking deposit accounts. Losing a customer after a single purchase often doesn’t cover the cost to acquire them.
So to rethink customer loyalty businesses should follow these principals:
- Focus on why customers are buying the product or service. Do this by mining data for patterns, stories, preferences, or responses. For example customers will rent a hotel room because they need a place to stay away from home. But what’s driving their decision? Is it the price, the service, the location, the room amenities? Maybe its the return policy for an eCommerce site. Zappos is a great example of a business that went into a crowded marketplace and created a loyal following by focusing on ‘why’ customers make decisions.
- Appeal to the preferences and interests of customers. For example, if you own a car repair shop you’ll undoubtedly find that customers rank high the ability to “trust” their mechanic. So you’d want to create a service system that shows customers exactly what’s wrong with their vehicle and only recommends to replace items when they truly need to be replaced. But everyone already tries to do that right? Most customers aren’t interested in alternators, fuel pumps, or brake fluid. What they are interested in is a vehicle that operates reliably and gets them from point A to point B each day. So focus the service discussions and recommendations of on how repairs improve the reliability of the vehicle. Show how a repair or preventative maintenance item increases the years of services for a vehicle.
- Reward customers by helping them exhibit behaviors for their preferences and interests. If you know your customer well enough, you’ll be able to reward them with parts of your product or service that matter most to them. Staying with the car repair shop example, what would happen if the customer was rewarded based on the age or miles on their vehicle? Older vehicles could qualify for additional discounts or free services.
- Differentiate service from other competitors. Customer loyalty is difficult when everyone looks the same. If competing products and services are of equal value to the customer then they make decisions based on price. If customers are making decisions based on price alone, then they definitely won’t be loyal and the profitability of the product or service will diminish as a the price is driven down by competition. A book that I highly recommend that goes into this concept at great length is Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant
- Use the rewards program as “reward”, not an incentive. Customers that only purchase a product or service to accumulate some type of point are typically not the best customers. Loyal customers purchase a product or service because they find value in it, not in an accumulated point. In this manner, customers consider it a reward just to have the opportunity to buy the product or service. In other words, base customer loyalty on customer interests, customer lifetime value, and repeat visits. Programs with points and the like should be a component of customer loyalty to truly reward customers. But don’t use these programs as carrot to sway customer decisions. That type of thinking will eventually catch-up with a business as customers will abandon an incentive if it gives them product or service they don’t value.