Customer Loyalty Program
- A Mature Business Model With Undiscovered Revenue Potential
Discount is not the answer
Traditional marketing strategies often incorporate discounting prices on products to increase market share and revenues. However, price reductions can easily be matched by competitors, leading to a general deterioration of revenues across competing companies. Frequently, there is little to no benefit to this pricing game as market shares are often not affected in a significant manner, yet each company takes in less money for its products or services thus resulting in lowered margins. To avoid a ruinous strategy for increasing or maintaining market share, some industries have introduced loyalty programs, which attempt to increase market share by attracting repeat customers, knowing it is less expensive to retain a customer than to gain a new one.
The rise of loyalty programs
The loyalty program was pioneered by the airline industry in 1981 and has been growing rapidly ever since. We count 324 programs in North America. 80% of Americans state that loyalty programs influence them. *1) The number of programs in the consumer and retail industry is growing. Programs in the travel and financial industry offer the most value and are increasingly popular due to the high level of aspiration involved with travel benefits.
In theory: a mature model with benefits for all stakeholders
Loyalty Programs are a unique business model, as they provide significant benefits for all three stakeholders at the same time; customers, program owner and program partner. Customers can redeem points that were accrued for everyday spending and will therefore experience a discount. The program owner will either secure existing business or will experience new and incremental business. The same benefit goes to the partner of a program. They will take advantage from a larger customer base, making incremental business as well.
The number of competing programs seems to eliminate business value
It might be true that programs become less effective in industries, where the concentration of programs is high. However it is also true that major corporations lose half their customers in five years - and have to replace them *2) . Loyalty programs serve as a tool to detect attrition first and to act before customers take their business elsewhere. In addition to the customer attraction aspect of these programs, some companies realized an opportunity to learn more about the purchasing behavior of their customers, allowing them to modify their sales strategies in ways to encourage further purchases.
A leading edge customer relationship management capability might give companies a competitive advantage even if the concentration of loyalty programs is already high in that particular industry.
*1) Maritz Loyalty Marketing Poll 2005
*2) Fred Reichheld, Loyalty Effect: the hidden force behind growth, profits and lasting value, March 1996