Loyalty Programs in retail : An overview
What is a loyalty program ?
Loyalty programs are the schemes designed with an intention to retain existing customers and attract new customers by rewarding a customer with both hard and soft benefits for his loyalty and patronage. Classification
Loyalty programs (either on the shop delivery' or web based') can be classified either based on types of rewards and recognition tools used or the mechanism by which customers earn their rewards. Classification based on the mechanism by which customers earn their rewards : 1. Earning points towards a reward of free or discounted product. Such kind of approach is normally used in applications where there is high transaction frequency and moderate price points .However, such a kind of loyalty program increases functional loyalty rather then emotional loyalty ,for example a frequent flier program. 2. Allowing customers to redeem third party currencies such as airline miles for retail purchases. These kinds of loyalty programs are successful but there are certain issues such as brand fit between two companies and a risk of brand dilution due to coalition partner's inefficiency. Page 5 of 21
Partnerships between frequent flier programs and retail outlets is a successful example of third party based currency program IIFT_NCS - Paper writing contest
3. Offering rewards for using store branded credit cards.
These kinds of programs are normally single brand loyalty programs i.e. they can't be used across various retail stores thus driving away shoppers who mange their credit through multiple cards. 4. Offering discount or margin for select items.
This approach is primarily used to push across slow moving products or to introduce new products. Classification based on the incentives and recognition tools used : 1. Providing unbiased and relevant product and service information to shopper. This is a high involvement reward mechanism which looks at a long term perspective. It works exceptionally well in apparel and fashion industry where the information is customized to each user. 2. Provide members with access to limited products and exclusive services Loyalty program members can be invited to special shopping nights and exclusive sale of limited edition products. But care should be taken that other customers don't get offended . 3. Recognizing best customers with elite status.
Members achieve status for achieving a certain threshold level of sales value. Here again, care should be taken that the regular shoppers don't get offended in the process. 4. Encouraging shopper's involvement through interactive opportunities. Page 6 of 21
Rewarding shopper through involvement activities such as invitation to special events, parties, inviting customer ideas for advertisements /new products etc. IIFT_NCS - Paper writing contest
Retailers all over the world have recognized the significance of loyalty programs as an effective marketing and promotion tool. Loyalty programs if designed and implemented effectively can provide both tangible and intangible benefits (or should we say short term and long term benefits!) . Tangible benefits include increased sales and footfalls in the stores, wider customer base and retention of high worth customers. There are other intangible and long term benefits like strengthening of customer relationships and reinforcement of retailer's brand and value proposition. An effective loyalty program which is accompanied by recording of shopper's buying information can be used to segment customers as well as identify and change customer behavior. Criticisms
Although a popular concept among shoppers and retailers alike, loyalty programs have had their share of criticisms. One of the most serious concern has been the privacy of data collected through loyalty cards. Retailers sometimes share their customer data with other marketing agencies resulting in intrusive selling by these agencies or with...