Are loyalty programs effective?

Loyalty programs are the hot thing in the retail world right now. It seems like every store has one and they all come with some perk or bonus. If you are a retailer, you're probably wondering about the pros and cons of a loyalty program. Is starting and maintaining a loyalty program worth the effort?

Loyalty programs are popular for a reason. It costs 5 times more to acquire a new customer than to keep an existing customer. Keeping an existing customer means nurturing that relationship. That often comes in the form of loyalty programs that reward customers the more they spend or the more they visit the website. Not only is this a nurturing act by businesses, but they're also building brand loyalty. According to Investopedia, companies with high scores on brand loyalty create revenue 2.5 times faster than their industry peers. Harvard Business Review conducted a study that found that companies that excel at brand loyalty deliver up to 5x the shareholder returns over a 10-year period. Invesp also found that if a loyalty program is done well, it can generate as much as 20% of a  company's profits. The same study showed that 84% of consumers say they're more inclined to stick with a brand that offers a loyalty program. Just looking at these statistics alone makes you think loyalty programs are worth it, but there is always more than meets the eye. 

There is a benefit to having a loyalty program, but we all know programs such as these don't just sprout up on their own and it can be a hefty task to create. Regarding capital, the main cost of setting up a loyalty program is time. Depending on how you set up your loyalty program, there could be a need for coding, CRM updates, and the potential of managing a new department that focuses directly on your loyalty program. The best way to actually quantify the cost-benefit of a loyalty program is to calculate it. Essentially, you will calculate the cost-benefit ratio. That can be done by dividing the proposed total cash benefit by the proposed total cash cost. In this case, the costs will be marketing, salary overhead, cost of items (if that's included when customers join), CRM additions, and any other cost associated with setting up or maintaining the loyalty program. Every industry and customer base has different expectations for a loyalty program. Some companies have upped the ante by adding credit cards and debit cards that make it more lucrative for consumers to join. Despite all the calculations, you can never say for sure what type of benefit your business will see from implementing a project like this without looking at the data. 

The data you need to analyze is the cause and effect of purchases, also known as purchasing patterns. Look for patterns associated with sales, email marketing, and various forms of brand pushes. Consumers segmented by age can also help decipher the need for a loyalty program. Older generations tend to not need or want a loyalty program while Gen Z love the idea of a loyalty program, even if it is not focused on financial rewards. It's important to keep your target market in mind while making these decisions.

If you still don't feel you've had a conclusive set of data, look into your logistics. Using ShipWise you can help organize data based on consumers. What areas are spending the most money? What segments are spending the most money? Do you have a lot of return customers, all based on address? ShipWise allows you to pull data based on your specific supply chain strategy. This type of data could help you realize either the desperate need for a loyalty program or the complete opposite. 

What we can say is that if done well and needed, then loyalty programs are in fact beneficial. Now, what does it mean to be done right? Unfortunately, you'll have to make that decision for yourself. Use the tools given to you and outlined in this blog to make an educated decision.