When I was a Product Manager, I often asked myself, “What type of customer loyalty program do I need.” Or “What attributes do I need to emphasize in my customer loyalty program?” I never asked the most important question, “Do I need a customer loyalty program?”
Customer loyalty programs start for all the right reasons. Marketers want to increase customer loyalty in a way that makes it easier for customers. A loyalty program seems like a must have or, at a minimum, a should do for every organization. However, if a loyalty program is to be successful, we need to understand more about our customers, their day-to-day needs, and more about the commercial impact from competitor’s customer loyalty programs.
The decision to launch a loyalty program is not a simple answer. To help Marketing teams, the matrix (below), Loyalty Program Implementation Type – Decision Matrix, is a 3 X 3 grid that supplies a framework to understand if your organization needs a customer loyalty program.
STEP 1: Determine Customer Retention Needs and Likelihood of Customer Churn. The decision matrix to consider launching a customer loyalty program factors along two categories: (1) the current level of customer retention and (2) the customer departure likelihood due to competitors, substitutes, or similar reasons. Customer retention is when a customer continues to purchase at the same rate, product category, and geography in a similar period. For example, if I continue to buy a cup of coffee at the coffee shop on the corner on my way to work on Monday and Friday, then I am a retained customer. If I start to bring my own coffee, start to drink tea from another store, or stop drinking a warm beverage in the morning, then I have become a lost customer. Deciding how likely it is to keep your current customers and decide how likely your customers will leave forms the basis of deciding to create a loyalty program.
STEP 2: Understand Three Approaches to Deciding the Type of Loyalty Program You Will Launch. The decisions to create a loyalty program fall into three categories:
(1) Enterprise-Wide Loyalty Program. An enterprise-wide loyalty program is valuable when customer retention is low to mixed and there is a high-likelihood that the customer will leave either due to competitors or substitutes. A robust and broad customer loyalty program will look to mitigate the effects of the competition and discover customer product and customer experience (CX) insight to make the customer more loyal. Industries such as Passenger Travel, Restaurants, and Coffee Shops are in these highly competitive arenas daily which supports their adoption of broad customer loyalty programs.
(2) Selective Loyalty Program. When both customer retention and competitive factors are mixed, then organizations should consider adopting selective customer loyalty programs. A restaurant may employ a Sunday brunch loyalty program to encourage customers to return weekly and offer a promotion on mimosas, but then offer no customer loyalty program for the rest of the week. Selective customer loyalty programs are designed specifically to promote the customer need and mitigate the effects of competitors but only when those actions are commercially necessary. In another example, a ski resort may offer a Wednesday 20% off discounted customer lift ticket loyalty program when their skier count is low but then offer no other customer loyalty programs the rest of the week.
(3) Loyalty Program Unnecessary. Loyalty programs are unnecessary when there is a combination of high customer retention and a low likelihood of moving to a competitor or adopting a substitute. For example, a mobile handset manufacturer does not offer loyalty programs for new handset purchases or customer retention because they have a high level of customer retention already and a low threat of customer departure and no available substitutes. In this example, a loyalty program is unnecessary for customers because they already retain at a high rate and the use of a loyalty program will not help meet any business goals.
STEP 3: Implement A Pilot, Measure Results, and Adjust or Launch. If a loyalty program looks like a logical strategy for your organization, then take the following steps.
- Design and implement a pilot program that meets the needs of customers and reflects the needs of your customer base. A pilot loyalty program serves as a proof point for the broader organization.
- Measure the results of the loyalty program pilot against baseline customer retention, spending rates, and purchase frequency. If your loyalty pilot is not improving retention, its time to go back to the pilot phase with a redesigned loyalty program.
- Decide if you need to adjust your customer loyalty program or launch the customer loyalty program to a broader audience.
Customer loyalty programs can be a smart strategy for some, but customer loyalty programs need to be applied when they will meet both the organization’s business and customer goals.
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