Do Loyalty Programs Really Work?

If you have a limited amount of money to attract and retain new customers, you might think loyalty programs are an expensive waste of time. In reality, these programs help retailers increase their profits and build better relationships with customers — but only if you offer the right rewards. If you have been struggling to build customer loyalty, think about implementing a program that rewards customers for repeat purchases.

In a crowded market, loyalty programs help differentiate retailers from their competitors, helping them earn more money and attract customers from profitable market segments. If a neighborhood has two stores with similar merchandise and comparable prices, customers are more likely to shop at the store that offers discounts, free gifts or other rewards. If you don't have your own loyalty program, you may be losing customers to a retailer that does.

Loyalty programs aren't as helpful for grocery stores as they are for other retailers due to the size of the reward offered. A customer may not be willing to share personal information or sign up for a loyalty card if all she is going to get is a dollar coupon. Companies that offer substantial discounts or free items worth several dollars seem to do a better job using loyalty programs to build loyal customer bases.

Tiered loyalty programs seem to produce better results than programs that only have one level. The lowest level of an airline loyalty program might give customers perks such as one free checked bag or a free drink at the airport bar, but the highest tiers offer exclusive perks such as access to the airport lounge or major discounts on air travel. Using a tiered system makes customers feel like they will miss out on good rewards if they use another company, which is why tiered systems are so effective.

Using a tiered system has an added benefit for retailers: the opportunity to deliver targeted offers to specific groups of people. If customers meet the criteria for a certain level of your program, you know how much money they spend with your company annually, and you may even have information about their personal preferences on file. Instead of delivering the same offer to all of your customers, you have the opportunity to deliver specific offers, making it easier to increase the conversion rate on each of your marketing pieces.

If you want customers to develop positive perceptions of your business, you must offer rewards your customers actually want. If you give a customers a free item they'll never use, the reward has no value. If you offer a discount off their next purchase, however, they're likely to return to your store to use the discount. There is a chance customers will spend more money than usual when they feels they're getting a bargain.

If you are struggling to retain customers, implementing your own loyalty program is a good way to start building profitable relationships, but you must offer valuable rewards. Take a look at the loyalty programs offered by your competitors to get an idea of how other companies build customer loyalty and increase their profits.

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