Is a loyalty program right for your business?
by Dr. David Cox
3 reasons why it might not be right for your business
Every supplier or retailer nowadays seems to offer a loyalty marketing program. It’s not surprising that with such a proliferation of loyalty schemes in the B2C and B2B sectors, you can easily be convinced that launching your own program will be a panacea for all the challenges facing your business.
However, loyalty programs, like all of the marketing weapons that a business has at its disposal, are only highly effective under certain conditions and more effective for certain products and services. Indeed, a number of academic studies have highlighted the failures of loyalty programs (e.g. Shugan 2005, Dowling & Uncles 1997).
Here are 3 reasons why a loyalty program may not be right for your product or industry:
1. Loyalty marketing has always been a defensive marketing strategy, meaning that it is used to defend market share, limit variety-seeking behavior, build a stronger relationship with existing customers, use the program data to better understand your customers and hence build products and services that anticipate and meet their needs. Therefore, loyalty programs tend to be more effective for companies that have an existing customer base and are not in a start up mode. Indeed, many loyalty program failures have been amongst young companies that have embraced the loyalty program concept before creating a sustainable product, service and customer base. A loyalty program will never be a substitute for a poor or incomplete product or service.
2. Loyalty programs tend to be more effective for products and services that have a shorter purchase cycle. It would be difficult to create a loyalty program for services such as wedding services or funeral services given that these transactions should happen only once in a person’s lifetime. Whilst these are extreme examples, it becomes increasingly harder to engage, regularly communicate and encourage active habitual behaviors if the purchase cycle extends beyond three months. Of course, the introduction of coalition partners with shorter purchase cycles as well as other non-transaction behaviors (e-learning, business referrals, testimonials) can be introduced to try to mitigate this affect.
3. There are some industries that are simply unsuitable for a loyalty program, either due to ethics or legislation. As a result, companies operating in the financial services sector (particularly in the EU region), healthcare and defense, find it more difficult to plan and deploy loyalty programs due to the amount of regulation that exists in these sectors.
Like any marketing strategy, loyalty programs have a place and an ideal environment in which they should be deployed and managed. So, it is important for firms to undertake a detailed diagnostic assessment to see whether a loyalty program is the best marketing strategy for their product or service, as opposed to rushing to set up a program in the hope that it will solve all your business challenges.