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We’re all familiar with customer reward programs. We encounter them every day in a variety of shopping venues, both online and in the real world. It may be your local pharmacy’s Customer Care Club or your favorite restaurant’s Preferred Diner’s Club; it could be your local supermarket’s Shopper’s Plus program or your favorite online book seller’s Collector’s Club. But wherever, and whenever, you encounter a customer reward program the purpose is always the same – to encourage repeat business, increase sales, and build brand loyalty.

Customer Reward Programs are Valuable Marketing Tools

Customer reward programs work because they provide value to the public. Those that enroll receive special discounts, access to limited sales, and other exclusive perks that ‘reward’ them for becoming, and remaining, a loyal customer. These programs also provide value to the company by allowing them to gather detailed information about their core customer base; information that can be used to promote new products and selectively upsell merchandise and services to specific customers. 

On the surface, it looks like a win-win for everyone involved. But before you implement any form of customer loyalty program there are a few things to consider. While these programs are effective at retaining customers and building brand loyalty they do come at a price. As advantageous as they can be, there are potential pitfalls to running a customer rewards program with your business. So it’s worth taking a closer look at the pros and cons of loyalty programs before launching on of your own.

Pros

Keep Your Customers Coming Back

The primary purpose of any rewards program is to boost customer retention. You want to encourage shoppers to return to your business rather than defect to one of your competitors. Studies have shown that customers are more likely to return to a specific business if they feel they are making progress towards a perceived money-saving goal. Psychologists call this the Endowed Progress Effect, and it lays at the heart of many a customer loyalty program. 

For example, take your favorite coffee house. You’ve enrolled in their preferred customer club, and you get a star for every cup of coffee you purchase. After a dozen stars you receive your next coffee free of charge. That free coffee is your motivation to pass by other cafes and to give all your custom to one company. It’s that level of engagement that keeps customers coming back for more.

Incentivize Customers to Spend More

Discounts, freebies and other shopper’s incentives encourage customers to make larger and more frequent purchases at your business. The promise of saving money, and having access to exclusive deals, motivates shoppers to open their wallets and spend more of their hard earned cash. According to the latest Bond Loyalty Report, more than 60% of shoppers polled admitted to spending more money in order to take advantage of perks offered by their customer rewards programs.

Attract New Customers

Sprout Funding logoCustomer loyalty programs are primarily designed to retain, and reward, existing customers. But that doesn’t mean they can’t be effective at attracting new ones. Potential new customers who learn of your rewards program may be more likely to make a purchase if they know that they can enroll in the club and gain access to future savings. Moreover, current members of your loyalty program who have been enjoying the perks of membership are much more likely to refer friends and family to your business. 

The cost of acquiring new customers far outweighs the cost of retaining existing ones, and a well-implemented loyalty program is one way of attracting new patrons to your business without breaking the bank.

Take Advantage of Targeted Marketing

Digital customer loyalty programs allow businesses to accumulate valuable data on their members. You can track spending patterns and purchase histories, and use that data to tailor customer-specific marketing strategies for each or your club members. This not only helps to build stronger relationships with your customers, it also provides invaluable upselling and cross-selling opportunities as well as offering a perfect conduit for the introduction of new products and services.

Cons

Maintenance and Monitoring

A customer reward program can help you increase customer retention and build brand loyalty, but it does require extra effort on your part to monitor and maintain over the long haul. You’ll need to have a system in place to record your customers’ spending habits, track their accumulated reward points, and send out timely emails and mailers to maintain customer engagement levels. This comes at a cost, and you will have to balance the investment in your loyalty program against the potential returns. 

Depending on the size and type of loyalty program you implement a digital backend with an automated service will be necessary to keep things running smoothly. Some examples of software solutions for customer loyalty programs include:

Customer Rewards Cost Money

For your reward program to be effective you need to offer customers something that they actually want, and it needs to be something with real value. Whether it’s a discount, a freebie, or a buy-one-get-one-free offer the cost of the incentive is going to impact your bottom line. There are also the added costs of monitoring and maintaining the program itself to consider. 

If you decide to implement a customer rewards program it is critical that you monitor it closely to ensure that you don’t end up losing money in the bargain. Customer retention is the goal, but that won’t mean much if you are spending more money to keep customers than you are generating in sales.

Overly Complex Rewards Programs can Backfire

Successful loyalty programs are simple to use and understand. If your program is too complex it can end up driving customers away from your business. If you are considering starting a customer loyalty program remember to keep it simple. The best rewards programs are clear and transparent, and above all else easy for the customer to understand.

Ending the Program can Adversely Impact Customer Relations

Over time you may decide that your customer rewards program is no longer cost effective. You may find it necessary to overhaul the program or end it completely. That is likely to have an adverse effect on your members, and could very well result in the loss of customers and a dip in business and revenue. 

If you are considering launching a customer loyalty program it is imperative that you have an exit strategy prepared in case you need to end the project. Phasing out the program in stages is usually the best option, but even then you run the risk of alienating some of your long-term customers.

Finally

A well-structured customer loyalty program can definitely help your business attract, and retain, valued customers. But these programs are not foolproof, and there are many variables to consider before committing to a long-term project. 

If you are thinking about instituting a customer rewards program take some time to consider both sides of the equation. Weigh the pros and cons until you are certain that the benefits are worth the investment of time and money. If you decide a loyalty program is right for your business start off small, offering membership to a small sample group or setting a time limit on the project. If the program is successful you can expand it as you see fit, using the program to its full advantage to reward your loyal customers, boost your overall sales, and build brand recognition.

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