May 24, 2011

Loyalty Programs

Loyalty programs are popular, aren't they?

Too bad that they are often ineffective.

The key to a good loyalty program isn't the loyalty program.  Rather, it is the inherent customer behavior that is tied to the loyalty program.

Loyalty programs have a chance of working under the following conditions:
  • An annual repurchase rate of 60% or greater.
  • Customer places five or more orders per year.
In these situations, the customer has a need that can be met by a loyalty program.  Maybe the customer wants to feel special.  Maybe I want to sit in Economy Plus on United.  Maybe the customer wants to save 5% or 10% on a purchase.  Maybe I want to pay six cents less on a box of Mac 'n Cheese over the course of one hundred boxes over the course of a year.

In any of the above situations, the benefit is amplified by purchase frequency.

Too often, I witness loyalty programs tied to infrequent customer behavior, as if the reason the customer doesn't buy more often is because there isn't a loyalty program.  Wrong.  If a customer has a 35% annual repurchase rate, and only purchases 1.3 times per year, there's very little incentive for the customer to buy more --- the customer simply doesn't have a need to buy more often.

Loyalty programs have the best chance of working when the customer is already pre-disposed to buy numerous times per year.

5 comments:

  1. kevin this is amazing insight. nice post!

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  2. Hi Kevin, what about loyalty programmes for yearly product life cycles (membership purchases, for example)? Does the focus shift from the number of purchases per year to the number of years of renewed membership?

    Alec

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  3. Alec - the focus could shift. The key word is "could". You're probably better off just giving the prospective membership customer 20% off for the annual opportunity to maintain membership. My opinion only.

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  4. Can the creation of a loyalty program incent infrequent purchasers to purchase more often? Yes we want to 'reward' frequent buyers but we also want to incent less frequent buyers to buy more often. Can't a loyalty program (with the right incentives) do that? Or is that a pipe dream - your post seems to indicate so....

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  5. Can it? Sure. Does it work with regularity among infrequent buyers? Not enough to pay the bills.

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