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.