Academic literature is full of lists of what loyalty programs can do for a company. There are many reasons why businesses embrace them and invest so heavily in their implementation and maintenance (to the tune of billions of dollars as a sector). The following is a compilation of the major functions of loyalty programs (with academic and business expert references):
(Copyright PR Loyalty Solutions, 2011)
“Keep customers from defecting” (Nunes & Dréze, 2006): As described in their book Loyalty Myths (2005), Keiningham et al., point out that customers are affected by “the sunk-cost fallacy,” where they continue patronizing a business or loyalty program because they focus on the amount of points “they have already accumulated. … Hence, they become locked into the program and continued interaction, despite the fact that they may not feel truly (attitudinally) loyal” (p.119).
“Win greater share of wallet” (Nunes & Dréze, 2006): By providing extra incentives, loyalty programs encourage consumers to direct more of their purchases toward a business and less at competitors.
“Prompt customers to make additional purchases” (Nunes & Dréze, 2006): Especially when close to achieving greater rewards, consumers can be enticed to buy more than they would have without an incentive program (like with Safeway when they offer 100 Air Miles for purchases of a minimum of $100).
“Turn a profit” (Nunes & Dréze, 2006): American Airlines’ AAdvantage program and Air Canada’s Aeroplan are examples of successful loyalty programs that have generated significant revenues by selling “miles” to partner businesses. (Aeroplan, now owned by AIMIA, often earns far more profits than Air Canada, the airline which started the program).
“Yield insight into customer behavior and preferences” (Nunes & Dréze, 2006): Loyalty program customer relationship management (CRM) systems provide a tool for collecting customer data and tracking behavior. This lets a business know what a consumer buys, how much, and how often. Using CRM can determine which customers to focus marketing resources on to maximize returns, reduce overall marketing costs, and improve the efficiency and effectiveness of marketing efforts.
Yield insight into the effectiveness of a business’s marketing efforts (Stone & Field, 2001): Careful tracking of customer purchases can help not only identify profitable customers, but also assist in the evaluation of specific promotions. By way of a loyalty program’s data tracking abilities marketers can determine which customers respond to targeted advertising and in what way, what customers buy and what they might buy, and how they can best be influenced into making additional future purchases.
Facilitate business communication with customers (Stone & Field, 2001): Successful businesses can use their loyalty program CRM systems to stay in touch with customers, ensure that public awareness of both the business and brand stays high, and entice consumers to make future purchases. For example, companies can send personalized Christmas cards, or “holiday greetings” if it is determined from data that that is more appropriate. Loyalty members can also be sent customized back-to-school or other promotions recognizing the customers by name and where they are in their personal and family stages of life.
“To enable [a business] to provide special, differentiated service” to best customers (Stone & Field, 2001): A loyalty program provides a means to reward different customers differently, according to their value to the business.
“Enhance the overall value-proposition of the product or service” (Dowling & Uncles, 1997): Loyalty programs are worthwhile when they enhance the value of the product brand, increase product availability, or “neutralize a competitor’s program.”
Provide cross-branding recognition: A relatively little-known company can capitalize on the brand recognition of other higher profile companies through affiliation with a common loyalty program. For example, if someone sees the Air Miles, Aeroplan or other program logo in a store window or promotional literature, there is automatic brand recognition of the program, even if not for the actual store.
Tool for collective advertising and cross-business promotions (Swaminathan & Reddy, 2000): In a coalition loyalty program, in addition to each participating merchant paying for its own separate promotional materials, the group of businesses as a collective can advertise cost-effectively through the loyalty program.
Attract new customers: For small businesses, especially ones with little brand awareness, this is a particularly valuable function. When looking for a new business, when everything looks the same, for many consumers the existence of a reward program can be what makes the difference between buying from one place or another.
(Copyright PR Loyalty Solutions, 2011)
(Source: “Customer Loyalty Programs: What Makes an Effective (Community-based) Program?”, Peter Roundhill, MBA Thesis, University of Victoria, 2007)