Imagine being able to visit a local business, ‘check-in‘ by taking a
picture proving you’ve made a purchase and receive rewards, including
points that can be exchanged for cold hard cash. Looking to cash in on
the rise of location-based services like Foursquare, a new service
called WeReward wants to bring that experience to the masses.
The pitch to business owners: we’ll get consumers to buy from you and
give you a way to reward them for their “patronage.” WeReward describes
its service as “a global loyalty program that you control locally.“
Reading WeReward’s launch announcement made me wonder: why in the world would a business want to reward customers for simply making a purchase? The answer: in the name of boosting ‘loyalty‘, businesses make a lot of poor decisions. This is evidenced by numerous studies which have found that loyalty programs designed to boost business infrequently boost profits. That, of course, sort of defeats the purpose.
So how can companies build loyalty programs that are truly effective (read: profitable). A good start would be to look at the “Five W’s” of loyalty programs.
Multiple studies have shown that loyalty programs are largely ineffective and a big reason is that businesses make poor assumptions about who they should reward. According to Tim Keiningham of Ipsos Loyalty and the Fordham University Schools of Business:
Most company surveys wrongly define what constitutes a business’s most loyal, and thus desirable, customers; lots of managers chase after these customers mistakenly thinking they hold the key to bigger profits; and the majority of customers whom many companies see as loyal are not even profitable customers.
Needless to say, companies need to understand who their customers are and be able to identify the profitable ones if they hope to build an effective loyalty program.
Companies with loyalty programs need to carefully what actions and metrics need to be incorporated into the loyalty program. Both, of course, should have a direct correlation to profitable behavior.
Building an effective loyalty program requires recognizing that not every action deserves to be rewarded. With WeReward, for example, a wise business might ask just how sensible it is to reward customers for simply making purchases that, in many cases, would likely have occurred anyway.
Since the frequency at which a customer purchases from a business may not be correlated with the profitability of that customer, companies should think twice about when they reward action. Obviously, action should be rewarded when it promotes increase spend amongst profitable customers. After all, you can’t boost profits by increasing the volume of purchases made by break-even or unprofitable customers.
It’s a multi-channel world, and as more and more businesses interact with their customers across multiple channels and platforms, it’s important for them to look at how their loyalty programs operate in individual channels. After all, different channels and platforms have different characteristics, the customers that interact primarily through a particular channel may be markedly different than customers in other channels, and the actions and metrics that are best correlated with profitability may very well vary from channel to channel.
Far too many loyalty programs reward customers for the wrong reasons, and the ubiquity of loyalty programs has led many a business to implement a loyalty program that is as thoughtless as it is ineffective. Any business that operates a loyalty program but has a vague, subjective definition of ‘loyalty‘ that isn’t tied to tangible ROI needs to take a step back and ask, “Why are we doing this again?“
How customers are rewarded is perhaps the most important factor in building an effective loyalty program. Yet one study found that “a very large percentage of loyal customers — often more than 50% — are not profitable for most companies, because their loyalty is driven largely by expectations of great deals.” As I’ve written before in the context of social media, giving away the farm is easy, but it hardly constitutes ‘success‘.