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Improving Growth Through Rewards Programs

Loyalty programs started years ago in the travel industry, where customer spending is high and the incremental cost of rewards is relatively low. The success of these programs attracted other businesses to the idea of loyalty rewards programs, and today the strategy is prevalent among a number of different industries.

In fact, . Such programs are especially attractive to younger consumers.

There are three basic types of loyalty programs:

  1. Earn and Burn. Customers reap the benefits of their purchasing activity (earn) with rewards at preset thresholds (burn). Earn-and-burn examples include frequency programs (buy ten and get one free), points programs (earn and redeem points), and discount programs (members receive discounted prices).
  2. Recognition. Repeat customers are eligible for differentiated services earned on the basis of, for example, total account balance or total amount spent.
  3. Customer-Relationship Management. These programs use purchase data to develop tailored communications and targeted offers. Beyond that, customer-relationship management (CRM) data can inform broader business decisions such as new product development, merchandising, pricing, store design, and more.

Many companies employ or rely too heavily on only one of these types of programs. Each has its own shortcomings. The high cost of earn-and-burn rewards undermines the loyalty margin. Recognition programs limit the number of participants. CRM programs can undercut both incremental share and program size. The companies with the most successful programs use a combination of the three approaches.

In loyalty programs, as in many other aspects of successful business practices, you have to spend money to make money. There is an initial cost in implementing loyalty programs, but the return on investment pays off. Research shows that a loyalty program that costs 3% of revenues breaks even at a 10% incremental share and generates 100% return at a 20% incremental share.

Marketing & Sales
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