The Loyalty Effect

You have just finished your regular shopping and approach the cashier to affect payment when you are asked the customary question, “Are you a member of our loyalty scheme? Do you have our loyalty card sir?”

A loyalty program, as a critical component of any Customer Relationship Management (CRM) strategy, is generally acknowledged to be part of a tactical marketing drive that rewards faithful buying behaviour over an extended period of time.

From a distance, the basic concept of a loyalty scheme appears relatively simple and straightforward. Subscribing to a such a scheme, and presenting a loyalty card, guarantees entitlement to a discount on the current purchase or an allotment of points that can be used for future purchases. It is about competing in the relationship dimension – not as an alternative to having a competitive product or cheaper price. The major differentiator is he degree of attention to customer requirements rather than the price difference of the product or service in contrast to the competition.

In today’s highly competitive business environment and quasi-perfect information availability about the competition, there is a high probability that all the players in any particular sector treat the customer in very much the same manner. In such an environment, product and price will rarely provide long-term, sustainable competitive advantage since all the players appear to the potential customer to be significantly similar.

A customer loyalty program provides a cost-effective channel through which to differentiate oneself from the competition and in the process enhance customer-retention levels. As a consequence, the high cost of developing new business, in contrast to retaining existing clients, is reduced significantly, in the process improving bottom-line profit.

The business author and strategist, Frederick Reichheld, author of the ‘The Loyalty Effect,’ utilised scientific research to demonstrate how organisations that employ a well-planned loyalty scheme, irrespective of business sector, tend to develop at twice the rate as those which did not. Reichheld coined the term ‘loyalty effect’ and described this manifestation as the outcome of having loyal customers who tend to spend more, cost less to serve, and regularly refer others to follow suit.

However focusing exclusively on the loyalty factor of a scheme is a rather one-dimensional viewpoint of a powerful, two-way, marketing channel.

At a more profound layer, a loyalty scheme represents a (generally) tacit agreement in which a client agrees, within a sanctioned privacy framework, to provide personal information to an organisation in return for reasonable consideration; very often price discount.

We are living in the Information Age; an era in which information acts as core currency, powering the ‘Digital Economy.’ Personal information represents a digital treasure-trove that requires no transaction cost and whose value does not decrease as the supply increases. On the contrary, the more personal information business organisations can amass, the more value and critical insights they can extract from it.

The information collated through a loyalty scheme can be used to develop typical customer-purchase profiles, including likes, dislikes and sentiment, and in this manner enhance ‘Customer Lifetime Value’ (CLV) as well as enable the targeting of other similar customers.

So rather than boosting loyalty over the short or medium term, a loyalty scheme can provide the necessary Key Performance Indicator (KPI) to define the long-term worth and expected value of a customer over a projected long-term period and across various demo-graphics and socio-graphics.

A number of business organisations have perfected this data collection to such a degreethat they can even calculate the estimated ‘wallet share’ and projected potential of a broad range of customers across a given time-period.

So no matter how you look at it, loyalty really pays.