Building Better Customer Loyalty

Excerpted from Wall Street Journal “Rewards that Reward” by Jean Halliday September 17, 2008

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Used by businesses for more than 25 years, loyalty programs aim to entice consumers to make repeat purchases by offering them rewards — things like discounts on future purchases or points toward free airline tickets.

Since companies continue to expand them, one would think loyalty programs are powerful tools for boosting market share. Our research indicates many aren’t, at least not as designed.

The biggest problem with loyalty programs, we would argue, is that most retailers adopt a one-size-fits-all approach: They use monetary rewards to encourage repeat purchases. But product discounts won’t change buying behavior in the long run in shoppers who value things like personalized service, convenience or shopping pleasure more. These types of consumers may change their behavior to access the price promotion, but they likely will revert back to their regular brands or buying habits shortly thereafter, resulting in, at best, a temporary change in sales and market share.

Loyalty programs also seem to be mainly of interest to existing customers — the heavier, more frequent, more loyal buyers of the store, who tend to live closer to it…

A more effective way to woo customers and maintain their patronage is to offer them individualized rewards, based on what they value. By offering different types of rewards to different groups of shoppers, companies set themselves apart and give people a reason to keep coming back…

Here is how to build a loyalty program with the best chance of paying off:

Group customers according to purchase motivations…

Increase intrinsic rewards; decrease extrinsic ones…

Determine if customers perceive a loyalty program’s rewards to be valuable…

Weigh other factors that may influence the effectiveness of reward types…

Edit by SAC

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