SME Update - Loyalty vs Rewards

Rewards vs Loyalty programs. 

I regularly get asked by small to medium businesses whether they should consider joining this loyalty program or this other loyalty program. Is it worth the cost and how can you judge the effectiveness? I am writing this blog to explain in detail what a small to medium businesses should consider when looking at a program for their consumer base.

Firstly - It is highly likely that the solution you are looking at is not a loyalty program, but a rewards program. They are easier to implement and also generic, hence easily sold. Interestingly, they use the word 'Loyalty' in most of their branding material, but in reality, when you dig into the detail, they are a rewards card. In fact, they are usually high margin rewards card with a high cost. Loyalty and rewards are two vastly different structures and you need a loyalty program which may or may not have a rewards component.

What is the real difference between the two and does your business actually need either?

The question can be answered by the following question.

Are any of the following items of interest?:
1) Increasing frequency of consumer purchase.
2) Increasing average purchase value or duration of consumer?
3) Do you want to increase breath of offering for your consumer?
4) Do you want to leverage more consumer data?
5) Do you want to lower your costs of goods sold?

If you answer no to all, you do not need a loyalty or rewards program. An example of this is a real estate business. Their customers are infrequent and an extremely high percentage of customers are single visit per multiple year.

What are reward schemes?

There are literally thousands of schemes in this segment as they are actually easy to implement. You charge the merchant as little as 0.7% through to 10%. The big names in the business are Visa, Mastercard, Amex, Flybuys through to the lesser known more expensive ones like Lyoness. They are an extra cost to the merchant, so the merchant who services these cards has to consider this in their margin planning and typically has a slightly higher price to incorporate those costs. In general, these cards profess to increasing your revenue by driving customers to your business which more than offsets the cost of the card lowering your marketing overheads as you only pay for it on 'success'.

Issues with reward schemes?

Longevity - The more expensive the scheme is to the merchant the more they become noncompetitive on price and also the more likely they are to drop the scheme. Numerous expensive rewards schemes have come and gone over the last 15 years. Some of the cheaper ones, just linger on as the cost to the merchant is bearable, but the benefit is also intangible and they are loathe to drop them due to perceived risk.
Margin erosion - These schemes take off the top and can be more than your normal marketing expense as a % of revenue. Does it actually translate to increased revenue. For lower margin businesses, that may require a doubling of revenue just to break even.
No Loyalty - They are reward schemes, they do not create attraction and retention. At the lower end, as a customer, do you choose a location just because they take Amex or are you just happy if they do so you get a few extra points?

So, what is a loyalty Scheme?

A well executed loyalty scheme is different for all industries, but it does the following:
1) It is inclusive.
2) Status needs to be earnt and the result is recognised (Potentially publicly).
3) It creates recognition of the individual.
4) It has multiple tiers (gamification) which confers multiple levels of high perceived value rewards. It elevates the customer to a higher perceived 'social status'.
5) It gives the customer a value differential. The perceived value the customer receives by being included in the club is significantly higher than the actual cost. In a similar fashion to elegant currency in a negotiation.
6) The rewards that are given are unobtainable easily with money and are conveyed graciously to those with elevated status.

These types of structures as a loyalty program in your business will drive up frequency and breath of purchase and result in a higher average sale as well.

How do you structure those 6 points for your business? You go back to the customer and analyse their journey and what they value. Having done this analysis numerous times for small to medium businesses, it is the same analysis whether you are a electrical supply company for tradesman, a caravan park or a main stream retailer. All businesses must ask the same questions as their customers are generally human. What do they truly value from your business?

If you would like to have a chat about what type of program would work for your business, give me a call. I love these types of business model / consumer discussions.

Have a great day!


Ross.