• Ivaylo Yorgov

CX Science: loyalty programs do work


What:

  • Loyalty programs do work: companies implementing them saw a 7% increase in sales and 6% increase in profits in the first year.

  • Tiered programs and earning mechanisms increase the return on loyalty programs.


Now what:

  • If you are wondering whether to have a loyalty a program at your company or not, go for it.

  • Make it a tiered one or implement an earning mechanism. There is some evidence that these are substistutes.



If I were a CX leader, I'd be in two minds about loyalty programs.


On one hand, it makes intuitive sense that these should work. They give people benefits and make them stick to your brand. It's a win-win - what could go wrong?


But then again, do they really do that? This study reports that a consumer is part of 14.8 loyalty programs on average, but takes part actively in less than half of them (6.7). Considering how much would a loyalty program cost to implement, is it going to be worth it?


Science to the rescue - loyalty programs do work. Read on.



The numbers you've been looking for


Unhappy with the state of the current results on loyalty programs, Malika Chaudhuri, Clay M. Voorhees, and Jonathan M. Beck embarked on a cross-industry multi-company study of the effects of loyalty programs on both sales and profits. Working with a sample comprising 322 US publicly traded companies, they set off to measure the return on investment of loyalty programs, whether the effects are sustainable on the long-term, and which program designs work best.


The results: companies that introduced a loyalty program enjoyed the following benefits:

  • First year: 7% increase in sales and 6% increase in profits

  • Three years: 11% increase in sales and 6% increase in profits


As the authors point out: "for a firm like Expedia that experienced annual sales of $3.45 billion and annual profits of $2.69 billion in the year prior to introducing their reward program, they could expect to experience a relative increase of $241.5 million in total sales and $161.4 million in gross profits in the year following the LP introduction that could be attributed to the program launch."


A word of advice to help manage expectations better: don't expect immediate increase in profits. Sales increase is almost immediate - in the first quarter after introducing the loyalty program - while profit growth becomes significant in the second quarter after the introduction. Quite soon still, just not immediate.


From my perspective, this puts the question whether loyalty programs work to rest. They do. Whether they would work in your particular company is a matter of execution, of course. At the very least, now we have a good benchmark and evidence that others have done it successfully.



How to yield even more benefits?


Here is what you can do to make your loyalty program even better:

  1. Tiered programs increase the return on investment of loyalty programs. Introducing different tiers makes it possible for customers to increase status. This results in a differential increase in sales and profits above the baseline for loyalty programs.

  2. Introducing an earning mechanism also adds to loyalty programs' return on investment. Allowing customers to "earn points for some achievement or redemption" works to the program's benefit, thus increasing sales and profits.

  3. Note that there is some evidence that these two designs are substitutes, i.e. their effect is not compound. It might not be worth introducing both at the same time.

  4. Introducing a membership mechanism is also effective in driving sales growth, but not so much in increasing profits. As the authors hypothesize, membership-based programs most likely also require higher costs to implement which decreases the return on investment. Still, I'd recommend not to discard them - there might be good reasons to introduce such mechanics beyond the pure financial impact.



There you have it: loyalty programs yield 7% sales growth and 6% profit growth in their first year. Imagine (or better yet - calculate) the impact on your business a good loyalty program can make.


My best wishes for a great day ahead!


CX Inspirations - card 12
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