The Current State of Loyalty Programs. What Can Sellers Do?

Shalini Prakash, Investment Advisor, 500 StartupsA technology savant, Shalini is structuring transformational solutions through technology

Every business is aware that their client base is the lifeline of the company. A fresh stream of new customers means the potential to grow the business further. So most companies interact regularly with its customers by sending exciting information and/or valuable promotions for high brand recall. The more engaged a business is with its existing customer, the more likely it is to get referred.

Research suggests that it costs five times more to attract a new customer than it does to retain an existing one. A study done by Frederick Reichheld of Bain & Company highlights that customer retention rates by 5 per cent increase profits by 25 per cent to 95 per cent. The numbers suggest that a business should focus more on retaining the existing customers than acquiring new ones, meaning, retaining customers is less costly than acquiring new ones. This gives rise to loyalty programs.

A loyalty or rewards program works on the principle, “A repeat customer gives and gives more.” Having a customer-loyalty plan could help in increasing repeat customers, which, in turn, could boost a business’s revenue. Based on a report by Manta and BIA/Kelsey, a repeat customer spends 67 per cent more on a given purchase than a new customer does, so in turn, a customer feels the need to be rewarded.

This behavior forces businesses to resort to deep discounting or cashback. However, it is impossible for a business to thrive on them. It is a general tendency for people to be attracted to discounts, which is clearly the reason why businesses try to provide cost benefits for customers. However, the question today is, how effective are these discounting policies in the long run?

For example, Paytm mall’s Cash Back
Policy provided cashback on almost 80 per cent of the categories (groceries and daily use products in particular) which has resulted in a steep sales decline this year because of which they have removed cash backs on warehouse supplies.

“Cashback was the biggest attraction for consumers on Paytm mall, and if that is discontinued, it directly impacts sales negatively on the platform,” said Mayank Shah, category head of Parle Products.

In conclusion, in most cases, customer loyalty is proportionate only to the Cost benefits that are provided to them. Deep discounts create traction for itself which ultimately breeds contempt like Ramakant Khandelwal, CMO of Payback India, rightly said, “Loyalty as a concept is a strategic act — you want to be able to retain customers. With bargain hunters, sometimes they’re there for a specific deal and then won’t return. When a program is designed to attract only bargain hunters, you may be missing out on the audience that truly appreciates what you’re doing.”

The new-age customer treats the points as personally earned and expects to use them as ubiquitous as cash

With the dynamic business environment and fierce competition between brands, business is willing to offer a share of his pie to ensure a transaction with the customers. Today, it is the buyer's market. So every seller or business should give the buyer or the customer something back constantly to make a transaction. So, it comes as no surprise that the global market for loyalty programs is expected to reach $201 billion by 2022, representing a compound annual growth rate (CAGR) of four to five per cent, according to Beroe Inc., a leading global procurement intelligence firm.

But, indeed, just offering rewards will not make a program successful. A customer expects contextual, digitalfirst experiences that align with their brand values. An article by Loyalty360, an association for customer loyalty, loyalty programs have to move from Conventional to Contextual Loyalty, Digital to Digital-First, Siloed to Seamless, and From Personalized to Predictive.

Businesses must have a foresight of the future and create policies that would benefit both the parties (Business partners and Customers) rather than focusing only on customers’ gratification!

The new-age customer treats the points as personally earned and expects to use them as ubiquitous as cash. This dictates the needs of the existing loyalty programs-wherein the customer gets freedom, flexibility to use the points anywhere, anytime. In the future, loyalty programs should be structured around a customer's needs- they cannot be bound. We need loyalty programs to move from closed loop to open loop structures. Ultimately, so no matter how magnificent or how cool your Loyalty Program looks, its fate is decided by its customers.