Do Loyalty Programs Work?

Loyalty programs can be a great way to reward your customers, if done right.

Years ago, my default response at the checkout clerk to “Do you have a [name of store] rewards card?” was “No and no thank you.” I’m suspicious of loyalty programs and generally skeptical of marketing and advertising. In my ideal world, I purchase products or services based on their quality rather than extrinsic incentives. I would frequent businesses who had earned it as opposed to me earning points meant to lure my money into their register. This is how I felt before I was a business owner. Now, by golly, I’ll do anything to tempt money out of your pocket (kidding).

MerchantOS recently announced its integration with Perkville, a service that provides a rewards program for small businesses. I have been curious whether rewards programs actually work, so I was excited upon hearing this announcement.

In this article, I discuss:

  • the obvious question: do loyalty programs work?
  • the planning process for starting a rewards program
  • implementing a Perkville/MerchantOS integration

I’m a loyal customer (but I would be anyway)

I’m not much on eating out, but in my town there is one restaurant where I can find vegan fare that I will eat. I would not describe myself as regular; however, since they started a rewards program, I’ve become more of one. Every so often when I’ve accumulated enough points, I get a coupon in the mail for $10 off, which is basically a free meal for me. The question I have as a business owner is: do my additional trips to redeem these coupons actually increase the restaurant’s bottom line? Or am I getting free meals? More generally, do rewards programs actually increase customer loyalty?

Research on loyalty programs

Before we can answer the last question, we need a definition of customer loyalty. There are academics who spend time thinking about this and creating models of loyalty, but I think a simple idea works:
that customers continue to use your service and/or purchase your goods (provided that they stay in your market).

In the articles I have read, researchers equivocate on loyalty programs’ efficacy. Not surprisingly, the details and goals of the program matter. For example, researchers at Stanford measured how an incentive program at a golf course affected buying behavior (i.e., how often customers played golf). They found that behavior of customers who were already heavy users was not changed; they gave a discount when they didn’t need to be. The program did, however, encourage the light users to play an extra round every now and then. The net result is unclear.

What is clear is that you cannot make a business from a loyalty program alone, unless you’re in the business of selling loyalty programs. A loyalty program can help your business, but you are not likely to be successful purely based on your awesome rewards program. To create a successful retail business, you must:

  • offer excellent service
  • have great products and the appropriate prices for your market
  • be in the right place at the right time

If you don’t have those parts in place, stop reading this and get to work on your business plan. You have more important things to do.

Creating an effective loyalty rewards program

I am not an expert in loyalty programs, so I will share advice from a Wall Street Journal article. The two tips I thought most germane to planning a new program are:

1) Segment your customers by their purchase motivations and tailor incentives for each segment. The article outlines four relevant motivations:

  • economic (i.e., to save money)
  • hedonistic (i.e., to feel pleasure)
  • routine-loyal (i.e., to avoid being disappointed by a purchase by remaining loyal to a favorite brand or store)
  • relational (i.e., to be recognized as a privileged client)

2) Ensure that your rewards are perceived as valuable. The researchers grouped rewards in five categories:

  • economic (e.g., discounts)
  • hedonistic (e.g., participation in games or points exchanged for a massage)
  • social-relational (e.g., special privileges like priority service)
  • informational (e.g., information about a new product or service)
  • functional (e.g., priority checkout or home delivery)

Does my business need a rewards system?

Consider these tips when designing your program, but also consider that you may not need a point-based rewards program to foster customer loyalty. Bicycle stores, for example, often have an affiliated bicycle club that serves as a loyalty program. Then again, a club program may only appeal to the “relational” segment of your customer base. You may have many customers who don’t care to be a member of a club, but they would like to save money. For these customers, discount incentives may be the ticket to getting them back in your store.

Ultimately an effective rewards program is not about people getting points and redeeming rewards. It is about your bottom line. Organized correctly, the program may generate sales that you might not have had otherwise, but there are costs involved. You need some system for tracking points such as Perkville (which costs $19/mo). Depending on your rewards, you might also be leaving money on the table in the form of discounts. Plus, time and human resources will be spent on marketing and organization.

If you’ve decided to experiment with a point-based rewards system, the next section will show you how with Perkville and MerchantOS.

Getting started with Perkville and MerchantOS

First, make a plan. What is your points system? What are your rewards? What are your goals? How will you measure those goals? If the goals are not met, what is your exit strategy?

Next, sign up with Perkville. See this post for instructions. NOTE: once you’ve integrated your merchantOS account with Perkville, you are live and customers will begin receiving emails. The integration does not allow for points to be redeemed on the MerchantOS checkout screen. Thus, if you’ve chosen to give a discount voucher as a reward, you can create a custom payment method to track “payments” with Perkville points in MerchantOS.

Before going live, train your staff on the program. Once you have Perkville set up and your integration complete, you’re ready to tell your customers.

I created a flyer about the program for our store. You can view it here in google docs. You’re welcome to copy and edit it for your needs. I also created a webpage with information about our program. Finally, send an email to your customers informing them of the program. I tried to make ours fun (see image).

See how it goes!

Questions? Comments?

Have you used a rewards program in the past? What was your experience?

One thought on “Do Loyalty Programs Work?

  1. Pingback: Using Perkville for Customer Rewards

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