Sunday, January 18, 2009

Why Loyalty Programs Suck

I personally do not consider loyalty programmes as coming under the banner of CRM. The main reason for this is I come from the school of thinking that CRM is about analysing existing relationships with customers and modifying business processes to improve future communication. That is, understanding the needs of the customer and then anticipating future needs.

Loyalty programmes do not do this. They are simply a trick where the customer is duped into thinking they are getting something for nothing, giving them an incentive to return. This is not management of the customer relationship any more than putting up signs saying 'closing down sale' is CRM.

So here are my three main reasons why I think loyalty programmes should be avoided by all parties.

There is no real reward in a loyalty program
The promoters of loyalty programs claim the customer is being rewarded for loyalty. This is rubbish for the vast majority of loyalty programmes. Unless the business can derive some kind of economy of scale through the employment of the programme, all additional costs (the cards, stamps, advertising, 'rewards', back end systems to manage it etc.) will go one place and that is onto the price of the items being bought by the consumer. 

Loyalty programmes do not reward but simply introduce an additional cost to the process, which is occasionally offset for frequent purchasers and not offset at all for people not in the programme. If a competitor has access to the same supplies at the same cost, they can make the same product for cheaper, if they are not using a loyalty programme. With low switching barriers, the infrequent customers will go elsewhere and save a few dollars. In other words a loyalty programme drives customers to low cost competitors, promoting disloyalty.

Loyalty programmes are easily copied
No sustainable competitive advantage can be obtained from a loyalty programme. The main reason for this is it can be easily copied by a competitor if, despite all reason, it does derive benefit for a particular business. Once every competitor in an industry has a loyalty programme, they are all stuck with the same additional costs and offer nothing that is not offered by their competition. Everyone loses including the customer.

Loyalty programmes hinder business growth by tying up cash
If I have a loyalty programme and people can claim against it, I need to keep assets on hand to cover the possible redemptions EVEN IF no one claims. In reality this means a company with a loyalty programme has significant amounts of money sitting in a bank account doing very little when, without the loyalty programme, it could be employed into building real benefits for the customer. The average cafe would not worry about this, but for larger programmes, such as airlines, this is a significant problem where literally millions of dollars sit around idle.

To get around this, points used to expire. If you did not use your points within a certain time, they disappeared and the underlying cash was released. These days clever marketers think it is smart to have points never expire and then wonder why their marketing budget is getting smaller and smaller each year.

If you need a way to tie up cash, provide no sustained competitive advantage and burden you and your competitors with additional costs, a loyalty programme is a great start. Smart players in an industry will not copy their competitors who go down the line of loyalty programmes but rather employ the funds they would spend on such a project elsewhere. It could be in maintaining the product price while others are forced to increase theirs. It could be in increasing the price to match the loyalty programmes but then investing the additional profits into the business to reduce costs elsewhere, providing sustainable lower costs of production. It could be on additional advertising to drive demand. Anywhere is better than a loyalty programme and if you really want to generate loyalty in a business, give the customer something they genuinely want, not smoke and mirrors.

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