Rewards programs and loyalty programs, do they work?

Rewards programs and loyalty programs, do they work?

Do they work?

How can you ensure your program drives behaviour?

Are you just giving away margin?



Three great questions, which we will try and answer in this overview of loyalty programs.

The key to a successful customer loyalty program or rewards program is that it is attractive enough for customers to change their behaviour, but not so great you erode your margins.

It was a recent trip to a McDonalds drive thru, in which I redeemed my full coffee loyalty card for a Cappuccino that prompted me to write this.  I reflected on why I had kept McDonalds sticky beans and filled my card, yet didn’t bother to collect Texaco petrol stars, despite traveling 30,000 per year by car.  I did some investigation around the topic, including a great article from Harvard Business Review in preparation of this.

It probably is worth us putting the word “loyalty” to one side for now.  Its not about loyalty (defined: un-abiding trust – being faithful even when it is contrary to your own benefit) it is about an incentive for customers to behave in a particular way.

What can your loyalty scheme or rewards card do for you?

They can make it harder for a customer to deflect and go to a competitor.  They are about customer retention.  Psychologists have often referred to “Previous Investment” as a strong driver in behaviour.

Gain wallet share.  Where a customer may buy products from a range of retailers, a loyalty program can give them an incentive to buy it all from you.  For example: Customers locked into Tesco Clubcards, may choose to buy a TV from Tesco instead of Curry’s (where they get no points).   

Add-on Sale

Tiered reward programs or incentive programs sometimes can encourage customers to buy extra product to reach the next tier.  This is common with airlines who operate Silver, Gold and Platinum air mile programs.  As you elevate through the tiers, you gain additional benefits.  This is clever in that you don’t treat all customers the same – you treat your most “loyal” customers better.  This does need managing however, a recent article about Starbucks tier reward program received bad press when a writer was informed that he longer had top tier status, as he wasn’t spending enough, but was not warned in time to address it.  

Although customers are unlikely to buy something they don’t need, they may pull forward a planned purchase for later in the year.  

We have noticed that customers increase their frequency of visit as they get closer to a reward status – for instance get 1 free car wash after 6, or a free McDonalds coffee after 6.  

Costing your rewards scheme. 

This is a challenge at the outset.  Over time you will get good data to support your costings, initially you will be forced to make intelligent guesses.  Let’s look at the McDonalds Coffee scheme as an example.

Scheme: Buy six coffees get one free.

A simplistic view would be 6x £1.49 (money taken) = rebate of £1.49 (assuming I would have purchased the 7th coffee anyway.

Cost of scheme for me = 25p discount per coffee.

My free coffee comes with a sticky bean, which means I only need to buy 5x coffees to get my free coffee next time = 30p discount per coffee.

Other things to consider when costing McDonalds loyalty scheme.

  1. What percentage of reward cards are actually redeemed?
  2. Cost of creating the sticky beans and pull off loyalty card.
  3. What else I buy when ordering my coffee?
  4. The impact on my visit frequency as I get close to filling my loyalty card.
  5. The value annually of changing my habits from coffee shops and service stations for my daily fix of Cappuccino to a McDonalds drive thru.

This shouldn’t put you off, or bamboozle you, but get you to think a rewards scheme through thoroughly before hitting the “go” button.

How easy do you make it for the customer?

There is a limit to how many cards a customer is prepared to carry around with them.  My wife’s purse that was bursting at the seams with loyalty cards, has now been thinned out for the top few, Boots, Costa, Tesco and Nectar.   I carry Tesco, Costa and Starbucks.  My McDonalds card sits in the car arm rest.  Despite that, I am constantly caught out when I visit Costa with only cash in my pocket or a Starbucks that is “not part of the rewards scheme” or pay for petrol and my Tesco card is nowhere to be seen.

What can you do to make the scheme centre on your ‘customer’ not their ‘card’?

Using customer information to drive sales.

Tesco know more about the shopping behaviours of its regular club card member shoppers, than any other retailer in the UK.

They know when you treat yourself, how much fuel you buy, how susceptible to offers you are, how much you spend on your Christmas food shop and what time of the day or night you do it.  Tesco has an enormous department trying to make sense of this data and looking for patterns.  At the last count over 4,000,000 different variations in vouchers and offers was sent out to its customers.  

I had a discussion with a company of approx. 100 staff and a team of 4x marketeers.  They invested £250,000 in a new CRM system that would give enormous insight into customer behaviour from 4 or 5 different contact points in the business.  “What will you do with all this data I asked?”  Ten years on and a running total far in excess of the original budget, the company sends out a generic monthly e-shot.  

Many retailers offering schemes have no proviso to data capture.  This is crazy, customers should sign up and retailers then use email, social media and direct mail to drive customers back into the store.  

Making your scheme work.

Getting started – rewards set in the future are less impacting on our behaviour.  i.e. the further away the reward is perceived to be, the less likely I will participate.  There are two things you can do that will help:

  1. Start them off.  Get customers to sign up and give them some points.  It is noticed that points to get them started induced some momentum.  Be careful, people are cynical, so some effort (I.e. signing up) is required.
  2. Make the rewards accessible.  Give people the option to redeem at £10 instead of £20 for instance.  You may find they will hold on and go for the £20, but the accessibility of it makes the reward program feel more achievable.

Some experts warn against McDonalds approach claiming that a customer that buys 6 cups of coffee giving the 7th free, if there motivated enough to buy 6 there is a pretty good chance that they would have bought the 7th anyway.  Effectively you are giving them a quantity discount.  What might be more effective is giving them a larger cup size or a free cake of pastry because this might generate a different type of behaviour where they start having cakes or larger sized drinks.  

Airlines have been known to bump Air mile customers up to business class and first class to give them a taste of what it might be like to do on a regular basis.

Warm tingly feeling

Nectar noted an increase in spending on their card after pints were redeemed.  It was if customers had a warm tingly feeling or a rush after experiencing the benefits.  American Express note that experiences or luxuries stuck with people, as opposed to more utilitarian purchases to kitchen equipment.  It is important therefore that customers are encouraged to redeem – contrary to what a retailer may think (it’s better they don’t cash them in from my perspective!). If they don’t cash them in, they don’t value them.  If they don’t value them, then they are having no impact on a customer’s behaviour.  

Things to avoid:

  1. Don’t reward the disloyal.  

  2. Avoid double point days and so on.  They are effective another form of discount.  Campaigns that are focused on discounts on return for a card do not promote loyalty to the customer for their behaviour.  They promote loyalty to the card and you can have as many store cards that offer vouchers and discounts as you can possibly carry.  That does not necessarily mean loyalty.  The loyalty should be around a particular behaviour.

  3. Focus on your active users i.e. rewarding the loyal.  Perhaps a tiered scheme is the best way to achieve this.
  4. Focus on profitability.  
  5. Look to bolster your loyalty scheme with things that do not cost you anything.  For instance some airlines offer meals first to their premier customers.  Be careful not to offer something you cannot actually deliver on a daily basis. 

In Summary

Do loyalty schemes work, well yes they can.  But it isn’t as simple as printing a loyalty card.  A business that makes its reward program the centre of its activities, can influence and drive customer behaviour.


Other readers found this interesting…

Steps you can take to keep and grow repeat customers. Increase repeat custom

Creating your Loyalty Program

We can help you create a loyalty program for your store, brand or town.  We have incorporated the latest thinking into making loyaly and rewards schemes work – and run cost effectively.

Contact us to talk about your proposed scheme.

Tel: 01455 203 206

Written by

Corin Birchall is a Retail Sales & Marketing Consultant and founder of “Kerching Retail - helping to make your till ring”. His consultancy works throughout the UK and Europe. Corin is an active writer, coach and public speaker, helping to develop and grow a wide range of businesses & business leaders from Leisure and Retail sectors

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