Are rewards effective in building loyalty?

In the business press, customer incentives have been reviled as cheap promotional gimmicks, fads, and offering something for nothing. Even though they’ve been around for over a decade, more companies are joining the bandwagon, not fewer. Organizations are pouring millions of dollars into designing and running rewards programs, ranging from airlines offering deals for frequent flyers to telecommunications companies cutting their prices to get more volume.

Reward systems are frequently misunderstood and misapplied in practice. Too many companies approach incentives as short-term freebies or monthly specials when it comes to design and implementation. When used in this way, incentives can provide value by encouraging new and existing consumers to try a product or service. However, they will only produce a small percentage of their potential value until they are structured to develop loyalty.

A rewards program can shorten the loyalty lifecycle by pushing first- or second-years to buy like the company’s most lucrative 10th-year customers only when it’s part of a broader loyalty management strategy. A company must discover ways to share benefits with consumers in proportion to the value created by customer loyalty. The goal should be to create a system that constantly educates customers about the benefits of loyalty and motivates them to earn it. A planned long-term approach is required to achieve long-term loyalty, measured in years.

customer behavior

While it may seem like a simple concept of designing programs to reward and therefore reinforce desirable behavior, the market is teeming with companies that reward words instead of walks. For example, a credit card issuer recently launched a promotion offering new customers an additional 10,000 points that can be used for airline miles and other benefits.

In today’s consumer goods companies, such campaigns are widespread and the results should serve as a warning. Customers have become so used to deals offering everything from a free Florida vacation to a free credit card that they yawn or become experts at getting free stuff when they see a new item. Long distance phone providers frequently give $50 checks or discounts to customers who switch to their services. It is true that the financial market is very actively using this form of promotion, for example, there is a no deposit bonus on Forex, which is very helpful in attracting new customers. For those who haven’t made up their minds about it, this type of promotion could work as a push factor. Customers will be on their way to earning a plane ticket with that initial incentive, so the deal is quite worthwhile. However, there is nothing stopping people from joining, racking up their points, and then leaving. In the long run, this behavior is detrimental to the company.

The reward rules

Traditional small businesses are some of the best examples of establishing customer loyalty through shared value. Successful neighborhood retailers and restaurants have instinctively recognized the broader strategic goal of a good rewards program for many years. These entrepreneurs care about getting to know their best customers on a personal level, and frequently reward them with unique services and attentions, such as informing them when the desired product arrives or offering them a courtesy drink or a special dessert. They understand that providing additional value to lucrative consumers turns them into loyal customers, who then become even more profitable.

However, as companies grow in size and complexity, their ability to identify which customers are the most valuable decreases dramatically. The problem is compounded by the high turnover of sales and customer service workers. Personalized connections with customers, as well as the keen judgment of shared value that goes with them, fade away.

Large corporations seeking to expand market share, size, and efficiency strive to make up for lost personal ties by targeting valuable consumers through database marketing or advanced market research methodologies. However, for such investments to pay off, companies must adhere to the following shared value principles.

customer equality

Recognizing the benefits of loyalty requires recognizing that not all consumers are the same. A company must provide the highest value to its top customers to improve loyalty and revenue. That is, customers who help a business make more money should get rewarded for their efforts. As a consequence, they will become even more devoted and profitable. For example, a company may consider offering better rates to consumers in the long run. Credit card providers often offer lower interest rates to customers with higher credit profiles and payment histories.

State Farm Insurance offers individual savings on their auto insurance plans based on long customer retention and clean accident history. It also prevents companies from dealing with problem drivers by refusing to offer competitive rates to that group of customers. As a result, State Farm’s rivals are forced to serve a less attractive base of surviving consumers.

Unfortunately, most businesses wrongly treat all consumers the same, offering items of similar value no matter how much they spend or how long they’ve been a customer. A company that provides mid-value products and services to everyone takes time to oversatisfy less profitable customers and to oversatisfy loyal customers who are more highly valued. The end result is predictable. Consumers with higher expectations and more attractive options leave, while less desirable customers remain, lowering company profits.

The Value Generated

Most companies start rewards programs without considering their own requirements or the economics of cause and effect. They have not considered the connections between the value provided to customers and the value generated by the company. A rewards program shouldn’t give something away. The profits may be fictitious, but the costs are real.

However, a closer look at the actual restaurant offering indicates that the cards have more to do with cash management than customer loyalty. Transmedia pays the restaurants in exchange for significant discounts later on. In fact, he is lending money to restaurants at exorbitant interest rates. The deal appeals to restaurants with financial difficulties. Stable businesses that are under a lot of pressure to compete have also joined. Restaurants participate in discount card programs to attract new customers and take market share from competitors who don’t. However, the structure does not guarantee that consumers will dine out more often than before or concentrate their clientele in a particular restaurant, which is necessary to produce genuine value.

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