Research shows that it costs up to five times more to acquire a new customer than retaining an existing one. It has also been proved that a 5 percent reduction in customer defection rate can increase profits by 25 to 85 percent, depending on the business. In the US, only 12 to 15 percent of customers are loyal to a single retailer, but even this small percentage generates between 55 to 70 percent of the sales, according to the Center for Retail Management at Northwestern University.

For a long time, retail businesses focused on expanding their customer base without any particular attention towards retaining them. But businesses now realize that it is more important and profitable to focus on customer retention and building customer loyalty.

Foundations of Loyalty Programs

A key contributing factor to this shift in focus is the shift in customer buying behavior. Today, customers are smarter and more aware of their buying options. The increase in market choices and accessibility of information to the customer posed a difficult problem to retailers -- how to make the customer come back.

Companies came up with a unique marketing strategy that led to the worldwide phenomenon of loyalty programs. While these programs today have become a system of advanced analytics, the idea of customer loyalty can be dated back to 1793 when a US merchant started giving out copper tokens which could be collected and exchanged for items in the store later. This rudimentary practice was lost in the course of industrial developments, until 1981, when American Airlines launched the first full scale loyalty marketing program of the modern era with their frequent flier miles. The airline industry was the first to adopt this practice and it took another two decades for the system to become a necessary part of retail business.

Today, some retailers find that as much as 65 to 95 percent of their sales go to members of loyalty programs. According to the Colloquy Loyalty Census 2013, loyalty program memberships totaled close to 2.65 billion in the U.S. in 2012.

Avoid the 'Points' Trap

There are multiple reasons for a customer switching brands -- better products, better discounts, accessibility, individual or personal reasons of the customer and so on. Though it is difficult to map and take into account the preferences of each customer in a retail set-up, there are modern loyalty programs with advanced analytics and mobility that are capable to understand customers, increase accessibility and map competition. However, when marketers get to engage a loyalty program, it mostly turns out to be another "points" program, which is hackneyed and jaded. These programs end up as a promotional method of offering delayed discounts.

Instead, loyalty programs need to target purchase behavior and customer’s engagement with the brand that will help in getting the right information from the customer and building the right strategy to reach out to them. Some of the aspects that can increase the success quotient of a loyalty program are:

  • Segmenting customers in different tiers based on their spending proclivities. This can help retailers design customer-specific promotional marketing that delivers personalized offers based on visiting patterns, behavior and preferences. It also leads to controlled upgrading of customers through the tiers.
  • Loyalty today needs to go beyond discount. Retailers can convert points and discounts into personalized services such as charity programs, promoting eco-friendliness or other CSR initiatives, happy hour shopping, informative material on their areas of interest, etc. This gets a customer to associate with the brand beyond purchase.
  • Loyalty programs should also allow customers to personalize their rewards. They should be able to download their points or rewards into discounts or offers that are of value to them and use at their own convenience. An example of this is the emergence of different clubs such as Baby Clubs, Home Décor Clubs, etc. This is also a way for customers to inform retailers of their unique preferences.
  • In a fast moving world, customers want to be appreciated for their patronage instantly at the Point of Sale (POS). Many retailers collect information about customers and their shopping habits. With this data they get an almost accurate picture of consumer demand that helps to design specific promotions based on data analytics and deliver it in-store. POS is soon becoming a sophisticated tool capable of handling this massive amount of customer and business intelligence. Retailers can leverage the POS to do suggestive selling based on this analysis.
  • Larger retailers who have multiple customer touch points can integrate the loyalty program to maintain consistent messaging through multiple channels.

Given that the objective of a loyalty program is to build long-term brand equity with customers, it is therefore imperative to take a strategic insight into the loyalty program that can build a lasting relationship with the customer. Businesses should understand that loyalty is a long-term initiative and it requires substantial upfront investment. This demands retailers to do a comprehensive evaluation of the solutions available from loyalty service providers. The evaluation should ensure that the solution fits well to the business attributes, is flexible and supports integration with other enterprise applications.

The evidence is clear. Companies receive proven bottom-line benefits from establishing long-term customer relationships, and those companies that invest strategically in improving customer loyalty can expect significant gains in profitability and other financial measures.