Over the past two years, the loyalty and rewards market has experienced significant growth worldwide. This is primarily the result of a pandemic that caused changes in the demand and supply of products and services.
A set of non-standard and unpredictable customer buying behaviors has triggered the exploration of new ways to build competitive advantages. In this view, loyalty has been recognized as the key to the company's continued revenue growth, expanding market share, and building a loyal customer base.
Let's discover eight undeniable benefits of having a loyalty program. Also, learn the five things that all successful loyalty schemes have in common.
Overview of the loyalty program market
If you're wondering whether investing in loyalty systems as part of a company's strategy is a game worth the candle, the answer is YES. According to Cision reports, the loyalty programs market in Europe is expected to grow by 12.4% annually to reach $41410.1 million in 2022. Even more, the said market is projected to register a compound annual growth rate (CAGR) of 11.9% from 2022 to 2026, and is on track to reach $64922.8 million by 2026.
Needless to say, the market for loyalty programs is heading for steady growth, which is sure to encourage further investments.
Why are loyalty programs becoming more important than ever?
The first loyalty programs, which were supposed to be just a test, resulted in a massive increase in the purchase value, even by 30-50%. This was mainly due to the first-in-first-out effect in a given industry. Later, the values dropped to around 20-25% with the emergence of new loyalty programs. Experts noted that loyal customers make more buys than new customers, and this, of course, translates into more revenue for the company.
Given how profitable well-prepared and operated loyalty programs have turned out to be, companies in various industries have begun to take advantage of this solution. Meanwhile, competitors aren't dragging their feet on the matter and have also started investing in building brand loyalty. This is how loyalty systems have become a standard in many sectors. Pawel Dziadkowiec, an expert in reward customer loyalty and loyalty programs, says that there's a business "Maslow's pyramid" in which a loyalty program is no longer an aspirational business need but lies at the very core.
What has affected loyalty programs the most?
Of course, all sorts of positive as well as unfavorable events in the environment affect the way the loyalty systems industry operates. Take, for example, the global crisis caused by a pandemic, the emerging digital transformation, automation, or the popular smart shopping.
The global crisis caused by the COVID pandemic
The pandemic has changed everything when it comes to customer behavior. People are more focused on their expenses and want to get more significant benefits with each transaction. Prior to the crisis, customers made their purchases quite spontaneously. They didn't care as much about in-depth research of the offerings and didn't rationalize every shopping decision to the same degree, especially when they didn't have many options on where to buy.
In a moment of crisis, customers turn to more favorable offers in terms of money and benefits. Consequently, companies with a loyalty program are able to stay afloat because their customers are loyal and more likely to return to them. On the other hand, those companies that don't have a good loyalty program should really be concerned about customers leaving and being taken over by competitors. Unfortunately, they don't have substantive loyalty tools to work on customer engagement.
To sum up, companies that invest in a loyalty scheme can follow up with customers and offer them meaningful shopping benefits, especially when they monitor their spending more closely.
Let's now turn to a positive change that affects loyalty programs, namely digital transformation. Digital transformation includes activities such as:
- Building extensive databases
- Analyzing existing customers
- Tracking customer behavior to discover brand advocates
- Looking at social and loyalty trends
- Creating new ways to reach the target audience
- Using automation when possible
Indeed, new technologies influence the accessibility of the loyalty program. First, it's all about making it easier for the customer to be in the loyalty scheme and, for example, offering a user-friendly and convenient mobile app instead of a plastic card, which can quickly get damaged, lost, or simply forgotten.
As part of digital transformation, you can choose from a wide range of innovative tools, systems, and platforms to analyze customer behavior and deliver the best customer experience it is. These can include the Open Loyalty engine, in which you can first quickly create a loyalty program tailored to your business and then proactively build multi-channel relationships with your customers.
Another truly influential phenomenon is automation. Properly implemented automation within a loyalty program will cause selected customer behavior to trigger predefined system actions. Knowing this incredible possibility, businesses are more likely to choose automation because they can't otherwise act one-on-one with customers. You can use automation to prepare a dedicated offer for your customers or send them a push notification encouraging further interaction in your loyalty program. This way you get some work done without lifting a finger!
The latest innovation related to digital transformation is smart shopping. Customers feel more confident and make better use of their shopping skills. They're more willing to buy online because it's more affordable, but they browse products in person at stationery stores (showrooming). Well, such a situation leads to "offline" and "online" teams starting to compete for the customer's attention to close the sale. Fortunately, you can easily avoid team conflicts by properly implementing a loyalty system that drives and shares sales across all channels.
B2B vs. B2C loyalty programs
There are two main types of approaches to building loyalty, and they're related to the customers' characteristics and their needs. Here I'm referring to B2B and B2C transactions.
Until recently, B2B customers were considered to make rational purchasing decisions based on how products/services could enhance their interests. In contrast, B2C customers were thought to make more emotional purchasing decisions based on lifestyle, desire, and prestige. This, however, has changed.
A recent KPMG report, "Me, My Life, My Wallet," revealed that convenience and product quality aren't enough, as customers make purchases based on their values and integrity. Data shows that more than 80% of people prefer to buy from brands whose actions align with their values. With this in mind, let's take a closer look at the types of B2B and B2C loyalty programs so that you can grasp the difference.
Types of loyalty programs for B2B customers
I bet up-sell and cross-sell can be challenging in B2B transactions. Even though B2B loyalty programs are more restrictive in terms of who can participate, you can still tease your customers by offering rewards, free product trials, or product/service bundles through your well-thought-out loyalty program.
In addition, with a loyalty program in place, you can access invaluable customer data that can help you build data-driven direct communication strategies and achieve higher ROI.
The last notable thing about B2B customer loyalty programs is that you can use direct contact information to get customer feedback. Your team can use these insights to improve your product/service, create better collaboration between teams, or start new business partnerships. Now, the most popular loyalty programs for B2B are:
- Reference Program
- Investor Program
- Coalition program
- Partner Rewards Program
Learn more about the types of B2B loyalty programs, as well as, using a mobile loyalty app to drive B2B sales.
Types of loyalty programs for B2C customers
Suppose your business is based on B2C transactions. In that case, you'd undoubtedly like to identify your customers and get them to buy more products, spend more money, and share more personal information. I trust you'd also like to increase lifetime value and improve customer communication or marketing efforts — this's what loyalty programs for B2C are for. The most popular loyalty programs for B2C are:
- Coupon-based loyalty program
- Fixed-offer loyalty program
- Coalition program
- Partner Rewards Program
In short, B2C loyalty programs are highly effective in engaging, empowering, rewarding, and retaining your customers. Once customers become participants in the program, it'll be difficult for them to let go of your offer.
Loyalty program benefits
Let's cut to the chase and review the top eight benefits of loyalty programs. The best part is that they're legitimate for B2B or B2C, and you can easily see what's in it for you when you choose a loyalty program.
1. Broad customer knowledge
The first benefit of having a loyalty system is that you can systematically build knowledge about your customers. Collecting and analyzing data allows you to learn more about your target audience and offer them more customized deals, ultimately driving sales.
The loyalty program grants you access to two databases that complement each other and give you a 360-degree view of your customer, namely:
- Behavioral and sales data. You can find out the customer's shopping behavior and what products/services they're most interested in.
- Loyalty preference data. You can find out how customers use the loyalty system and how they redeem loyalty points.
Armed with such comprehensive knowledge, you can do more detailed customer segmentation and supplement it with behavior and loyalty preference data. You can see at a glance:
- What the customer spends their points on.
- What rewards are enticing to them.
- What partners are appealing to them (in the case of multipartner programs).
- What they value in your program, such as getting a movie ticket (experience) or buying a vacuum cleaner (physical object).
Knowing the customers' expectations and demands, you can easily create sales forecasts, plan further partnership activities within the company, and dynamize sales and post-sales processes.
2. Higher basket value and shopping frequency
Another benefit of a dedicated loyalty scheme is higher basket value and shopping frequency. In simple terms, it boils down to increased purchases, both in terms of value and frequency of individual transactions. Interestingly, McKinsey's research has shown that the best-performing loyalty programs can boost revenue by 15 to 25 percent a year by increasing purchase frequency or basket value.
To increase your basket value, you can use specialized loyalty program mechanisms so that your loyal customer will buy more from you in one visit. For instance, you can use the loyalty app to offer complementary and enticing products that perfectly match the items in the shopping cart. Easy!
When it comes to increasing the frequency of purchases, there are two ways you can do this in your loyalty program:
- By triggering a purchase need. For example, you can use a loyalty program to offer a discount on a customer's favorite product on their next visit.
- By taking sales away from your competitors. For example, if a customer buys a product three times a month, and of those two times they buy from you, you can increase the frequency of purchase by one, taking it away from the competition.
Bear in mind that you may treat basket value and shopping frequency value differently depending on whether your business is dominated by B2B or B2C transactions.
3. Higher customer retention rate
The goal of any loyalty program is to encourage people to use your brand's offerings, create long-term relationships, and build a loyal customer base. Speaking of a loyal customer base, this one is closely related to a high retention rate when occasional customers turn into loyal ones. A customer retention rate shows that a customer is satisfied with your services and isn't going to give up in favor of your competitors.
You can find important data in your loyalty program to increase your customer retention rate. Take the extensive customer segmentation and tracking option as an example. When you observe that your customer is buying fewer products and less frequently, it's a sign that they're changing their buying habits, which will negatively affect your company's performance. Such a customer then automatically falls into the "risk" segment, and over time into the "high risk" segment. Depending on the customer's risk segment, you can offer different loyalty program-based incentives to address customer churn.
Ensure that your customers feel valued and that the shopping experience is exceptional. Remember that properly executed behavioral segmentation is the foundation for creating personalized customer experiences. According to the McKinsey report, such all-out efforts to refine the shopping experience bring an increase of:
- 10 to 20 percent in customer acquisition
- 10 to 15 percent in long-term customer value and retention
- 20 to 30 percent in satisfaction and engagement
Use all the customer information collected in your loyalty system to engage customers, get them back on the path to purchase, and keep retention rates higher.
4. Effective cost optimization
The other benefit is that you can seamlessly optimize your company's costs and operations with a well-tailored loyalty program. Let's look at a hypothetical situation: If you had 100% loyalty customers who make on-plan purchases, you'd be able to anticipate and reduce many unnecessary expenses and focus only on necessary costs related to production, orders, deliveries, inventory, partnerships, you name it.
Well, having 100% loyal customers is a utopian vision. Still, if you have even half of the loyal buyers in your base, you know much more about them than you do about the disloyal buyers who shop unpredictably.
Another example that perfectly illustrates cost optimization with customer loyalty programs is team management. If you have online and offline stores, you certainly spot "sales peaks" on certain days and times. Based on this, you can adjust the number of employees at a given time so that customers don't feel left out and employees don't feel overworked.
Notice that a loyalty program evolves with your company. This means that if the number of program participants grows, your costs will also escalate. Sure, you'll have to spend more on customer rewards or staffing, but even if the cost of the loyalty program increases, it'll be disproportionate to the revenue growth to which the program undeniably contributes.
To sum up, with a loyalty scheme in place, you can refine your sales and business model and optimize your costs, which is sure to please board members.
5. Successful data monetization
The customer loyalty programs are fueled by data from different departments and areas of the company. Since you collect all kinds of information about your business and customers (first-party data), another major benefit is that you can easily turn it into profit.
If you have information about how much you spend on products from the purchasing department, you can then determine the margin from the sales department. Once you decide the margin, in the next step, you can see exactly how much revenue you'll make from customers from the finance department. All these correlations are factored into the loyalty program so you can create various analyses, forecasts, or define trends based on quantitative/qualitative data.
In addition, you can use the collected information in your loyalty system to find opportunities for joint promotion with external companies and organizations. Sharing non-personal customer data between partners (third-party data) usually makes your loyalty program more detailed and profitable.
6. Increased customer lifetime value
Acquiring a new customer can cost five times as much as retaining an existing one. Loyalty expert, Pawel Dziadkowiec, added that it costs about $500-1000 to acquire a customer, while it costs a company about $50-100 to keep a customer. The Average Customer Acquisition Costs (CAC) is exceptionally high and, in some industries, can reach up to $2,000.
As you know from the previous paragraphs, a loyalty program can effectively retain customers, but it can also increase customer lifetime. Customer lifetime value (LTV) is the average amount of money a customer will spend on your offerings over a certain period. A great loyalty program can encourage customers to make repeat purchases, and they can become brand advocates over time.
7. Reliable business metrics
A loyalty program supports building business metrics and increases information transparency. You'll definitely get the following data in the future loyalty campaigns:
- New and existing loyalty members
- Point issuance
- Intriguing anomalies
- Stock in-kind rewards
With dynamically collected information, it'll be easier for you to build sales forecasts, develop the customer loyalty program, and set basic KPIs for the company.
Learn more about the data collected as part of the loyalty program.
8. Improved customer experience
A PwC report shows that 82% of customers would share personal information for a better experience, and as you already know, customer knowledge is power. If the customer experience you provide is upbeat, people can speak nothing but positives and attract more prospects to your brand so you can have more loyalty program members. Data shows that 74% of people point to word-of-mouth as a major factor in their purchasing decisions. That's why you should align your loyalty rewards programs with a company's overall customer experience.
Don't forget to incorporate the various mechanisms of your loyalty program into every touchpoint in the customer journey. The customer is supposed to remember that your company's loyalty program offers many unique benefits and gives them a final positive impression. Simple as that!
What do successful loyalty programs have in common?
Whether you want to create a loyalty program for B2B or B2C, there are some common features and elements that all winning loyalty programs have. Let's go through them to make sure you're ready to move on to creating a loyalty program.
1. Collective belief in the loyalty program
First of all, there must be a collective belief in launching a loyalty program in your company. It's just necessary to lift internal resistance and keep company morale high. Every department must believe in the program's mission and vision and contribute to it. Lay the foundation well within the company to introduce the loyalty scheme. Convince your teammates and board members that what you're doing is an important investment in the future.
2. A successful loyalty program strategy
Another key to a successful loyalty system is strategy. It can't be random and done on the fly! You need to develop the loyalty scheme sensibly, keeping in mind all the dependencies between behavior motivators, sentiment builders, and engagement activators. In addition, you should involve all teams in the design of the loyalty program strategy so that they feel part of it and are more willing to cooperate.
3. Loyalty program embedded in company strategy
There's no way to build a loyalty system without a green light from the board. Integrate the loyalty scheme into the company's strategic plans. So a typical KPI for a business might be to sell 1,000 products by December, launch a well-rounded loyalty program within seven months of January, and increase annual sales by 30%. This was just a simplified example, but you know the drill.
4. Skilled and well-prepared loyalty manager
When you have the loyalty program, you need the "captain," meaning the loyalty manager. This can't be just anyone, though. A loyalty manager must have a certain set of skills to make a loyalty program a hit. As your business grows, you'd need more people on board, such as loyalty system specialists, data analysts, and other experts focused on the operational work. If you've just hired a loyalty manager, send them this article on proven practices for managing your loyalty program.
5. Use of proven loyalty program platform
The last common point of any successful loyalty scheme will be a good and reliable toolkit for handling and managing business processes and customer data, as well as the loyalty system platform. The right loyalty system platform is one that:
- Is trustworthy and doesn't have long service intervals
- Is secure, provides two-factor authentication (2FA), and prevents break-ins of customer data
- Provides 24/7 support and hotline
- Provides SLA and quick response to system failures
- Enables flexible changes as your business grows
Consider your loyalty system provider first before any further development steps. The truth is that building a loyalty scheme from scratch is complicated and time-consuming. It's also easy to make mistakes, especially human ones, and prolong the project.
For that reason, if your main goal isn't to build loyalty software from the ground up but to build customer loyalty itself, it's better to use an existing platform that has been proven by other customers, such as Open Loyalty. This solution is API first and headless, so you have full control and the ability to create any logic or integration to keep your customer's attention.
Companies are outdoing themselves with ideas for new loyalty mechanisms and customer engagement tactics. This mindset is causing a dynamic shift in the landscape of loyalty programs. The number of loyalty programs is expected to skyrocket in the short and long term due to growing consumer demand. As a result, launching a new loyalty program will truly become an industry standard and will be crucial to success.
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