Pros and Cons of Popular Customer Loyalty Programs

Programs rewarding customer loyalty have surged in popularity across many different industries in recent years. Proponents say such programs create a lasting bond with the customer, create opportunities for selling, drive interest in new products and services, and prevent churn among the most loyal customers � the 20 percent of customers who contribute 80 percent of revenues. These programs also allow marketers to obtain important data about their customers and create incentive programs customized to reach various market segments, according to a recent article in Sloan Management Review.

Despite their popularity, loyalty programs such as airlines� frequent flier miles have come under fire by critics who claim that they do not fundamentally change behavior. Instead, they merely bribe a customer to purchase again. These critics contend the �top 20 percent� of customers that many of these loyalty programs target are, in fact, not necessarily the most loyal buyers, nor are they the most profitable. These criticisms are compounded by evidence that loyalty programs are often established only in response to a competitor launching a similar initiative, and are not the result of a proactive strategy.

When considering whether or not your company should create a loyalty program, consider the following:

  • Will your program have a unique offering? If it can easily be matched by a competitor, you can be sure that it will soon be countered and a lose-lose situation will result.

  • Do your firm�s core customers purchase several different brands? For them, a loyalty program is unlikely to change behavior in a cost effective manner.

  • Are the loyalty rewards aligned with your brand�s core values? Loyalty programs provide expensive benefits to customers who may not be in line with a brand�s positioning.

  • Does your program target the right customers? Research shows that loyalty programs targeting the wrong segments of customers are almost certain to cost more than they bring in.

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