Loyalty Programs-The Good, Bad And The Ugly

January 11, 2007

O.K.. so you are in charge of building loyalty for your business and you are considering a loyalty program.  Remember when life was simple and we had S&H Green Stamps.  I certainly do.  In fact, I was an avid “collector” and used the stamps to get the simple things in life like an ironing board (true!).  Did the S&H program build loyalty?  Yes it did…  But, why?   I believe it was because it was the “only game in town.” 

Of course, the first question you should address is do you really need a loyalty program.  Usually, the less differentiated you are from your competition, the more likely you are to need such a program.  The more unique your product or service is, the less likely you need a loyalty program.

The really big “surge” in loyalty programs came with the airline’s frequent flyer programs.  American Airlines was the first one to offer such a program.  Seemed very simple.  Just fly on American and get one mile for every mile you flew.  When you got to a certain level you could fly for free.  A very simple and effective concept, especially for business people.  Now the ugly part.  Every other airline in the world jumped in and offered a program of their own.  They were all quite similar.  Then the “loyalty program wars” started.  Everyone tried to out do everyone else.  Triple miles were all the rage at one point.  Today, you can earn miles on practically anything you buy.  Again, airline seats are very close to a commodity, so it seemed to make sense for American to offer such a program and “stand out” from the crowd.

So, what is my point?  As can be learned in the airline example, loyalty programs can work but, like the products themselves, they must be unique or you run the risk of competition simply copying what you are doing, thus negating the positive effects of the program and simply adding costs.

One way to avoid competitive programs is to join an existing multi-manufacturer program.  One example of such a program in today’s marketplace is  U-Promise.  A multi-manufacturer program in which you generate money for the college education of your children or grandchildren.  Since category exclusivity is provided, it is extremely difficult for competitive products to provide a similar program.

Of course, at the end of the day, any loyalty program must make sense from an economic point-of-view.  If your business does not increase sufficiently to pay out the expense of the program, you may be wasting your money.

So, there you have the good, bad and the ugly of loyalty programs.  Be careful if and when you launch such a program.  Remember they are not easy to establish and even harder to terminate.

Rich

Bizvice:  Strategy, Marketing & Entrepreneurship

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