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Are customer loyalty programs a win-win? - Views on News from Equitymaster
 
 
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  • Apr 18, 2011

    Are customer loyalty programs a win-win?

    Loyalty gets rewarded. Well, almost always. In the retailing world, retailers have unique loyalty programs for their customers. Store chains have an array of membership cards ranging from basic privileges to premium cards. Customers receive discounts, advanced notice on sales and special deals, and other preferential treatment for being a member of the rewards program. In this way, the retailers can keep in contact with their loyal customers and make them feel special. This works in favour of the retailers also as it is only a small group of customers who bring in a bulk of sales.

    The concept

    A membership card is a plastic card with a unique identity that entitles specific customers to additional benefits over other customers. One way to get a card is to pay money and buy it. The other way is to make a minimum one-time purchase of a specified sum (this sum varies across chains) and you get the card for free. Customers obtain rewards on purchases which they can use for buying other goods on discounted prices or even free of cost. There are a few non-monetary benefits as well like valet parking, free home delivery, dedicated lounges and billing counters with specialized staff assistance.

    These days, retailers such as Future Group Pantaloon Retail, Landmark Group, Reliance Retail, Indus League and Shoppers Stop are experimenting with mobile-based mechanisms so that a customer does not have to carry these cards every time he goes shopping.

    Loyalty Programs by Retailers
    Retailer Pantaloon Shoppers Stop Lifestyle West Side More Reliance Fresh Star Bazar Wills Lifestyle
    Loyalty Program Greencard First Citizen The Inner Circle Club West Club More Reliance One Star Power Club Wills

    Advantages to retailers

    Loyalty programs help the retailers in acquisition of information relating to the customers' spending habits. This data is employed for highly efficient inventory management. It enables the companies to identify, communicate, and market to the end users, and also maintain the distributor relationships at the same time.

    It helps in building an emotional connect with the buyers. Retailers have dedicated special days on which members get discount/ more discount than the other shoppers. This goes a long way in creating brand loyalty among consumers. With the same objective in mind private labels were also introduced by the retailers.

    As stated earlier, it is only a small group of customers who bring in a bulk of sales. Thus, retailers benefit out of their focussed efforts on these. They earn a substantial portion of their revenues on account of their loyalty programs.

    Sales from loyalty programs
    Company % of sales No. of members
    (in millions)
    Pantaloon 55% 1.8
    Shoppers Stop 75% 1.9
    Lifestyle 50% 2

    Also, it is much cheaper to retain an old customer than it is to find a new one. A person who has already made a purchase at a retail store has more chances of repeating it. Retailer needs to put in fewer efforts towards retaining him.

    Challenges

    Are they actually loyal? A survey states that 76% of the retailers, and 75% of the shoppers are engaged in one loyalty program. One third of the customers are involved in multiple loyalty programs.

    Maintaining loyalty programs is not an easy task. It requires promotional and implementation expenses. A retailing company may not see the benefits of such efforts for initial few years. If the program does not turn out to be the way it is conceived, it may prove to be quite an expensive failure.

    A dedicated team has to be assigned this task. In the retailing sector, attrition is a huge problem, thus employing the right people for this job is a challenge. They have to be well trained about all the features of the loyalty programs.

    Conclusion

    Maintaining customer loyalty these days is not an easy task. The key to loyalty lies in gaining commitment from customers and involving them to the point where it is hard for them to walk away. It has been proved by retailing companies like Shoppers Stop and Lifestyle that these costly activities result in better revenues. However, the challenge lies in customizing programs for different segments of the shopping community. Also, with more retailers getting into the industry and FDI in retail being enforced, the retailers will face a hard time maintaining absolute loyalty to their stores.

     

     

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