The customer loyalty challenge

A customer loyalty scheme can be a highly effective marketing tool - but do they work for everyone? A checklist of criteria is offered for deciding whether a loyalty scheme is appropriate for your company.

The customer loyalty challenge

A customer loyalty scheme can be a highly effective marketing tool - but do they work for everyone?

Paul Hawkes
WITH a new scheme being launched every week, there is no hotter topic than customer loyalty programmes. From In terms of 'working', we do, of course, mean profit generation. For example, British Airways has calculated that a frequent business flyer is worth in excess of £10,000 over his or her lifetime, and introduced a four-tier loyalty programme, Executive Club, to ensure that they held on to them. First Direct, the UK's first branchless bank, now has around 550,000 customers since its 1989 launch, and is increasing at the rate of 10,000 per month. The company has just announced the launch of a loyalty programme based around its Visa credit card. Instead of constantly having to recruit new customers, businesses are becoming more aware that loyal customers buy more frequently, tell their friends and relations, require less promotional investment and are cheaper to cross-sell or up-sell - loyal customers have an above-average lifetime value. It does mean, however, that all customer loyalty programmes offer rich returns for every business sector. Instead of developing long-term profit, they can simply become a major marketing cost, in effect reducing the profits to all through increased overheads. Abram, Hawkes has conducted research to ascertain the competitive characteristics of those companies employing loyalty schemes in the UK today. The study included over 300 companies in 20 industry sectors, examining approximately 100 loyalty programmes. To focus on loyalty programmes alone, the study excluded customer communications, where the same promotion or communication was sent to every customer, and sales promotion, where the benefit to the customer was short-term. The results clearly demonstrated a number of common strategic rationales for the use, or non-use, of loyalty promotions. Suppliers who enjoyed a monopoly, for example, simply have no need to incur the expense. Companies with cost leadership can create a loyal following simply by maintaining low prices, while high fashion products are bought simply because they are fashionable. Companies selling a highly differentiated product tend to attract loyal customers regardless of promotion, while low average transaction value products can fail to generate sufficient profit to fund a programme. The industry is also important. Emerging or growing industries will be creating a market, and so acquiring new customers will take priority over catering for existing customers. Some industries, such as retail banking, may also find that their reputation suffers from the introduction of a loyalty programme, as customers question investments in loyalty programmes while simultaneously incurring penalty charges for being overdrawn. It is dangerous to generalise about the value of any promotional technique, whether it be to attract new customers or retain those already acquired. Nevertheless, the characteristics of those loyalty schemes currently deployed in the UK clearly indicate a number of criteria that should be considered prior to implementation. Abram, Hawkes has developed the following checklist of criteria to provide a broad indication as to whether a programme might be appropriate, based upon the behaviour of those UK organisations which have currently taken the plunge. The table shows four different industries put to the loyalty test, assessing the appropriateness of a loyalty programme against the above criteria. There can be, however, no hard and fast rules - each company must decide based upon in-depth research and the evaluation of its own, unique competitive position. A customer loyalty programme can prove an effective weapon in a marketing armoury, providing it is used strategically. Otherwise, businesses may find that they are attracting customers who are deal-loyal rather than real loyals, or that the cost of the loyalty programme becomes nothing more than an ongoing marketing overhead, instead of an investment in the lifetime value of a customer.

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