Every time I go into my Panera to buy my favorite treat – a pecan braid twist – I’m offered a Panera card. Whenever I go to Kohls, I’m asked if I want a special Kohl’s credit/discount card. A trip to Subway is hard to get through without being asked if you want a Subway card (buy x number of sandwiches, get the next one free). We’ve all become pretty accustomed to these loyalty program tactics. Harvard Business Review recently raised the question that is probably on everyone’s minds. Does this tactic actually help to increase sales?
Why have a loyalty program?
A lot of companies feel that offering a loyalty program or a rewards program is a good way to say “thank you” to customers. Almost any business can offer something akin to a rewards program, whether it’s a discount after x number of projects or a free service/product after x number of purchases. The reasoning also goes that if a person knows they will get some sort of reward after x number of purchases, they are going to be more willing to make those purchases. It’s all about proper motivation.
So what’s the problem?
So far, all of the reasons for offering a loyalty or rewards program sound pretty good, right? You win because you know that your customers are going to be motivated to make at least enough purchases to get their discount. Your customers win because they can work towards getting something for free, and they feel that you are appreciating them and their purchases. What’s the downside here?
In Rafi Mohammed’s Harvard Business Review article, the bottom line is brought up as a clear victim of the loyalty program. Mohammed writes,
A typical $100 sale transaction breaks down to $90 in costs and $10 in profit. A 5% loyalty discount — $5 off a $100 sale — results in a 50% decrease in profits. The costs remain the same, but instead of earning $10 from the sale, profit is reduced to $5. What appears to be a small discount — in this case, 5%, — can significantly impact profits. It’s important to share with your front-line workers how costly these discounts can be to the company’s bottom line.
Additionally, there is the sense of value that you want your company to exude. If you charge a certain amount for a service or a product but then you are willing to sell it at a massive discount or offer it for free, what does that say about the price you usually charge? This same logic creeps into mind when a retailer offers a 50% discount. You get the distinct impression that even at 50% the retailer is still making a profit, so why do they need to charge half again as much?
Finally, there is the question of true loyalty. Will a customer rush to get to that free or discounted item? Maybe, maybe not. Once they get that discounted or free item, will they continue to support you? Maybe, maybe not. And if everyone can earn loyalty points, are they really going to feel “special?” Probably not as much as if the loyalty program was more customized and selective.
So what do you think? Has your company ever considered offering a rewards or loyalty program? How do you weigh in on this subject? We’d love to hear your thoughts!
Image Credit: http://www.flickr.com/photos/simpleillustrations/6424666159/ via Creative Commons