The Pros and Cons of Loyalty Programs

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


5 comments on “The Pros and Cons of Loyalty Programs

  1. Thanks for making me think, Margie. I think reason #2 is like the United States version of haggling – the price on the ticket is never what you pay. In some ways I admit that the psychology of that is fun to me. For example, I feel so clever when I’m able to get a lower price. But I do tend to think of stores who do this as second rate!

    • It’s definitely a very carefully plotted out mind game, right? How much of a discount can you offer while still making a profit? How much MORE can you charge without scaring people away? It’s a tricky dance, but it’s one you must always keep tabs on.

  2. I use loyalty cards all the time, particularly at CVS and the various grocery stores we go to. They are both in highly competitive fields and they certainly have gained my loyalty by offering great deals. I think Mohammed’s numbers are skewed. Remember, many of those discounts are underwritten by the manufacturer, either in whole or in part. And I think the 90/10 figure is not very accurate, though it depends on whether you’re a restaurant or some other type of retailer. All have very different profit margins.

    You definitely need to think through the loyalty thing for your particular business and category, but if done well, it can be a win for everyone.

    • It may be that he was referring to a very specific business and that just didn’t come through in the article. Still, even asking questions like that is an important exercise for a business – and you’re right, if it’s all plotted out, it can be a big win for everybody. Big if 🙂

  3. I truly do not like these cards. I would wish that the prices be reduced, and enough of these cards. Sadly that is not reality. To get discounted prices over non-card customers, a card is required anytime you use a business regularly. To me these are not “loyalty” cards, but “keep-me-from-being-completely-ripped-off” cards.

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