Why Loyalty Programs Work

Note: This was a research assignment for a class. I have modified it based off the grade I received/since I no longer have to meet grading criteria. The sources I used are listed at the bottom. This is to show some of the marketing research I have done.

Loyalty programs can be used as a way to bring in new customers or boost consumer retention. Brands can learn about their consumer’s habits and preferences and thus give them a better experience, and in return the customer will recommend the brand to others. According to Bond, 72% of consumers say they are likely to recommend a brand with a good loyalty program; and, according to Forbes.com, 75% of consumers are influenced by word-of-mouth when it comes to choosing brands. Additionally, consumers are more likely to return to a brand with a program and spend more to collect points. It is important to remember that without giving the customer a good experience, the program will not be successful, and the brand will not earn the consumers continued business or trust.

Testing should be done first to see if loyalty programs would be valuable to the consumer. McDonald’s tested its loyalty program in a test market which gave them the ability to evaluate their target market’s needs. McDonald’s, who has some of the most loyal customers in the food industry, uses their app to get their customers to engage with them. My McDonald’s, the apps name, allows consumers to order on their phone, make payments, and use promotions or rewards when they order. McDonald’s chief digital customer engagement officer, Lucy Brady, said the application was designed to reward customers for their loyalty and get them to engage with the brand. The continuous engagement gives McDonald’s the ability to learn more about their consumer and as a result can make data based decisions to better serve consumer needs.

Forbes.com recommends four characteristics every loyalty program should have: simplicity, choice, relevance, and excitement. The interface of the program’s website or app should be simple and easy to use because consumers won’t use the program if it’s difficult or confusing to understand. My McDonald’s is a good example as it simple in design and easy for the user to operate, but it still has branding and photos of the food to get the customer excited about their purchase. To empower the customer and more about their preferences, they should be able to choose how to spend their rewards. Since programs collect data about the consumer, offers should be based off their habits. Random and generic offers do not make consumers feel special, while customized deals increase loyalty and satisfaction. Data from Merkle’s loyalty report proves this, with half of consumers wanting rewards based off their activities.

According to Merkle, consumers participate in loyalty programs for discounts and rewards. Furthermore, consumers want to be acknowledged for their loyalty to the brand. Hilton Honors is the top hotel loyalty program. Members of the program receive the lowest price on room bookings through Hilton.com. If the guest finds a lower price on another site, Hilton will match it plus take an additional 25% off the room price. Members also earn 10-20 points for every dollar spent at the hotel and every time they use their Hilton Honors American Express Card. Members of Hilton Honors also get access to other exclusive features like choosing their room, the ability to use the app to unlock their room and check-out, free breakfast, and more. The perks increase the more nights you stay, which gets consumers to spend more money. When they earn higher status, they get gifts, which Merkle found to be the most important way a brand can interact with consumers.

Ashkan Faramarzi and Abhi Bhattacharya did a study on the economic worth of loyalty programs. The number of consumers who use loyalty programs is growing steadily; however, they are not suited for every brand or market. Faramarzi and Bhattacharya found that loyalty programs are better as a defensive marketing tactic in marketing conditions where switching is higher and in the service industry. They also found that loyalty programs have the greatest value to the consumer in markets where they have low purchase risk, as well as in markets with little change over time. Brands with very high levels of consumer satisfaction will not create more value to their consumer by using a loyalty program, so luxury brands are not recommended to use resources to create one unless they want to expand into other markets.

Loyalty programs are an excellent marketing strategy to get consumers talking about your brand and to increase loyalty, customer satisfaction, and revenue. They get customers to stay, say and spend. To keep customers using the program, brands should make their program easy to understand and use, exciting to the customer, and give customized rewards based on their behavior and data the brand has on the consumer. Loyalty programs are a great way to attract new customers and retain old ones, so brands should create one that would be beneficial for their consumers.

Sources:

Tabor, Catherine. “How Brands Can Reward Themselves With A Better Customer Loyalty Program Experience.” Forbes, Forbes Magazine, 19 Mar. 2021,

www.forbes.com/sites/forbestechcouncil/2021/03/19/how-brands-can-reward-themselves-with-a-better-customer-loyalty-program-experience/?sh=288a86631794.

Maze, Jonathan, and Joe Guszkowski. “Restaurant Chains Go All-in on Loyalty.” Restaurant Business, Restaurant Business, 5 Mar. 2021, www.restaurantbusinessonline.com/marketing/restaurant-chains-go-all-loyalty.

Hilton Honors - A Hotel Rewards Program, www.hilton.com/en/hilton-honors/.

Policella, Gabrielle. “5 Examples of Experiential Rewards for Luxury Brands.” The Smile.io Blog, The Smile.io Blog, 19 Nov. 2019, blog.smile.io/5-examples-of-experiential-rewards-for-luxury-brands/.

“Swarovski Crystal Society (SCS) Benefits.” Swarovski, www.swarovski.com/en_GB-CA/s-stories-scs-benefits/.

Foster, Beth. “Are Pay to Join Loyalty Programs Like PC Insider Effective?” The Smile.io Blog, The Smile.io Blog, 30 Nov. 2017, blog.smile.io/pay-to-join-loyalty-programs/.

Faramarzi, Ashkan, and Abhi Bhattacharya. “The Economic Worth of Loyalty Porgrams: An Event Study Analysis.” Journal of Business Research, 13 Oct. 2020.

Bond 2020 Loyalty Report

Markle 2020 Loyalty Report