Are Customer Loyalty Programs Useful for Retailers?
To combat the continuing rise of e-commerce retailers, many brick-and-mortar retailers in the US have turned to their reward/loyalty programs. These programs are highly popular, with 89% of the population enrolled in at least one reward program. In India, too, such reward programs are gaining popularity. Brands like Shoppers Stop (First Citizen's Club), Titan (Encircle) and Big Bazaar invest in loyalty programs to gain and retain customers. However, there is a lack of consensus on the benefits of such programs. A study based on pre-and post-introduction data of a loyalty program at a major US grocery retailer has tried to resolve this debate. It answers the question: Does the introduction of a customer loyalty program affect category sales and profit?
A loyalty program or reward program refers to an incentives-based initiative by a store through which “members” are offered benefits over “non-members”. These benefits include extra discounts, early access to sales or new launches, points that can be accumulated and redeemed for cashbacks or other rewards.
The study found that introducing a loyalty program has a positive effect in the case of most categories. In particular, sales increase the most for products with high penetration, high frequency of purchase, utilitarian features, and inability to be stockpiled. Excellent examples of this are staples like butter, cereal, laundry detergent, amongst others. Products like these allow customers to reap the maximum possible benefits through regular and frequent purchases. In contrast, the effect is negative for items that are either purchased infrequently, by fewer customers, as impulse buys, or can be stockpiled. Examples are grooming products, fabric softeners, high-end food products, etc.
Therefore, retailers should focus their marketing efforts on their high-penetration and high-frequency products post-introduction of a loyalty program. At the same time, they need to prepare to deal with the negative performances in the low-penetration and low-frequency categories. They can implement different pricing policies to achieve this, investing in marketing for the high-performing categories and using competitive pricing for the low-performing ones. For example, they can provide 2X points for commonly purchased grocery products and have a sale on imported food products.
However, the study also found that the effects of loyalty programs tend to be more prominent in the short term. The increase in sales is the highest right after the introduction of the loyalty program. Over the longer term, the program’s effects dissipate. There are a few things that managers can do to ensure that this does not happen.
First, they can design marketing campaigns that increase category reach and promote private labels. Second, they can anticipate shifts in sales of various categories and adjust displays, inventory, promotions, etc., accordingly. Third, they can utilise the customer data collected by tracking members’ purchases to tailor their customer communications and offerings at the individual or household level.
Although this study is more relevant to the US market because of their higher levels of preference for loyalty programs, its findings can be used pre-emptively by Indian companies utilising or introducing loyalty programs here.