Should B2B Firms have Loyalty Programmes?
B2B companies are introducing loyalty programmes to improve customer retention. These programmes lead to higher sales when the frequency of points redemption is high. So, B2B firms can design their programmes to encourage frequent redemptions and target different market segments more accurately. They can also improve communication of the programme and its value to customers to encourage participation.
While most B2C firms have large addressable markets, B2B firms are constrained by having
fewer potential customers. Thus, customer retention becomes all the more critical for the survival of B2B firms. Hence, B2B firms have been paying increasing attention to managing relationships with their existing customers. The use of loyalty programmes becomes imperative as a platform for building and managing strong customer relationships. However, a long-term commitment to a loyalty programme requires investment. As per estimates, it can cost a firm up to 5% of its sales. Given the expense, a study tries to answer the question: Are loyalty programmes worthwhile for B2B companies?
The study found that the frequency of rewards affects sales in B2B relationships more than the recency or monetary value of rewards. Frequency of rewards refers to the number of redemptions made by a customer. Recency is the number of days since the last redemption. Monetary value is the number of points redeemed. Frequency is more impactful as a driver of redemption because the more often customers redeem points, the more reinforcement there is of buying behaviour.
Customers prefer immediate rewards or short waiting periods. Therefore, frequent redemption options increase customers’ “lock-in” to the loyalty programme and the firm. Frequent redemption also leads to a higher motivation to participate in the programme by overcoming the loss of interest that customers feel once the incentive to accumulate points (the reward) is obtained.
The study also found that a higher frequency of reward redemption directly impacts the likelihood of higher sales. Each quartile increase in the frequency of points redemption increases the chance of higher sales by 28 per cent, while a quartile increase in the number of points spent pushes up the possibility of higher sales by 20 per cent.
The study has significant insights for B2B firms that have or are planning to introduce loyalty programmes for their customers. Firms should encourage more frequent redemptions by customers to develop a momentum of points accumulation and redemption. They can also improve communications regarding programme value and redemptions to encourage customers to redeem points more frequently.
They can also design the loyalty programme and rewards list to generate higher sales while managing liabilities. For example, they can reduce the number of reward options at a particular level of points (say, 100 points) and have more vertical reward options (increasing the number of levels at which rewards can be redeemed). This will further encourage customers to buy more to accumulate more points.
Firms can also design loyalty programmes so that the rewards are attractive to customers
and are attainable for customers in a particular segment. For instance, if some rewards require 1000 points but only customers who buy certain high-value niche products can earn enough points to get to that level, then that reward will not encourage other customers to buy more. If there are different target segments, the firm should create separate or multi-tier loyalty programmes.
Finally, the loyalty programme needs constant attention from the firm to avoid eroding the
brand. Often the loyalty of customers is to the rewards programme rather than to the firm offering the programme. A poor experience with the loyalty programme can lead to erosion of the brand itself. Firms can leverage customers’ programme loyalty to build a strong relationship with them and to boost the brand’s strength through a loyalty programme that encourages frequent redemption and is relevant to the target market.