Loyalty Programs Don't Provide Businesses Bang For Their Buck, Research Shows
Business Solutions Gallup research shows that loyalty programs for small businesses aren’t as profitable as they could be.
American businesses spend about two billion dollars a year on loyalty programs. They distribute plastic cards,give away air miles,offer special prices on milk, and a hundred other enticements, all in hopes of keeping customers loyal. The theory is that cheaper milk is a loss leader, that customers will make up for the profit loss with other purchases, and that the lure of discounts will keep customers loyal. And the odds are good, it would seem, that loyalty programs work.
Do they actually work?
According to a recent Gallup study of 20,000 households, at least onequarter said they participate in programs with a grocer (57 percent), credit card company (47 percent), airline (33 percent), and department store (27 percent).
However, Gallup then asked those thousands of customers if enrollment in the loyalty program made the customer “much more likely” to patronize that company—hence what Gallup calls activated customers—and found that loyalty programs leave a lot of profit on the table.
For example, nearly nine in 10 respondents said they usually shopped at a specific grocery chain in the last year, and half participated in that store’s rewards program. However, only 28 percent were activated shoppers—just 14 percent of the grocery chain’s overall customer base. Only 24 percent of department store customers were activated—a tiny seven percent of shoppers who have a primary department store.
“There is a way to create more value, and it comes from fully engaging these activated customers by building an emotional connection with your program, brand, or product.”
Forty-three percent of credit card customers were activated, which means only 28 percent of consumers with a primary credit card provider were genuinely loyal, and 33 percent of airline customers were activated,a total of 17 percent of the airline’s customers.
This is a serious issue because activated participants are three times as likely as inactivated users to be extremely satisfied with their primary program and are three times likelier to say their primary loyalty program is much better than those offered by competitors in each industry that Gallup studied. There simply aren’t enough customers maximizing loyalty programs, presenting a missed opportunity for American business. That poses an obvious question—why are some loyalty program members active while others aren’t? The program is the same for everyone,so why are the customers different? Gallup’s theory is that the difference lies in engagement.
Engaged vs. loyal
Any company can print up a bunch of plastic cards, but very few recognize the difference between loyalty and engagement. Loyalty can be bought—with discounts and deals– but engagement must be earned. Gallup has been studying customer engagement for years and the results show that engaged customers have an emotional attachment to certain businesses, an attachment built on genuine human interaction, and that the actively engaged are by far more profitable and loyal.
Furthermore, fully engaged customers of primary loyalty programs are at least twice as likely as customers at any other level of engagement to be activated program participants, they’re vastly more satisfied with the program, and they contribute a much larger share-of-wallet—about 12 percentage points larger. “We looked deeper into the data and actually found that activating these participants is not an end game in and of itself,” said Jordan Katz, a customer strategy managing consultant at The Gallup Organization.
“There is a way to create more value, and it comes from fully engaging these activated customers by building an emotional connection with your program, brand, or product.” Ultimately, the data show that while loyalty is good, engagement is profitable. Putting the two together may both maximize loyalty programs and activate customer behavior—and provide the financial benefits of loyalty that two billion dollars are hoping to gain.