What does customer loyalty mean to you? There are two different definitions that we frequently see. If you ask the average person, you hear that loyalty means more frequent purchases of your product or service. This definition focuses primarily on repetitive, “loyalty-like” behaviors of a customer.
Alternatively, loyalty can be a customer’s preference, driven by a company’s real or perceived value compared to the competition. This type of loyalty typically makes up around 30 percent of your total customer base, and roughly 65 percent of your profits.
Which type of loyalty your program targets depends on which of the following are the focus of its design: bringing in new customers; bringing former customers back; or creating more deep-rooted relationships with customers.
A loyalty rewards program based on discounts generally focuses on the first two and caters to the first definition of loyalty. This is the type of program that gets customers to come through the door to try your offering, generating short-term revenue.
Problems arise if the only reason customers come back is because you are the lowest-priced option. In our experience, the price/promotion sensitive segment usually makes up approximately 20 percent of your customers. By competing in this fashion, are you buying the “loyalty” of that segment? Are you leaving money in the pockets of the remaining 80 percent that don’t need discounts?
Building true loyalty
These “loyalty-like” customers will always want more for less. For longer-term success, you need to move beyond the discount to the overall experience customers have with your brand. If you focus on identifying customers that fit into the second definition of loyalty, you’re finding a core group of people that fit with your business model and see the value that your brand already offers.
A loyalty rewards program can be a great entry point for customers to engage with your brand. However, it can’t be the reason customers keep coming back. Strengthening and retaining the right customers, without discounts, will improve both your margins and your relationships with customers drastically.