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It can be argued that customer loyalty is the single most important aspect of business success. Every business knows the impacts of losing customers, and most agree that any added incentive that helps to improve their customer’s loyalty, is a huge plus. Well, there is one customer retention plan that not only keeps customers coming back for more, but actually encourages them to provide a company with real time, market and competitive information. So, what is this retention plan, and how does it work?
Loyalty Programs are no Substitute for Good Customer Relationships
Spend money with certain retailers or use specific credit cards, and purchases earn points which can be exchanged for ‘free’ travel and other goodies. Since nothing’s really “free” the customer is actually providing the funds that are used to purchase their loyalty.
“Loyalty” is supposed to mean fidelity, attachment and affection. It’s a lot more than just a financial relationship.
In today’s business environment there are two distinct types of customers. The first type is driven exclusively by price; the second is looking for quality and value.
There’s an irony in that loyalty programs target the first category as well as raising the prices they pay. In the meantime, customers that want quality and value are at risk of being overlooked or at least not given their fair share of attention.
Loyalty programs force businesses to compete on price. This can be the price of the goods purchased, but it can also be the value of their giveaways. If what a business gives away is the best (i.e. most expensive) bonus on offer it will in theory enjoy the benefits of creating customer loyalty.
However, this purchased loyalty is fleeting. Once the competition tops a company’s offer, its customers are likely to defect to a rival. It may sell the same products at the same or even a slightly higher price, but it can get away with providing lower standards of service because of the loyalty it buys.
Loyalty programs don’t always work
Writing in the Ivey Business Journal, Mukarram Bhatty, Rod Skinkle and Thomas Spalding review the results of a Canadian survey of 1500 consumers – Consumer Eyes 2000, that found “…the enticements businesses usually employ to create and maintain loyalty are not effective.”
The authors noted that loyalty programs might induce customers to make a repeat visit, but they do not create customer loyalty. Not surprisingly, they concluded: “Our study shows that true customer loyalty is driven by a strong, trusting relationship between the customer and the business.”
To pursue customers who chase reward programs is expensive and to count on their loyalty is dangerous. Most consumers participate in more than one loyalty program on a regular basis. It might be through having multiple points-earning credit cards or simply by joining the credit processes of individual retailers that offer bonuses.
Genuine customer loyalty is essential to long-term growth. It is the basis for a businesses’ profitability. Historically customer loyalty has been created by attributes of the enterprise – its products and services, rather than by the provision of unrelated customer benefits.
The motivating factor of ‘something for nothing’ is so powerful that it can break what were once enduring relationships between customers and suppliers.
In many ways loyalty programs are a compensatory vehicle for shoddy products or services. Why else should management decide it needs such a program?
But these ‘loyalty programs’ don’t have the power to overcome the deficiencies of bad products or service in the longer term. They won’t compensate for operational shortcomings like poor delivery systems or inconsiderate sales staff.
And just like in the days of trading stamps, there are businesses out there today with loyalty programs they’d like to dump but they’re afraid to be without them. Won’t customers defect en masse if they don’t get their free goodies?
Some loyalty programs aim higher
There are some loyalty programs with a genuine basis – identifiable by their provision of benefits related to their own products and services and targeting long-term customers as a means of both rewarding and retaining them.
Loyalty programs are also used by ‘commodity’ businesses as a differentiator. Airlines are just such a business. They’ve have become a commodity at the economy level, all providing the same miserable service like flying cattle cars.
The argument goes that loyalty programs are needed so customers can tell one airline from another and will choose according to their loyalty programs.
Airlines and other businesses need to return to basics. Loyalty programs are being used to compensate for reductions in standards customer service, and this situation doesn’t create a customer/supplier relationship of any lasting value.
Microsoft’s Mid-Size Business Center provides some very good advice on customer loyalty programs. It advises:
- Don’t get sidetracked by creating customer retention programs that reward frequency.
- Get inside the customer experience to understand why they value your products and services. Then, plan rewards to match what your most profitable customers truly value.
- The best customer retention programs — whether aimed at businesses or consumers — engage their customers emotionally.
Consistently well-delivered products and services at prices that represent genuine value will be a much more effective device to create long-term customer loyalty than any add-on program like those proliferating in the current marketplace.
The Customer’s Rebate Plan
Like every business, customers just want to save money. While everyone wants the lowest possible price, most understand that there is a give and take. However, for those companies that simply offer the lowest price up front, without any incentives whatsoever, the end result will become a customer who is here today, and gone tomorrow. The question remains, how can a business offer just enough to satisfy customers and keep them coming back for more, but not so much up front that they take the first offer and run?
The back end rebate plan is the ultimate customer retention plan. Its basic premise is to incentivize the customer to continue to purchase by providing a discount each time they buy. However, the discount isn’t immediate, and is only paid out at the end of the plan. In this case, every time the customer purchases product, an amount goes into their plan. Once the plan is finished, the customer then receives a credit, or rebate, on their account for future orders.
Here is a step by step summary of how the plan works.
- Agree Upon Volume Requirements: The first initial step is to agree upon a volume requirement, and timeline, for the entire purchase.
- Include a Rebate Amount: Second, include a per unit, or per purchase, rebate amount on each shipment of product.
- Ensure Rebate is Provided at End of Timeline: Essential to success, is to ensure the rebate is only given to the customer provided they continue to order until the entire volume is taken.
- Apply a Credit on Customer Account: Once the customer has purchased their entire volume, they then receive a credit on their account for future purchases.
This Customer Retention Plan Provides Essential Market Information
Once customers have accrued enough of a rebate in their plan, they are more likely to come back when faced with a competitive bid. Otherwise, they risk losing their rebate amount. Therefore, the customer will likely discuss the price of the competitive bid, and try to secure the same pricing. This plan incentivizes the customer to return, and provides the company with real time pricing information, directly from the market.
What are the Benefits of this Reward Program?
Aside from the immediate benefits of improving customer loyalty, there is the added benefit of price protection, market and competitive feedback, and the information provided from a stronger customer relationship. Once customers build up enough within their rebate program, they will immediately contact the company should they receive a competitive bid. Why is this? Well, they not only want the new price, but want to keep their accrued rebate amount. This provides companies with real time market information on competitor pricing.
- The program offers price protection.
- It provides real time, market information.
- The program strengthens customer relationships.
- It provides insight into competitor pricing and market trends.
When it comes to keeping customers, excellence in customer service, and this reward program, can be seen as one and the same. When a company’s competitors are but a mouse click away, and with the ever present threat of overseas competition, using a reward program is a proven method of customer retention.
There are all kinds of studies that show the importance of customer retention. However, the best companies know how important their loyal customers are, and will do whatever it takes to keep them coming back. Consider this but another tool in a company’s arsenal.