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Are Rewards Effective in Creating Loyalty?

3 min read

In the business press, customer incentives have been vilified as cheap promotional gimmicks, passing fads, and offering something for nothing. Despite the fact that they have been around for more than a decade, more businesses are joining the bandwagon, not fewer. Organizations are investing millions of dollars designing and executing rewards programs, ranging from airlines providing frequent traveler offers to telecom firms decreasing their prices to obtain more volume.

Rewards systems are frequently misunderstood and misapplied in practice. Too many firms approach incentives as short-term promotional freebies or monthly specials when it comes to design and implementation. When used in this manner, incentives may provide value by encouraging new and existing consumers to try a product or service. However, they will only yield a small percentage of their potential worth until they are structured to develop loyalty.

A rewards program may shorten the loyalty life cycle by pushing first or second-year people to purchase like the company’s most lucrative tenth-year clients only when it is part of a broader loyalty-management strategy. A business must discover ways to share benefits with consumers in proportion to the value created by the customer’s loyalty. The objective must be to create a system that constantly educates customers about the benefits of loyalty and motivates them to earn them. A planned, long-term approach is required to achieve long-term loyalty, measured in years.

Customer Behavior

Although it may seem like a simple concept of program design to reward and, hence reinforce, desirable conduct, the marketplace is replete with firms that reward the talk rather than the walk. For instance, one credit card issuer recently launched a promotion that offers new customers 10,000 extra points that can be used for airline miles and other benefits.

In today’s consumer goods firms, such campaigns are widespread, and the outcomes should serve as a caution. Customers have gotten so accustomed to offers offering anything from a free vacation in Florida to a free credit card that they either yawn or become masters at getting stuff for nothing when they see a brand new item. Long-distance phone providers frequently give $50 checks or discounts to customers who switch to their services. It is true that the financial market is using this way of promotion very actively, for example, there is a no deposit bonus in Forex, which is a great help for attracting new customers. For those who do not have made up their minds in this regard, this kind of promotion might work as a push factor. Customers will be well on their way to earning an airplane ticket with that initial incentive, so the deal is pretty valuable. There is, however, nothing stopping people from joining up, collecting their points,s and then leaving. In the long term, this conduct is detrimental to the firm.

The Reward Rules

Traditional small companies are some of the greatest examples of establishing client loyalty via value sharing. Successful neighborhood retailers and restaurants have instinctively recognized the wider strategic goal of a good rewards program for many years. Such entrepreneurs make it a point to get to know their greatest clients on a personal level, and they frequently reward them with unique services and attention, such as informing when the desired product arrives or providing them with a complimentary drink or a special dessert. They understand that providing additional value to lucrative consumers converts them to loyal customers, who then become even more beneficial.

However, when businesses grow in size and complexity, their ability to identify which clients are the most valuable decreases dramatically. The problem is exacerbated by the high turnover of sales and customer service workers. Personalized client connections as well as the sharp judgment on value sharing that goes with them, vanish.

Big corporations seeking to expand market share, size, and efficiency strive to compensate for the loss of personal ties by targeting valued consumers through database marketing or advanced market research methodologies. However, in order for such investments to pay off, businesses must adhere to the following value-sharing principles.

Customer Equality

Recognizing the advantages of loyalty necessitates acknowledging that not all consumers are created equal. A firm must provide the highest value to its top customers in order to enhance loyalty and revenue. That is, customers who help a firm make more money should get the reward for their efforts. They will become even more devoted and profitable as a consequence. For instance, a business may consider providing better rates to long-term consumers. Customers with higher credit profiles and payment histories are frequently offered cheaper interest rates by credit card providers.

State Farm Insurance offers individual savings on its vehicle insurance plans based on lengthy customer retention and clean accident history. It also inhibits businesses from dealing with problem drivers by refusing to give competitive rates to that client group. As a result, State Farm’s rivals are forced to serve a less appealing base of surviving consumers.

Unfortunately, most businesses mistakenly treat all consumers the same, offering them items of similar value regardless of how much they spend or how long they have been clients. A firm that provides average-value services and products for everybody takes time by over-satisfying less profitable consumers while under-satisfying loyal customers who are more valued. The end result is predictable. Consumers with greater expectations and more appealing options leave while less desired customers remain, diminishing the company’s earnings.

The Generated Value

Most businesses start reward programs without considering their own requirements or the economics of cause and effect. They have not considered the connections between the value provided to customers and the value generated by the firm. A rewards program should not give something away for free. The profits may be fictitious, but the costs are real.

However, a deeper examination of the true offer for restaurants indicates that the cards are more about cash management than customer loyalty. Transmedia pays eateries up in exchange for substantial discounts later on. In fact, it is lending money to restaurants at exorbitant interest rates. The deal appeals to financially distressed restaurants. Stable businesses that are under a lot of pressure to compete have also joined. Restaurants participate in discount card programs to attract new customers and to take market share away from competitors that do not. However, the structure does not guarantee that consumers would dine out more frequently than they previously did or that they will concentrate their patronage on a particular restaurant, which is necessary to produce genuine value.

Editorial Desk Editorial team Account! Bringing you entrepreneurial stories. Flourishive views the world through the eyes of entrepreneurship—ambition, ​empathy, the ​grind. Be inspired by articles curated by Flourishive Contributors.