2 min.
Why are loyalty programs increasingly relevant and profitable?
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Why are loyalty programs increasingly relevant and profitable?

Business Strategy Creating a value exchange program

In recent years, more and more companies have launched loyalty programs and consumers are increasingly fond of them. Canadians love loyalty programs and continue to join them: Between 2017 and 2021, the average number of memberships in such programs per person has increased from 9 to 13.5, according to a LoyauT study conducted by R3 Marketing and Léger in 2021.

What’s more, according to Gartner Marketing Predictions’ Top 5 marketing trends for 2023, one company in three without a loyalty program today will establish one by 2027 to bolster their first-party data collection and stimulate loyalty in their priority customers. Loyalty programs are undeniably becoming increasingly popular among both consumers and companies themselves.

One specific goal: To collect data

A loyalty program is a means rather than an end in itself. The goal is to obtain transactional and other kinds of data in exchange for rewards or benefits related to purchases.

Giving customers the opportunity to collect points leading to rewards may allow companies to reconnect with inactive customers, enhance specific purchases such as high-margin products, increase purchase frequency, and also promote subscriptions to premium-type programs (a program with a monthly fee that offers benefits and additional bonuses).

Loyalty programs: Relevant and profitable

There are a ton of reasons that justify the relevance of loyalty programs. In particular, developing a direct relationship with customers and obtaining data on the purchase behaviour and engagement of consumers facilitates the improvement of effective communication strategies and promotes specific behaviours. Plus, today’s market context as well as current trends require even more customer loyalty than before.

Still not convinced? Here are 5 good reasons to change your mind and develop a loyalty program for your brand posthaste!

1. Acquiring new customers is increasingly difficult

Online media purchase costs are increasing (by almost 70% in two years), cost per lead is also increasing, and conversion rates are decreasing (reduced by 20% in the past two consecutive years). In addition, the growing presence of large American and European retailers, increasing competition online, and the disappearance of third-party cookies are all elements that call for transferring your budget from acquisition to retention. Companies that focus on retention and customer loyalty generally perform better than those who prefer an acquisition strategy. In particular, the success of brands like Starbucks, Sephora, and Loblaws (PC Optimum), which consider loyalty a structural initiative of the company that goes beyond planning or operational tactics, testifies to this fact.

2. Customers are getting harder to attract

All consumers, but especially those in the youngest age groups (Generations Y and Z), are looking for personalized content and relevant offers that fulfill their specific needs. It’s important to realize that younger generations consume and allow access to their data in a spirit of exchange: By sharing their transactional data, these consumers allow brands access to some of their personal data and in exchange they expect to receive personalized communications and offers that correspond to their needs, interests, and purchase histories. Without this benefit, these consumers will quickly turn to competitors who are able to respect this informal arrangement. Thus, a brand that is able to conquer and retain loyal customers will receive a much more significant return on its investment (ROI).

3. Customer experience is a priority for marketing experts

Knowing your customers is no longer a luxury, but has instead become essential to the success of brands. What do my customers expect? What are they looking for? What are their interests? What elements will allow me to earn their loyalty? To answer these questions, you must engage with your customers and collect data about them. A loyalty program allows you to obtain transactional data and better understand your customers. A number of tactics, such as satisfaction surveys and gamification, can be established to collect even more information and complementary data, the goal being to better understand the actual needs of the people who consume the brand and to improve customer experience.

The challenge of this approach is to have a sufficiently attractive program (with generous offers, relevant content, and other benefits) that incites consumers to engage with your brand and share their data, interests, profile, and other information. Brands that succeed will be able to offer their customers a more positive experience, which will generate more engagement and loyalty.

4. Customer engagement is becoming the Holy Grail

There is a direct correlation between the level of engagement and loyalty. Loyalty programs are excellent tools to facilitate engagement because they promote interactivity with the brand, whether through a mobile application, text, or email.

Loyalty programs used to only reward purchase behaviour, particularly through promotions of the type “Buy $10 and get 1,000 reward points!” But today the preference is to spread rewards out over several types of initiatives. We therefore recommend allotting a maximum of 50% of the total rewards to the amount spent. The other 50% can be divided up as follows: 20% for activities promoting engagement, 10% to 15% for promotional initiatives, and finally the remaining 10% to 15% for more targeted initiatives whose goal is to increase share of wallet or retention.

Share of wallet represents a consumer’s total proportion of spending on and purchases of a brand within a specific category. As an example, if a customer spends $5,000 annually on sporting goods, and $2,500 of that amount is spent at Sports Experts, this retailer has captured a 50% share of wallet.

5. Loyalty programs become profitable early

A strategically designed loyalty program is a very effective tool with proven profitability. Our experience has shown that the profitability of new programs reaches over 200% after 18 months on average. This means the net profit generated by the program is a lot higher than the total cost of developing and managing the program. This is why a good number of successful brands are progressively transferring their acquisition budgets to relational strategies. In many cases, we also often see significant savings in terms of advertising investments.

Think about it: If your program allows you to directly reach 40% to 60% of your program members, and this represents 60% to 75% of your sales, while simultaneously implementing initiatives that increase your share of wallet and customer retention, you’re in an excellent position and a lot less dependent on constantly acquiring new customers!

It is therefore possible to improve the performance and ROI of a marketing budget as well as track and continually improve the effectiveness of your various campaign and communication initiatives with a loyalty program.

So now are you convinced? We hope so! If you need more in-depth or personalized support in this area, don’t hesitate to call on our specialists’ expertise.