Loyalty Program - Definition, Importance & Types

What is Loyalty Program?

Loyalty program is a program or system made by companies to give additional benefits to loyal customers. A loyalty program is a tool or strategy adopted to retain good customers by giving them additional benefits like goodies, cashback, vouchers etc. The objective of a good a loyalty program is to appreciate a repeat customer & ensure that they remain loyal. This helps companies build a strong repeat consumer base.

Importance of Customer Loyalty Programs

Companies face intense competition in the sector in which they operate and there is a limited scope of differentiation in terms of products or services. Customers have several options to choose form when it comes to buying products or using services. In order to stop customers from switching to a competition brand, companies adopt various methods to retain customers. One such strategy of customer retention is through a customer loyalty program.

A brand loyalty program empowers the customer with more benefits & incentives which he or she gets along with the products or services that they use. With such a loyalty discount & rewards, a customer becomes happy and satisfied and it adds to the customer loyalty.

These days companies ensure that they have a strong customer loyalty program in place for its customers. Since customer retention is an integral part of business today, it is the responsibility of the marketing teams to make sure they attract customers with such benefits. A loyalty program can be seen as a tool to not only keep a repeat customer happy, but it is also a mechanism to improve brand equity. A happy customer contributes to the brand management of a company as he or she becomes a positive brand advocate by spreading constructive brand awareness about the products & services and its benefits. All these things make a brand loyalty program important for any contemporary business.

Types of Loyalty Programs

There are several ways in which companies can create a loyalty program to engage their customers. Loyalty programs can offer discounts, patronage rewards, redeemable points, cashback, offer free goodies through memberships etc.

Different types of loyalty programs for customer retention and increasing business are as mentioned below:

1.Discount-This type of a loyalty program gives discounts to regular customers on the price which is being offered. This works well for retail companies and ecommerce platforms.

2.Points System- This loyalty program encourages more shopping. The more a customer shops or buys, the more points he or she will get, and which can be redeemed in the next purchases.

3.Cashback- Cashback loyalty program is mostly for credit card or online shopping customers, who are given cashback based on their purchases. This is popular in ecommerce companies.

4.Club Cards or Programs- Based on frequency of usage, companies allot cards to customers. Club card loyalty program gives free services or goodies or better incentives to customers. This works well with service-based companies like airlines who offer frequent flyer cards.

5.Partnerships- Companies partner with other brands and offer loyalty program which benefits both partners. Like a food app can partner with restaurants to give discounts or benefits to repeat customers.

6.Coalition- Multiple-brands and companies combine to offer incentives and benefits to customers based on such a loyalty program. This empowers the customers to choose from a variety of offers.

Benefits of a Loyalty Program

Companies use loyalty programs to ensure that their customers are happy and satisfied. Some of the key advantages & benefits of loyalty programs are:

1. A loyalty program helps in retaining good customers.

2. It helps to reduce unwanted customers.

3. A good brand loyalty program helps in creating more brand awareness.

4. A good customer database is collected over a period of time based on customer loyalties & needs.

5. Repeat customers help in driving the repeat business.

6. Loyal & satisfied customers help in bringing new customers based on their good experience.

7. Loyalty programs helps in better brand communication and keeps consumers engaged & connected.

Disadvantages of Loyalty Programs

Despite the numerous pros, there are certain cons of loyalty programs as well. The disadvantages are:

1. Every loyalty program is a cost to the company in terms of discounts, cashback etc.

2. Despite many programs, customer loyalty is a personal choice & even heavy investments don’t guarantee happy customers.

3. Difficult to manipulate or control consumer behavior despite having the best loyalty programs.

4. Loyalty programs never ensure that a customer would not end up switching brands.

Hence, this concludes the definition of Loyalty Program along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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