by Joel R. Evans and Barry Berman, Zarb School of Business
In this post, we discuss how to gain the loyalty and increased patronage of current customers. Our focus is on the value of frequent-shopper programs.
WHAT IS A FREQUENT-SHOPPER PROGRAM? It is one awarding special discounts or gifts to people for their continued patronage. In most such programs, customers must accumulate a certain number of points (or their equivalent); these points are redeemed for cash or gifts. Here are examples:
- More than 70 million people belong to the American Airlines’ AAdvantage program. By traveling on American Airlines, and its recently acquired US Airways, and members of American’s One World Alliance – as well as patronizing participating firms such as Marriott and Hertz), people can earn free flights.
- With Dunkin’ Donuts’ DD Card Perk Rewards Program: “Points will be earned when you use an enrolled DD Card as payment for Qualifying Purchases at participating Dunkin’ Donuts locations. Earn five points for every dollar spent. Every 200 points will get you a Reward Coupon for a free beverage.”
- The BankAmericard Cash Rewards Credit Card offers online-exclusive $100 cash rewards bonus after a customer spends at least $500 on purchases in the first 90 days of account opening There is 1% cash back on every purchase, 2% at grocery stores, and 3% on gas for the first $1,500 in combined grocery store and gas purchases each quarter. There is no annual fee.
- Loyalty programs are not just for large firms. Boloco is a small New-England based burrito chain with a very strong customer loyalty program. Customers receive a free item for every $50 spent. This is how the firm promotes the program.
Among the advantages of frequent-shopper programs are the loyalty bred (customers can accumulate points only through patronage of one or a few firms), the “free” nature of awards to many consumers, and the competitive edge (distinctiveness) for a firm that is similar to others. Frequent-shopper programs also let existing customers know they are important to the firm and encourage them to shop more often. As a result, a good frequent-shopper program can actually increase the profits of a retailer (rather than decrease them).
Here are several hints with regard to setting up and carrying out an effective frequent-shopper program:
- Make the plan easy for people to understand, as well as easy for them to participate.
- Make the plan easy to administer by the firm.
- Make sure that points can be redeemed for items which are of value to customers.
- Do not set the point totals that are needed to gain a benefit from a frequent-shopper program (either a discount or a prize) so high that customers will be frustrated and thereby abandon the program.
- Have a range of gifts and discounts to encourage higher patronage by current customers. Introduce some new prizes on a regular basis.
- Run some special promotions that are keyed to frequent-shopper points (such as “Double Points Day”) rather than to run-of-the- mill sales (which everyone else will just copy).
- Promote the program in and out of the store.
- Publicize the big award winners. This creates excitement for all.
- Keep prices competitive so that people do not think they are getting points in exchange for paying higher prices.
- Constantly re-evaluate the program to see what is working and what is not.