How to build a strong loyalty program?

How many times have you heard from your marketing manager that this is the time to think about a new loyalty program? Working on a broad portfolio of brands and channels I’ve discussed this question already for many times….

However, this time before bringing consumer insights to my team I’ve decided to revisit a book written by B. Sharp “How brands grow: what marketers don’t know” as well as some related academic papers.

Let’s have a look at the key marketing rules & ideas discussed in the book from a perspective of building a new loyalty program.

Purchase duplication law says that “everybody switches” and that “defection rates don’t vary significantly between competing brands” (Sharp, 2010). The key metric that varies is a penetration – in line with a market share.

That can lead us to the first conclusion that eventually the key objective of the loyalty program should be a growth of its market share (Sharp, Wright and Goodhardt, 2002; Dawes, 2008).

Double Jeopardy law underlines that brands with a small market share “suffer twice – fewer people buy them, and those who buy them do so less often” (Sharp et al, 2012).

Research shows that loyalty programs is a classic example of a strategy skewed towards heavier buyers of a brand and as a result “loyalty programs generate small or no shifts in market share” (Sharp, 2010).

Heavier buyers of a brand are much more prone to join loyalty programs due to two reasons: 1) significantly higher physical and mental availability of a loyalty program for them; 2) sufficiently stronger economic value that heavy buyers receive from a participation in a loyalty program (Sharp, 2010).

However, light buyers do matter for a brand success. This is linked with the fact that all brands have a long tail of light buyers.

As research results show, loyalty programs don’t attract a disproportionate number of new heavier buyers for a brand, they have a potential to attract some light buyers (Sharp, 2010). For instance, loyalty programs that include several brands where bigger brands can attract some light buyers to make a trial / buy more frequently smaller brands presented in the program (Sharp and Sharp, 1997).

So, the second conclusion – as loyalty programs won’t attract disproportionate number of heavy buyers, it is worth to focus on attracting more light buyers.

Dirichlet model highlights that “consumers don’t randomly allocate their purchasing among all brands in a category but do so in a biased fashion…. All buyers have their own particular loyalties… consumers are polygamous loyal to a number of brands in most categories” (Sharp et al, 2012).

Hence, positive short-term results of a loyalty program can be driven by a temporary shift in buyers purchase frequency and/or spend per purchase; however, it won’t be represented in a long-term increase in buyers’ loyalty and will lead only to decrease in company’s profitability (Sharp and Sharp, 1997; Sharp et al, 2012).

Hence, the third conclusion is that since buyers behavior changes very little over the time, loyalty programs actually drive consumers switching within the repertoire of brands that in long-term won’t lead to a substantial impact on a brand share (Sharp et al, 2012).

Taking into account these three conclusions, the following recommendations on development of the loyalty programs can be provided to marketing managers:

1. Shift the focus of the loyalty programs from a decline in a brand retention rate to gaining more brand switchers.

2. Target buyers of diverse brands rather than a particular brand as it will allow to increase a base of the light buyers.

3. Include smaller brands in the loyalty programs to drive cross-selling and trial from the side of the light buyers of big brands.

4. Analyze loyalty program results in a long-term basis and consider market share as a key success metric.

5. Consider alternatives to loyalty programs to build consumers loyalty – e.g. moving from repertoire market to subscription market can increase buyers loyalty without additional loyalty programs (Sharp, Wright and Goodhardt, 2002).

6. Benefit from information received in the frames of the loyalty program – e.g. to build a database of consumers, empower communication channels and monitor purchase behavior.

Loyalty_insights_bestinsightsphere

Source: https:// securityintelligence. com/ cybercriminals-phish-their-way-into-customer-loyalty-programs/

Sources: 1. Sharp, B. (2010) How brands grow: what marketers don’t know, Australia: Oxford University Press; 2. Sharp, B., Sharp, A. (1997). Loyalty Programs And Their Impact On Repeat-purchase Loyalty Patterns. International Journal of Research in Marketing, 14, pp. 473-486; 3. Sharp,B., Wright,M., Dawes,J., Driesener,C., Meyer-Waarden,L., Stocchi,L., Stern,P.(2012). It’s a Dirichlet World. Modelling Individuals’ Loyalties Reveals How Brands Compete, Grow, and Decline. Journal of Advertising Research, 52(2), pp. 203-213; 4. Sharp, B., Wright,M., Goodhardt,G. (2002). Purchase Loyalty is Polarised Into Either Repertoire or Subscription Patterns. Australian Marketing Journal, 10(3), pp. 7-20

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