NFIB

The Pros and Cons of Customer Loyalty Programs
03/ 31/ 2004

by Maggie Flynn

From grocery store club cards to frequent flyer miles, customer reward programs are ubiquitous in today's shopping environment. Options for running a customer loyalty program include handing out cards to be punched every time a customer makes a purchase (Buy 10 cups of coffee, get the 11th one free) to offering a membership card that customers can buy for a small amount to receive discounts on all subsequent purchases (for example, The Body Shop's "Love Your Body" card allows customers to buy the card for $10, then save 10 percent on all they buy for the next year, as well as receiving other perks like a free birthday gift).

If you are thinking of starting your own customer loyalty program, consider some of the advantages -- and disadvantages -- first:

Pros:

1. Keeps your name in front of customers. Think of your rewards program as free advertising. Every time your customers open their wallets and see your club card, they'll think of you.

2. Encourages increased sales and return business. Even if you go with a small-scale rewards program, regular customers will appreciate knowing that their steady purchases will pay off with a free cup of coffee or free video rental. If you decide to hand out punch cards, start new customers out with a couple of extra punches to give them an extra incentive to return.

Not only do these cards help increase your rate of customer returns, they can also help you encourage business during slow periods. For example, if you have trouble getting people in the door on Mondays, make Monday your "double punch" day.

3. Can provide valuable customer demographic information. You can ask your patrons to fill out an application for their rewards card, building a valuable database of customer names and addresses. Your application can ask any additional questions that would be useful to your marketing research, such as how often they come to your store and what they most often purchase. Also ask for special dates such as birthdays and anniversaries, and mail them special offers when these dates approach.

Cons:

1. Unless the reward is significant, your program may not stand out. As much as customers may appreciate their eventual free drink, your business will not be the only one making such an offer. If you really want your customer reward program to stand out, up the ante. Give customers a choice once they complete a card. For example, offer that free cup of coffee or 15 percent off their entire meal.

Because punch cards and club cards are so pervasive, some customers might be sick of having their wallets stuffed full of them. You might consider keeping track of customer purchases in a computer database so they won't have to, or even filing their cards at your shop and retrieving them every time they make a purchase. This would take minimal effort on your part, and customers would appreciate the extra step to make the rewards program hassle-free for them.

2. Unique offers could backfire. Some small-business owners may eschew punch cards and club cards altogether, and instead opt for special sales and offers for their most loyal patrons. While this can be a great approach, there is always the unfortunate risk of offending customers when you're trying to extend goodwill. For example, if you send out a Valentine's Day offer, recently divorced customers may feel alienated. Sending out a special Christmas discount offer could have the same effect upon your Jewish customers. When sending out special offers, try to make them as neutral as possible. For example, invite your best customers to a "VIP only" seasonal sale, as opposed to a holiday sale.

3. Loyalty cards could be considered invasive. Chain supermarkets have faced criticism over their loyalty cards that track customers' purchasing habits, due to the fact that they force customers to share private data in order to receive sale items. If you collect customer data, make sure that it doesn't seem as if it is more for your own benefit than theirs.

Also assure customers that their information will not be sold or shared with anyone else. And don't be surprised if some customers flat-out refuse to share personal information. Consider giving them "loyalty" privileges regardless.

Not every business needs a loyalty program. Unlike grocery chains and big box stores, small-business owners have the autonomy to thank their patrons in many unique ways. Reward your best customers informally. If you own a restaurant, give the couple that comes in for dinner every Tuesday a free dessert every once in a while. If you own a yoga studio, offer to let your regulars try a new class for free. Chances are you recognize your best customers already, and acknowledging this will keep them coming through your doors for years to come.

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