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Opinion

Loyalty programs are not the same thing as reward programs

In defining a loyalty/reward program for your customers, you need to be clear what you are trying to achieve, as they each have a different purpose. And although loyalty and reward programs may have some overlap, they are quite different.

Loyalty programs were originally intended for exactly that, loyalty. Loyal customers are supposed to receive something for being loyal to the brand. Whereas reward programs are a smart marketing tool to reward shoppers via discounts like buy-one-get-one-free.

Scott Mackenzie of Travel Codex defines the two as follows:

Loyalty programs target customers who devote a significant amount of their time and money to a specific brand at the expense of other options that may be less expensive, more comfortable, or more convenient. Typically the customer is provided with something he or she can’t buy, or with something very different from the usual item being purchased.

Rewards programs target customers who want to earn a credit toward future purchases. Larger transactions receive larger rewards by definition. These rewards may not be in the form of cash back, but they can operate very similarly. Typically the customer is treated no differently than any other, and the benefit is limited to receiving and redeeming the reward credit.

Frequent travellers may join loyalty programs offered by airlines. These typically provide varying levels of VIP status with commensurate benefits attached, such as rapid check-in, priority seat selection, free ticket cancellation, upgrades, use of VIP lounges at airports and other benefits for loyal users of the service or product.

Sometimes, loyalty programs charge a fee for joining and/or membership. Amazon Prime is a classic example of this. It offers fast, free shipping on orders and instant video streaming for an annual fee. These programs tap into the fact that consumers tend to place a higher value on things they pay for.

Why you need to understand human behaviour

In 2011, New York City homeless shelters were under major financial pressure due to less government backing and reduced donations, and some chose to start charging a nightly rent. Initially the shelter’s beds emptied, but they gradually filled back up.

Residents said it was calmer, cleaner and that people respected their accommodation more after rent was introduced. Incidentally, it motivated people to move on and find sources of income and rebuild self-esteem.

Retailers need to understand human behaviour and realise that the value people place on services and products is dependent on the scarcity of those things. Generally, reward programs are available to everyone, but loyalty programs can have a cost.

In my opinion, reward programs are simply a quick fix with a major focus on discounting and offering freebies for certain levels of consumption. Coffee shops, for example, offer a free coffee to customers after they buy 10. A simple reward for consuming.

Still think that loyalty programs are the same or similar to reward programs? Think again. Let’s look at an example:

A retailer offers customers 1 point for every dollar spent. Each point is worth 10 cents.

The retailer waits for the consumer to spend $250 and then emails them a $25 voucher, thanking them for spending $250. But there is a catch! The voucher has to be used within 30 days.

Is this a loyalty program? I think not, it is a reward program on the company’s terms, a marketing push to get the customer to spend money under time limited duress.

Would that make me feel special or loyal? The answer is no. To me, a loyalty program is a program that offers benefits to me as a member when I want to consume or redeem them. If I have accrued points at a retailer, I would like to choose when I walk into the store to redeem my points.

As a final example, many wine retailers offer subscription-based loyalty programs offering new vintages, guaranteed selections of curated wines and other benefits. Other wine retailers simply offer a reward program, which is usually free and involves receiving emails with regular discounted offers.

Ultimately, loyalty programs and reward programs are put in place to extend the lifetime value of customers and attempt to win new customers.

In planning or redesigning a loyalty or reward program, you need to consider the outcome you want for your business and your clients, and whether your focus is on short-term or long-term gains.

Mark Freidin is the co-founder of Internet Retailing and writes a weekly opinion column about the e-commerce industry. 

Have a burning question or idea you want to share? Email Mark at [email protected]

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