Are you skeptical of programs that discount your product – and your brand – to bring in customers, and then charge you for it?

First, let’s clarify the difference between a rewards program and a loyalty program.

Confused about the terms? Aren’t they interchangeable? We don’t blame you.

The term loyalty program is liberally used and is often a misnomer. In fact, you might be dealing with a rewards program that doesn’t enhance your brand’s loyalty.

In brief: a loyalty program is necessarily also a rewards program but a rewards program is not necessarily a loyalty program.

What is a loyalty program?

A loyalty program is a program that aims to increase customer loyalty towards the organization running the program. In practice this means increasing the number of repeat purchases. This is achieved by giving out rewards. The rewards can be provided by the company itself for instance in the form of a discount on the next purchase. Or they can be provided by a partner of the company that runs the program.

An example of the latter would be American Express Membership Rewards. Their points can be redeemed at car rental companies, airlines, Airbnb, Uber and Amazon. The loyalty program of American Express encourages loyalty towards American Express and it brings new business to the participating partners. American Express is able to buy the services from participating partners at favorable rates because of their purchasing clout. However, note that it does nothing to increase loyalty towards the partners that participate in the network of American Express.

What is a rewards program?

A rewards program offers rewards to its participants, but there is not necessarily an underlying goal to encourage loyalty. A rewards program of this type is provided by a company that does not provide any services itself, except the running of its rewards program of course. It has built a network of partners and has negotiated discounts with these partners in return for the promise of bringing in new customers. These companies you could call reward network providers.

A reward is given by these providers in exchange for making use of their service, usually a mobile app. An example of the latter would be Zomato. If you become a member of Zomato Pro you can get discounts at 1000’s of restaurants. Another example is EliteClub. Members of their rewards program can avail themselves of discounts in hotels and their outlets. The partners get new customers in exchange for giving customers substantial discounts.

Why sign up for a third-party rewards program?

It could be that capacity is underutilized and new business is needed so badly in order to cover fixed costs until better times arrive. In these cases participating in a rewards program will help reduce losses. But as regards to the long-term a partner has three possible viable strategies:

  1. They leave their standard prices unchanged. Usually, this means that on customers which are brought in through the rewards program they will not make any money when they avail themselves of the discounts. They make the benefits available temporarily just to boost name recognition and get new faces through the door.
  2. They leave their standard prices unchanged but they ensure that customers are restricted to how often and when they can avail themselves of the discount. So the idea is to get customers through the door with the discount but once they have seen the place and liked it they will still keep coming even without the discount. An example of such a program is that of The Entertainer where you get to use only 3 two-for-one vouchers a year.
  3. Build the business primarily on customers which use these apps. In order to make a profit this will usually entail raising the normal prices, thereby making themselves less attractive to non-reward program customers.

All three strategies above can make sense.

But do not fall into the trap of offering a combination of unrestricted discounts, not limited in time, without raising your prices!

The bottom line is: participating in these reward programs does nothing to build brand loyalty. The reward apps encourage customers to shop around.

These reward programs have brought to light, perhaps even have created, a segment of chronic switchers, who routinely shop for the lowest price.

Reward program

If anything, the first two of the above strategies can form a part of a broader marketing strategy that also incorporates a focus on customer loyalty. The third strategy though (raise prices and build a business based on discount chasers) is hard if not impossible to combine with increasing customer loyalty. The customers you attract are there because of the discount provided by the app, not because of you, while at the same time you discourage what might be termed natural loyalty. You will find it more difficult to attract those customers who would otherwise come simply because you offer good value for money.

What is the business model of these reward network providers?

What is the business model of these rewards network providers? Loyalty programs, such as the one run by American Express, that provide freebies at partners, have to pay those partners if one of its members redeems reward points to obtain the partner’s services. But reward network providers usually do not provide freebies. They provide discounts or disguised discounts, such as two-for-one deals.

And that is the genius. The reward network provider doesn’t pay the partner anything for providing its discounted services.

In this new upside-down world, in exchange for the promise of new customers the reward network not only requires the partner to give away a discount to the customer but also makes the partner pay for the privilege.

In addition, the network provider might or might not charge the customer for signing up to its rewards program. Groupon for instance does not charge a fee to obtain the rewards, but EliteClub and Zomato Pro do.

So, the successful network provider is able to establish a large network that is able to charge on both ends of the platform and is able to deliver good rewards to its customers.

The lesson here?

Just because you participate in a rewards program, even one that is self-labeled as a loyalty program, it doesn’t mean that it will enhance your customers’ loyalty. It might be that you are just the one giving out the rewards and the program provider is reaping the loyalty …. further increasing their negotiating clout. Ask yourself if the program increases your customer’s loyalty or theirs.

No business can make money on customers who are chronic switchers. A long-term perspective is critical.

The best way to increase your customer’s loyalty is by delivering a service that is so good and at such a good value for money that your customers want to keep on coming back. But that is obvious…  A genuine loyalty program however can help you with accelerating that effect by giving rewards to your loyal customers. But in order for it to be YOUR loyalty program, you need to be in charge, it needs to be your loyalty program.

It is our mission at Loyaltier to help you launch your own loyalty program. You will get total control over the promotions and events you want to bring to their attention. The people who sign up to your Loyalty program are your customers only, and their data are not shared with anyone else. You get access to all the data of YOUR customers.

In case you do not have an in-house loyalty program yet, we have made it easier than ever to launch your loyalty program. Our white-labeled app can be branded for your hotel and get its own App Store and Play Store listing in a few days. The content you display to your customers will be under your control. Customers do not get rewards before they earn them. They need to first spend; in return they will get a discount on a future spend. How much is up to you. We have kept the rewards system simple; as a system that is easy to understand is an important factor in its success: a customer that returns. And you do not need any partner network to provide rewards.

This is not to say that it is a bad idea to participate in rewards programs run by external parties.

Perhaps it is a case of “can’t live with them, can’t live without them”.

It is a double-edged sword in our opinion. It is a great way to get exposure to new customers and if you are struggling for survival then you might need the income just in order to cover fixed costs. But if you decide to use them we have two recommendations:

  1. Make sure you sign up those customers who come in through these reward network providers to your own loyalty program. In this way you can keep your brand at the top of their mind and attend them to your current events and promotions. You get to stay in touch with them directly and include them in targeted marketing campaigns based on their previous buying behavior.
  2. The benefits you offer need to be at least as good as those you offer to those who shop around using the apps of rewards providers. So unless you can establish that you still turn a profit on customers brought in through reward networks we suggest you participate in external reward programs either only as part of one-off or temporary promotions.

Want to launch your own loyalty program? Now it is easier than ever with Loyaltier. Schedule a Zoom meeting here.

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