“Join our customer club and get 5% off every purchase. Earn points for each purchase and redeem them for free merchandise. Our members get free shipping on all orders.” These are all examples of rewards offered by loyalty programs. They can be a great way to drum up new and repeat business and generate genuine interest and excitement among your customer base. At the same time, if it is not executed well, a loyalty program may be more trouble than it's worth or could even hurt your business. Carefully consider the following pros and cons.

Pros

Repeat business

The most obvious pro to using a customer loyalty program is the opportunity to gain repeat business. If a customer signs up to participate, there is a good chance they will be back to take advantage of the rewards you are offering in exchange for their membership. The more times you can get customers back in the door, or back to your website, the more you can sell to them.

New business

If you market your loyalty program well, and the rewards are attractive enough, you can capture the interest of new customers and turn them into repeat customers. If they see the opportunity to save money before they have even signed up, you may have a powerful means of expanding your customer base.

Competitive advantage

If your competitors don't offer loyalty programs, you will gain a competitive advantage quickly with an attractive offering. If your competition offers their own program, study their approach and figure out what you can do to make yours stand out.

Reputation

A well-received loyalty program can enhance your reputation as a company. When a business has a great rewards program, for example, customers love that they're able to take advantage. If it's a paid program, such as Sam's Club or Costco, there is also an element of exclusivity.

Word of mouth

Loyalty programs can also lead to members talking about their savings or rewards with their friends and family, or even on social media. If you provide an experience that gets people excited, they are almost guaranteed to share it with somebody.

Opportunities for promotion

A loyalty program can also provide you with a direct line of communication with customers, which you can use to promote new or existing products. Add exclusive offers to the mix, and your chances of selling only increase.

Data

When you get signups, you also get data about your customers. Depending on how well you're able to analyze the data, you may be able to use that to your advantage.

Cons

Cost

The reality is that setting up and maintaining a loyalty program can get costly. Between the time you spend on it and the savings you provide to members, there's a chance you can lose money on the whole endeavor if it doesn't go according to plan. If you go to all the trouble and the interest isn't there, you've wasted time and resources on something that went nowhere. If the rewards are too good, you risk losing money by not getting enough out of your sales.

The data may not be worth it

While it is true that you can get a significant amount of customer data, there's always the possibility that it won't pay off the way you hoped.

"In order to actually gain insight from customer data, you’ll likely need to spend a great deal of time analyzing the numbers," says Jim Granat, Head of Small Business at Enova International.1 "Some of the most successful customer rewards programs require dedicated teams that carefully pore over statistics and patterns. Even if you do have the staff to support this, the insight gained may not be worth the investment, especially if your customers are there solely for the reward you’re offering."

Ending it may also cost you

If you decide to cancel your loyalty program because it's not benefiting your business, you risk upsetting members who have gotten used to the perks. If customers become angry, it's entirely possible that they will decide to stop doing business with you, and they may spread the word through their network of contacts.

A loyalty program must be planned out carefully in order to provide your business with the desired results. Be sure to weigh the pros and cons before making any decisions you may regret later.

1. https://www.forbes.com/sites/forbesfinancecouncil/2019/09/03/the-pros-and-cons-of-instituting-a-customer-loyalty-program/#11530fb13f09

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank. Nevada State Bank is a division of Zions Bancorporation, N.A. Member FDIC