Pros and Cons of Loyalty Programs

Businesses that are considering starting a customer loyalty program naturally have a wide range of questions on the topic, all of which strive to answer a single question – is it going to increase profits?

So before you go ahead and create and implement a loyalty program for your business, it's important to know what to expect. Here are some pros and cons of loyalty programs to help you determine whether a rewards program can help you achieve the results you desire:

Pro: Keep Your Customers Coming Back

Since their conception back in the early 18th Century, the main motivation behind customer loyalty programs has been customer retention. If you offer a customer a reason to come back, you have the beginnings of a sustainable business model.

One of the prime benefits of loyalty programs is that they allow you to offer your customers discounts on future products and exclusive offers that other customers don’t have access to.

Con: Some Maintenance is Required

As with anything worth doing, an effective loyalty program requires a certain level of attention and regular maintenance.

Your program will need adjusting and tweaking as your customers’ needs change, and it may take a few attempts before you settle into an appropriate loyalty program strategy that allows your customers to reap rewards while still remaining profitable for you.

However, if you maintain your customer loyalty program properly and pay close attention to your customers’ spending habits, the benefits of loyalty programs are endless.

Pro: Stand Out from the Crowd

A customer loyalty program can spread awareness of your brand and help potential customers differentiate between you and your competitors.

In the small New York state town of Massena, right up near the Canadian border, there’s an Italian restaurant called Vino Vidi Vici that offers incentives like free appetisers and discounts on pizzas to return customers… but what really put this restaurant on the map is their bigger offers, like “Get a free Ferrari with your millionth purchase” or perhaps the more achievable, “Have your name engraved onto one of our tables with your fiftieth purchase”.

Con: Potential damage to your business’ finances

Perhaps the biggest trap you can fall into when implementing a customer loyalty program is to make your offers so good that you aren’t turning a profit.

If you give away rewards or discounts that are too large and are not increasing repeat purchases and customer spend, you are going to do some serious damage to your business’ bottom line.

There are plenty of cases of businesses failing to conduct research properly before implementing their customer loyalty program, and putting themselves in financial trouble as as a result. This is one of the problems with loyalty programs.

However, so long as you take the time to crunch the numbers, and choose appropriate rewards to ensure your customer loyalty program is balanced, you will increase your profits, not decrease them.

You can learn more about how to create a cost-effective loyalty program here.

Pro: Target Your Marketing (Customer Segmentation)

This is where digital customer loyalty programs really show their superiority over the old-school “punch card” system.

Loyalty programs allow you to accumulate data on each customer who signs up, such as what products they purchase, their spending habits, and other invaluable information that in turn provides you with upselling and cross-selling opportunities.

When you use this information to group your loyal customers into several specific categories based on product preferences, demographics and other tendencies, you can tailor your marketing strategies to be more relevant to each customer.

This is called customer segmentation, and it prevents your customers from feeling like they are just walking dollar signs to your business, which is often the case when companies send out mass email or SMS promotions that don’t differ from customer to customer.

Con: Complexity Causes Confusion

If your loyalty program isn’t easy for customers to understand, it can actually have the opposite effect and turn customers away.

That's why it’s vital to ensure that your loyalty program's offer and system is easy for customers to understand and navigate.

From our experience, we’ve found that the best rewards programs are simple and transparent for the customer to understand – Do X, Get Y.

After some time, once your customers have become accustomed to how the program works, you could look at adding further functionality. However, it's important to remember that simplicity is the key to launching a successful customer loyalty program.

Pro: Communicate With Your Customers

This doesn’t mean patting their dog every time they come into your store and memorising their grandparent’s names… having a digital customer loyalty program opens up the lines of communication between the business and the customer.

Loyalty programs allow you to capture your customers data which you can use to communicate with them in the future. This could to notify them of a special offers, exclusive sale, new product releases, send surveys, or wish them a happy birthday!

The communication aspect is particularly useful if you run your loyalty program with a loyalty app. Considering that nearly 80% of the population owns a smartphone nowadays

For example, at Stamp Me, our digital loyalty platform allows you to communicate directly with your customers via SMS and Push Notifications.

In this way, a digital customer loyalty program is an unparalleled method for customer retention and loyalty.

In conclusion, if you're still weighing the decision, consider that for businesses such as coffee shops and hair salons, the advantages of implementing a customer loyalty program typically outweigh the drawbacks. Digital loyalty solutions, in particular, offer ease of setup, maintenance, and adaptability, making them a valuable addition to enhance customer engagement and retention.