Encouraging customers to stay with a brand is more cost effective than going through the process of acquiring new ones, hence the proliferation of loyalty points programmes in the past decade.
But the effectiveness of these schemes is increasingly being challenged by some brands, as they question the level of loyalty they buy in real terms from consumers, and by customers growing tired of the wait to get anything worthwhile from points they have accumulated.
Safeway famously dumped its ABC points card some years ago, in the belief that customers were more interested in making on-the-spot savings than the vague prospect of a reward in some months' time.
That view seems to be confirmed by a SAS survey, conducted last month by YouGov, in which 67 per cent of respondents said that price was actually the biggest factor in their shopping choices, closely followed by good service. Only 35 per cent thought that rewards generated loyalty.
Some marketers criticise points schemes as just another form of sales promotion. They argue that long-term customer relationships are more effectively generated by brand quality than by rewards.
Brand promise elements
"Amazon and Starbucks run successful loyalty programmes, but they were great businesses to begin with. Their schemes are just one element in their brand promise, not the promise itself," points out Susan Rose, partner at customer insight specialist 5one.
And in an effort to build true loyalty, brands that might once have considered incentives as a means of generating it are now looking at other ways to strengthen relationships with customers.
For instance, when DM agency archibald ingall stretton was appointed by O2, it recommended focusing on making offers as relevant as possible rather than offering a reward scheme. This approach has worked well, the agency says, with a big increase in retention levels, particularly of high-value customers.
On the other hand, there is plenty of evidence that loyalty reward programmes work, particularly those that make an effort to engage customers' interest.
"Lookalike schemes bore people, but one that does something unexpected will have more of an edge," says Marc Nohr, managing partner at Kitcatt Nohr Alexander Shaw. Nohr cites the agency's work for Virgin Holidays, which holds regular parties for members of its loyalty programme (see box).
Even traditional points schemes continue to be effective, if they can offer real value. "The key is to make the points mean something, both in terms of reflecting the brand's values and in offering continuous benefits," says Jo Malvern, UK marketing director at online loyalty brand Pigsback.
Brands that partner with 'coalition' cards such as Nectar, which can be used in 18 outlets, are arguably better placed than those with standalone schemes such as Tesco Clubcard and Boots Advantage Card.
According to Loyalty UK Management, which is in charge of Nectar, a couple who shop at Sainsbury's and use an American Express credit card can cash in to the tune of 拢180 a year. If they also regularly buy flights, petrol and energy from other suppliers in the scheme, the payback can reach 拢500 or more.
In addition, the reward can be redeemed in a variety of sectors, which means card members are more likely to get something they really value.
A card linked to a variety of brands also has an advantage for businesses, as it creates a large pool of data that offers a single view of individual customers. "As soon as you stop shopping at Tesco, it loses sight of you," says Brian Sinclair, client services director at Loyalty Management UK. "By contrast, if someone stops using Sainsbury we can still see if they are active elsewhere in the programme, and can go on providing relevant data."
Increasing loyalty options
Online rewards programmes are also proving attractive to brands and their customers. Loyalty programmes, including ipoints, have emerged as one of the most successful online loyalty schemes. Participating brands have reported increases as high as 60 per cent in basket size and 40 per cent in frequency of purchase from their existing customers.
"Traditional loyalty programmes give back around one per cent in spend to the customer," says ipoints managing director Geraldine Tosh. "We aim to actively reward them for their repeat business by giving them up to 10 per cent back."
But some retailers who run their own loyalty cards have developed a new approach. Somerfield last year launched its Saver Card, which offers shoppers instant discounts at the till based on their previous purchasing history. This cuts out the wait associated with traditional points schemes.
Around one million customers are targeted each week, with respondents showing a 13.5 per cent improvement in retention. In its first year, three million cardholders signed up for the Saver Card, which is now linked to more than 60 per cent of Somerfield's sales.
"Transactional data can be an extremely powerful tool when used to leverage consumer behaviour," says Sheridan Thompson, MD of Catalina Marketing, the company that manages the card. "Sadly, many loyalty schemes do not effectively use the mounds of data that they collect."
Thompson's view is backed up by Merlin Stone, business research leader for IBM Business Consulting Service. "Loyalty management works well when companies use customer insight to understand what makes people buy more from them," he says. "This could be anything from the attributes of a brand to timely or good value promotions."
"Good data management is the foundation of good customer management, and companies neglect this at their peril," he warns.
Stone thinks the biggest change to loyalty programmes has been the impact of the web, as it enables savvy customers to discover quickly whether the incentive they are being offered really is a good deal. "It means you need to know which customers are coming to you through which channels if you're going to manage them well," he says.
An advantage of web-based schemes is that customers can be given personalised access. By tracking their behaviour the company can make highly relevant offers. This approach has been taken by InterContinental Hotels Group, whose Priority Club Rewards programme uses personalisation technology provided by ATG.
Customer profiles are created by tracking a mix of transactional behaviour across the web and other channels. Customers are divided into categories, based on criteria such as location, reason for booking and requirements. This means the company can better understand the needs of customers and offer benefits they will find valuable.
The rewards scheme has boosted the firm's annual online revenue by $200 million. "By using web personalisation technology, we've been in a position to deliver new online features quickly, increasing the value of the rewards programme and attracting new members at a record pace," says Del Ross, director of global ecommerce at Intercontinental Hotels Group.
Nonetheless, the debate about how to generate loyalty is a long way from being settled. Some businesses are convinced that the best way to create lasting bonds with customers is to provide a quality offer. But with so many schemes in operation, it seems there is still plenty of life left in the rewards model, as long as it evolves to suit customers' needs.
CASE STUDY: VIRGIN HOLIDAYS
Virgin is one brand that has found relevant ways to offer incentives to regular customers. For instance, first-class business travellers who make eight or more journeys with Virgin Trains each year are eligible for membership of Traveller. This gives them free weekend travel for themselves and their partner, with children travelling for 拢10 each.
Members receive priority seating, as well as car parking spaces in key train stations. They can also get free drinks at London Euston's First Class Lounge. Craik Jones, which runs the loyalty programme, organises special events that have included a golf and spa day at Mottram Hall in Cheshire.
Similarly, Virgin Holidays offers membership of its Frequent Virgin Club to customers who have bought at least three Virgin holidays. This now has more than 90,000 members, of which around half are active customers.
Members can take advantage of 10 per cent discounts and are given preferential treatment at resorts. They can also attend specially organised parties to catch up with friends made during previous holidays, and share experiences. These are routinely sold out, despite the fact that members have to pay.
"The great thing about this scheme is its simplicity," says Helen Litvak, general manager, CRM, for Virgin Holidays. "Customers don't have the bother of saving points - as soon as they have booked three times, they are eligible for discounts."
"It's a real personal service, where club members can call the company directly to make a booking or simply to chat, and often they know staff by name," she says.