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A smart loyalty program (that includes discounts, free products or special services) is a great tool for stimulating continuous purchase decisions among customers. But despite the large number of brands using loyalty strategy, many of such programs fall short of success.

In this post, we’ll  review what drives customer loyalty, how to create a smart customer loyalty program and what pitfalls to avoid.

Today the buying process is more complex, customers are more demanding and your competitors are only a click away. As the result, rising sales (and customer loyalty) often requires more than just relying on a discount strategy or sending coupons. That’s why entrepreneurs have so many questions concerning customer loyalty program that will really work.

  • How to develop an effective loyalty program that will drive customer retention and engagement?
  • What are the potential pitfalls to avoid?
  • What is the best marketing alternative to common low-pricing strategies?

Let’s roll it!

According to Barry Berman, Professor of Marketing and International Business, there are 4 broad categories of loyalty programs:

Type 1. Any customer receives a discount upon registration.
Type 2. A customer gets a free item after he/she has purchased a selected number of products at a full price.
Type 3. A customer gets reward points based on his/her past purchases.
Type 4. A customer gets reward points AND something special like individual & special communications, promotions or services based on his/her purchase history.

The question is what type of loyalty program works best for you and how to get most out of it.

STOP DISCOUNTING (IF YOU CAN’T, USE IT INTELLIGENTLY)

Discounts can increase sales and double your revenue in a single day, drive short-term product demand and entertain customers. However, as a marketing strategy for long-term sales, discounting isn’t worthy. Here’s why.

Your customers like getting a great deal. But when people get something at a discount price, they’re no longer willing to pay as much money for the same product!

What’s more, discounting can easily damage a brand image and devalue the items you offer. As, for example, many people value products/services based on their price.

According to a study in the Journal of Consumer Research, the effect of discounts is not always positive.

Leonard Lee (Columbia University) and Claire I. Tsai (University of Toronto) conducted an experiment: one part of the participants purchased chocolate truffles at a full price of $1, the other part got them at a discount of 50 cents. One more important thing, half of the participants consumed the chocolate right away, and the other half waited for a week before consuming the chocolate.

The results. The participants who paid $1 for a product enjoyed it no matter when they consumed it (immediately or 1 week later), but the participants who got the product at a discount price enjoyed it only if they got it immediately.

What it means to your business. Discounts may increase sales in the short run, but could have negative long-term effects on customer satisfaction and brand loyalty.

The trick to discounting properly is to increase the transaction value or convert new customers into regular – not to make customers wait for the sale. For instance, a good way to discount is to do it like this: Buy any [your product] and get 50% off on [your product] or Buy 3 [your product] and get [your product] for free.

WHEN A FREE PRODUCT IS MORE VALUABLE THAN A DISCOUNTED

A free product is not necessarily cheap or low-quality. Today brands offer free bonus products with a required purchase.

There was an experiment, one group of people after buying a jar of organic tomato sauce for $8,95 were offered a box of spaghetti for a highly discounted price of 50 cents. The other group of people after buying the same tomato sauce for $8,95 were offered a box of spaghetti for free.
The researcher asked both groups one question “How much would you be willing to pay for this box of spaghetti?”

The result. Those people who got spaghetti for free were willing to pay an average $2,95, those who got spaghetti for a discounted price of 50 cents were willing to pay only $1,83.

What it means to your business. Promotions with low discounted prices devalue products more than free offers.

“When a free product is paired with an expensive one, customers assume it is worth more than if it was offered at a low discounted price. For example, if a luxury jeweler offers a free bottle of wine with a purchase, consumers assume it isn’t cheap. But customers might assume the same wine is cheaper if the jeweler offers it for $1,” concludes the author of the experiment.

MOVE BEYOUND DISCOUNTS & SALES

How to track customers’ attention, drive engagement and skip so widespread discount programs? Encourage customers to increase their purchases with the reward points based on their activity on your website. Give extra points for the number of purchases, feedback/reviews/ratings, photos with your product, newsletter subscription, sharing their referral link, voting in a poll, automatically on a birthday, following you on Twitter/Facebook/Google+ and so on.

Since online merchants use the same points to all their customers, such loyalty program may not necessarily lead to creating truly loyal clients. But undoubtedly, such a reward program works great.

THE ART OF CUSTOMER LOYALTY

Instead of lowering your pricing strategy ADD VALUE. Reward your customers with exclusive promotions, premium service and special customer support, invitations to special events, personalized recommendations, early access to new products, additional units based on their purchase history. Such benefits may be perceived as more valuable to your clients than just mere discounts.

Customers don’t need to save 50 cents – but if you make them feel special, purchasing from you will become their regular hangout.

By adding more value you get your clients pay at full price, make them feel great and entice to act before the promotion ends.

BOTTOM LINE

A well-planed loyalty program can encourage your would-be customers to stop with your business and your currents clients to buy more frequently from you, spike sales and increase revenue, create positive word-of-mouth advertising opportunities.

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