Customer loyalty programs are widely used by both online and offline businesses to encourage repeat purchases. But a new study suggests that online sellers may benefit much more from these programs than brick-and-mortar businesses do. In fact, "a loyalty program in an offline setting may not have any contribution to profit, or it may make it worse,” says Sanghee Lim, a researcher at Johns Hopkins University Carey Business School in Baltimore.
Offline customers tend to patronize sellers who are physically nearby, whether or not they get any loyalty reward, Lim explains. But loyalty rewards are more important, and useful, for online sellers. “Online customers are more dynamic. They are not bound to a geographic location as they are in offline markets,” she says.
One limitation of the study is that it doesn’t look at businesses that sell both online and offline, Lim points out. Future research may examine mixed-channel sellers, she adds, as well as analyzing real-world data rather than relying on a statistical model as this one does. Meanwhile, Lim suggests offline retailers consider investing in data analytics to better understand customers and their needs, rather than just trying to win repeat business through rewards.
OPEN Forum asked three loyalty marketing experts to compare loyalty rewards in online and offline environments and to discuss how businesses can best use loyalty programs: Seth Sarelson is COO and co-founder of New York City-based RevTrax, which helps users quantify digital marketing’s impact on in-store sales; Robbie Kellman Baxter is founder of Peninsula Strategies, a consulting firm in Menlo Park, California, and author of The Membership Economy; and Barry Kirk is vice president of loyalty solutions at Maritz Motivation Solutions in St. Louis, Missouri.
Do loyalty programs work better online or offline in your experience? If so, why?
Seth Sarelson: I don’t think about an online register or offline register. I just think about commerce. About 90 percent of transactions take place offline, so if the goal is to stimulate commerce, the offline piece is critical. Whether a loyalty program has someone engaging on a phone or tablet or PC, any device can be your loyalty engagement vehicle.
Robbie Kellman Baxter: The more you understand who your customer is, the more you are able to build loyalty. Most rewards programs are just rewards for volume. They’re not really about loyalty. Historically, they couldn’t track loyalty. They could track how often someone bought and how much they spend. For small companies, the thing to be cognizant of is that when somebody makes a transaction online, you can track that data. It’s really what you do with it, which is do something better or give them a better experience.
Barry Kirk: I’d agree with all that. Drawing a clear distinction between online and offline as an either-or proposition is a little curious. You have to have both those channels integrated to have an experience that’s going to drive loyalty. There could be a business that only operates online, but I’d be hard pressed to think of a business that only operates offline. It’s basically a requirement today for a successful program that you engage online, because that’s where people are spending their time.
How can online merchants best use loyalty programs?
Kirk: There are basic things you need to serve a customer in a loyalty context. Rewarding for transactions and rewarding for frequency works very well, but on its own, that approach doesn't go far enough. It’s actually connecting in other, more meaningful ways. One of them might be status.
In the hospitality and airline industries, they’re very effective at leveraging loyalty, and status is probably the most effective way they do that—you get to sit in a lounge, you get to board early, etc. Online retailers need to think about how they can treat customers differently because they are frequent purchasers. For instance, give them early access to merchandise, or hold special events where only they can get in. In an in-person transaction, it’s easy to make somebody feel special. Online retailers can do that, too.
Sarelson: The biggest thing for me is extending the duration of the touchpoints where the consumer is engaging with the brand. A great example is [a nationwide pharmacy's] program [that] gives consumers rewards points for physical activity. When I’m checking into a yoga class or I’m running and I’m thinking about [that pharmacy], that’s a great thing. I’m nowhere near the store, I’m not shopping, but I’m engaging with the brand.
What are examples of successful offline loyalty programs?
Kellman Baxter: If you’re heavy participant in [a certain casino's] experience, they’ll often invite you come down to meet [a celebrity]. You can shake their hand and take a picture. You can’t buy that. And every organization can come up with a special experience that can only be accessed by members—a tour of the kitchen, a private gardening lesson with the landscaper, etc.
Sarelson: I’d encourage small businesses to try things like Foursquare. A customer can get something for checking in or referrals to friends. And there are a lot of other activities that can generate that kind of engagement. They are easily usable by consumers, and there’s very little investment by a small-business owner who would be scared by the idea of developing an app. Loyalty programs are not just something for big companies. Loyalty can be implemented on a micro level and be incredibly compelling for local merchants and consumers.
Kirk: If I were a small-business owner, I’d deliver VIP experiences for my best customers. That’s not terribly difficult to do if you’re an owner-operator and you recognize people who come in frequently. The challenge is when the owner-operator isn’t there. Some upscale restaurants are using small-scale CRM programs to capture details like what time of day customers come in and what kind of cocktail they prefer. That way, it’s not up to the owner-operator. If you have that kind of information captured in some simple database and employees can share it, it gives you the ability to make a customer feel special in a way a larger company can’t.
Read more articles on customer engagement.