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Loyalty Programs: One of the Hottest Trends for Retailers in 2013

By Victor Ho, CEO, FiveStars

The last few years have witnessed the emergence of ‘daily deals’ as the major marketing innovation for small to medium sized retailers. With the promise of reaching thousands of potential new customers, businesses have eagerly signed up with companies like Groupon and LivingSocial, offering deep discounts as a lure for new customers. As popular as these programs have become, there has been little discussion of whether they actually work. Do ‘daily deals’ genuinely help the retailers that use them? That is, are the large discounts worth the price? Are they generating new customers or merely providing established customers with giveaways? And finally, if retailers aren’t seeing long-term benefits from ‘daily deals,’ is there something else on the horizon that might actually produce the desired results?

Given the large number of businesses that have tried running daily deals over the past few years, we now have a substantial data base which permits us to evaluate the efficacy of these relatively new forms of promotion. For example, Utpal Dholakia, a professor of management at Rice University Graduate School of Business, recently published his findings on the daily deal trend for retailers in an article entitled “How Businesses Fare With Daily Deals: A Multi-Site Analysis of Groupon, LivingSocial, OpenTable, Travelzoo, and BuyWithMe Promotions.” Professor Dholakia found that while it is certainly possible to have a profitable outcome from running a daily deal, only around 55% are profitable and only 48% of businesses that try one daily deal, opt to run a second. Foodservice and beverage retailers are even less enthusiastic, with only 36% of merchants opting to run a second daily-deal promotion.

Why are these numbers so low? Professor Dholakia’s research suggests that the daily deals do not convert enough ‘deal hunters’ to regular customers to cover the costs of discounting products and services. As with any new customer acquisition strategy, if one can’t retain the customers that come in the door, it’s extremely difficult to make a profit from discounts, let alone from such drastic ones.

So what marketing alternatives are there for small- to medium-sized retailers looking to get over ‘daily-deal remorse’? As more and more businesses become disenchanted with deep discounts and the deal hunters they attract, we’ll likely see a shift towards a more sustainable strategy that yields long-term benefits. To put it simply, we’re predicting that most retailers will be attracted to a completely different strategy for expanding their base, namely a new generation of customer loyalty and retention programs. By 2013, you will be hearing more and more about this already fast growing and effective marketing tool for small to medium-sized retailers. I hesitate to call it new, because the concept is actually quite old. Companies of varying sizes and industries have implemented customer loyalty strategies for decades. With large Fortune 500 companies, we’ve seen customer loyalty programs in the forms of credit card reward plans, company branded rewards cards, or programs connected to personal phone numbers in place for many years.  

According to the Harvard Business Review, “customer loyalty is the single most important driver of growth and profitability.” Further research conducted by a Deloitte Retail Survey showed that retailers with a loyalty program are 88% more profitable than their competitors that don’t have one! The profitability of well-executed loyalty programs has been known for decades and as such, Fortune 500s continue to aggressively invest in their loyalty strategies. Just this past year, Starbucks launched their new loyalty program and has already reported a 10% increase in customer visits. BestBuy’s Reward Zone loyalty program has successfully increased revenue by $55 per customer, and Macy’s new Star Rewards Program has resulted in an 8% profit increase worldwide.

Up until now, the cost and technical infrastructure required for these programs have prevented small- to medium-sized businesses from taking advantage of them. Instead, these smaller players have had to be content with paper punch cards. Check your wallet and count how many you carry from your favorite local merchants. Fortunately, a few young technology companies are creating opportunities to introduce new age loyalty solutions to businesses of all sizes and resources. Armed with sophisticated technology, these new companies empower small businesses with the same tools used by the big boys at a very modest cost.  Of course, as was the case a few years ago when the daily deal concept emerged, this is a wide-open field, with a host of new loyalty companies out there, each taking a different approach to this problem. Here’s a basic overview of the current options available today:

Mobile applications: There are literally hundreds of mobile loyalty platforms out on the market right now. They often require a smartphone user to download the company specific app and scan a digital QR code at the point of each purchase.

iPad solutions: A few new loyalty companies are betting on iPad technology to create a more interactive loyalty solution. With this option, an iPad is placed on the counter near your register and requires your customers to enter some form of personal information (usually email) to interact with the program and earn points towards a reward.

Point-of-sale integrated: These types of programs integrate with the expensive equipment in which many retailers have already invested significant resources. These new programs are different from the older loyalty programs offered by POS vendors, which are often overpriced and have relatively few features. Now there are a couple of new companies that have POS integration technology for their modern solutions. The key advantage of this integration is that it allows for important customer transaction data to be captured in order for the retailer to differentiate between high and low spending customers. It also encourages a higher level of employee to customer interaction because all of the relevant customer data is placed right on the POS screen.

To make the right decision for your business, take the time to evaluate the options available to you. First, do all of your customers have smartphones and would you consider them ‘tech savvy’? If not, the last thing you want to do is alienate them from engaging with your smartphone-based loyalty program. Ultimately, your loyalty program adoption rate is the number one contributor to profitability. Find a solution that all of your customers will use.

One of great things about new loyalty technology is the data collection behind these transactions. Make sure you know how the loyalty company you work with views this data. Does the customer data belong to you, the merchant, or are they viewed as the loyalty company’s data (i.e. Groupon & LivingSocial’s policy)? Additionally, find out how you can use this data to implement a good marketing strategy. Can you email customers freely and in targeted ways? Can you contact your customers via text messaging (another huge upcoming trend for retailers)? If social media is something you see value in, make sure your loyalty program has good social media integration.

As merchant disenchantment with the daily deal experience continues to grow, we will witness an explosive increase in the adoption of customer loyalty programs in their place. If you pay attention to the marketplace, you have already noticed how many big companies are increasing their emphasis on loyalty. Many of them have even started promoting their rewards programs with television advertisements. All of the aforementioned factors are pointing to an exciting shift in the way smaller retailers think about running their business. For the first time, they have access to the same type of technology and data mining capability that Fortune 500’s spend millions of dollars developing. This is why customer loyalty will likely be one of the biggest industry trends for retailers in 2013.

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