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Since the earliest days of commercial activity, concessions in the form of discounts have been offered to repeat customers as part of their sales promotion programs, thus encouraging them to come back to the same supplier. The new technology has enabled the loyalty schemes to become highly sophisticated.
Over 25% of ‘scheme members’ are happy to switch to a scheme offering marginally better benefits and as such display loyalty. Once saturation is reached, it may be that lower prices may well become the determining factor in customer choice.
A number of the schemes discussed below involve the awarding of points, stamps or vouchers to the loyal customer. Such rewards are known as alternative currencies as they can be traded in for goods and services at an agreed exchange rate, in the same way the actual cash is used for purchasing goods and service.
The various Cooperative societies that have sprung up in India are based on the concept that, they are owned by the members. The major benefit of Cooperative society membership is the dividend that is paid out either as cash or goods at the end of the year. For each transaction, a member is offered a certain discount that is recorded on a slip and placed in the dividend book.
Features of a successful loyalty scheme
The Co-op dividend was successful in attracting customer loyalty as it displayed all the attributes of a successful loyalty scheme.
The most important attribute of a successful scheme is that the customers perceive added value. If they do not, then the scheme is doomed. To add value, it must offer benefits that the customer wants as opposed to those that the organization may wish to give.
1. Be mutually beneficial
The original co-op schemes needs to be viewed from sociological perspective at the time. By owning the organization, the members were able to control prices to some degree. Given the smaller amounts of disposable income available to a working class family at the time, this was of considerable benefit when linked to the payment of dividend.
The organization benefited from a customer base that was locked into it due to ownership and culture. Today, the benefits to the organization of an effective loyalty scheme can be viewed not only in terms of customer loyalty but also in the information they can provide the organization about the customer.
Electronic Point of Sales (EPOS) equipment linked to the information held on the cards issued to members of loyalty scheme can allow an organization to build up a profile of the customer.
Company is able to use customer-ordering information and his profit to make targeted special offers based on the previous purchase. This is not only beneficial to the customer who can receive extra discounts on regularly purchased items, but it allows the company to make the customer feel special — that it is ‘his / her ‘ special offer and not just a general one open to all.
2. Reward increased spending
A successful loyalty scheme will reward spending deferentially. Whether it is points system such as the ones operated by many supermarkets or a percentage scheme.
One of the most important functions of loyalty scheme is that it provides the organization with the name and address of the customer. This then allows the organization to mail out the customer. Mailings cost money and anything that can allow those monies to be targeted should be welcome.
General details about the organization be sent to the customer, along with special offers. Receiving a personalized mailing can also strengthen the customer’s sense of belonging, thus binding the customer closer to the organization.
The cost of loyalty scheme should be borne by the organization and not the customer. It may well be that there is an entry barrier requiring a certain level of initial purchase to enter the scheme.
The original cooperative dividend schemes were very restricted as there were not transfers between Cooperatives in different parts of the country. The development of card-reading computer systems has allowed organizations to offer multi-site loyalty schemes.
Not only have successful loyalty schemes developed a multi-site function, many are increasingly offered as a multi-organizational schemes. The loyalty schemes operated by several airlines allow the customer to collect points based on purchases at a wide range of retail and food outlets in airports or hotels.
Whilst the logistics of operating a multi-organization scheme may be more complex, they are eased by the ability of computers to communicate very effectively and thus there is no real problem in operating such a scheme provided that the partners have the equipment in place to read each other’s cards.
7. Ease of redemption
One of the problems with earlier types of loyalty schemes was the effort required by the customer to redeem their reward for goods.
Modern technology makes it very easy to store the accumulated records on a magnetic strip on the customer’s loyalty card and to use this information to ease redemption. The easier it will use redeem a reward, the more likely the customer is to use that particular scheme.
Most current loyalty schemes are based around a card that can be read by a computer, whereas earlier schemes were based on issue of stamps, vouchers, etc.
8. Trading stamps
Large numbers of outlets across the whole of retail sector offered these stamps, which are collected by customers who then redeemed them for items. The problem with this scheme was that it tended to drive prices up as retailers had to pay to take part.
Large numbers of consumers collected the stamps and there was pressure on retailers to offer them in order to match their competitors. The introduction of cards that could be read by computer helped hasten the demise of stamps.
The idea of a voucher included with each purchase of particular product was used by the cigarette companies in the years after World War II with considerable success. Large numbers of smokers collected vouchers that were, like trading stamps, redeemable against goods in a catalogue. As with trading stamps, the vouchers had to be stored, counted, collated and then sent through mail.
10. Air Miles
One of the most successful loyalty schemes has been ‘Air Miles’. Air Miles was designed to offer the glamour of air travel. All airlines have a proportion of empty seats on many flights and the concept was that Air Miles Promotions would purchase from Airways that it could then sell on to retailers in the form of vouchers in a series of air mile denominations.
11. Pseudo-loyalty schemes
By guaranteeing a residual value for a new vehicle after a few years (normally 2 or 3) and with an allowable annual mileage, a customer would be able to pay only the difference between the purchase price and the residual value. There was also a guarantee that there would be enough money left over in the deal for the deposit on a new vehicle at the end of the scheme period.
Thus, the customers receive lower repayments and the manufacturer, in effect, locked the customer into buying a new vehicle on a regular basis. Provided that the customer is happy with the products of the chosen manufacturer, these schemes can be useful, but as with all such arrangements, there are financial penalties if the customer wishes to leave the scheme early.