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Are Loyalty Schemes Still Rewarding? (The Pros and Cons of Customer Loyalty Programs for Small Businesses)

By December 9, 2019December 10th, 2019Blog

As is the case with various other elements related to customer experience and business management, the concept of loyalty schemes has greatly evolved with the passage of time.

A few years ago, when technology hadn’t come to dominate every aspect of the corporate world yet, a loyalty program offered by the business usually meant a handful of coupons that the customers could avail at their next visit to receive a good or service for free, or at a highly discounted price.

However, with the rapid shift towards e-commerce, businesses are now relying on various other techniques to ensure that their customers keep coming back for more.

If you are looking for ways to strengthen customer relationships and attract lifelong customers, you might be wondering: are loyalty schemes still rewarding?

To answer that question, here are some important stats that you need to consider:

According to survey results, 74% of customers choose to shop at a particular store because of the loyalty program that it offers.

Even if you run an online business, you’d be interested to know that over 80% of customers are more likely to recommend a brand to their friends and family members if it has a good loyalty program.

There’s no denying that loyalty programs have various benefits. They facilitate customer retention, increase sales, raise brand awareness, and so on. But on the other hand, they also have the potential to harm your business. This is because loyalty programs can be difficult to manage, and often come at the cost of reduced profits.

Here is a detailed explanation of the pros and cons of customer loyalty programs that will help you in determining whether or not introducing one is the right strategy for your small business.

Pros of Loyalty Schemes

Gives the Customer an Incentive to Return

If customer retention proves to be a rather daunting task for your business, introducing a loyalty program might be all you need to tackle the problem.

By their very nature, loyalty programs inspire customers to become repetitive buyers. When you acknowledge and appreciate their patronage, they are compelled to keep coming back for more. Rewarding customers for buying your goods or services not only keep them engaged, but also improve customer experience and helps you in establishing a more positive brand image.

Helps Increase Sales Revenue

When your customers try to get a discount, a free item, or any other incentive offered through the program, the chances are that they will spend more money on buying your products or services. In an attempt to avail the said benefits, they are more likely to make frequent purchases as well.

Therefore, by introducing a loyalty program, you can expect to see a tremendous boost in your sales revenue.

Serves as a Low to No Cost Method of Promoting Your Business

As mentioned earlier, introducing a loyalty program can help you increase brand awareness as customers are more likely to recommend a business that incentivizes transactions.

However, if you really want to derive the maximum benefits of starting a loyalty program, you need to do something that sets you apart from literally countless other businesses offering similar reward schemes.

For example, if you run a café, you can encourage customers to visit more often by offering rewards like engraving a customer’s name on one of your tables when they make their tenth purchase, and so on.

Cons of Loyalty Schemes

It Can Be Difficult to Manage

Implementing a loyalty program requires time and money. You need to put extra effort into setting up the system and keep it running smoothly.

A failure to manage the loyalty program not only means that you miss out on its potential benefits, but it can lead to more adverse effects as well. Poor tracking and mismanagement can drive away loyal customers.

It Can Eat Away at Your Profits

The biggest drawback of offering a customer loyalty program is that it can quickly turn into a financial disaster if you are not mindful of the money you are investing in the process.

If the program involves too many free giveaways or a substantial price cut on various items, you can end up losing a great deal of money real fast. The key is to ensure that the volume of sales and increased customer spending balance out the reduction in prices, if not exceed it altogether.

It Might Not Increase Customer Satisfaction

Increasing customer satisfaction should be at the forefront of every business strategy, be it starting a loyalty program or promoting your products in any other way.

Unfortunately, loyalty programs are not always effective in ensuring customer satisfaction. For instance, loyalty schemes based on the point system usually fail to deliver the desired results. This is because, in the case of small businesses, customers need to spend a large amount of money in order to gain any significant number of points.

Similarly, since different customers have different preferences, they might not be particularly happy with the program.

3 Types of Loyalty Schemes

Here is a short summary of the main advantages and disadvantages of different kinds of loyalty programs.

  • Punch Cards– These are easy to implement and manage, but don’t allow you to capture any important information about customer spending
  • Points Program– This helps you identify purchasing behavior, but are more complicated to implement
  • Membership Program– Membership programs enable you to gather data such that you can create a vast range of sales promotions tailored to each customer. These are usually most effective in building customer loyalty, but can be quite expensive to manage.

The Verdict

Are loyalty schemes still rewarding?

The answer is yes. Loyalty schemes are indeed very rewarding for customers and businesses alike.

However, whether or not you will be able to cash in on the benefits of introducing a customer loyalty program depends entirely on how well you plan things out.

You need to look at what your customers want before deciding what type of loyalty program to offer. Take customer feedback and pay close attention to the program’s performance to figure out if it will benefit you in the long run.

Put simply, only you can decide whether a loyalty program will help or hinder your small scale business.