Studies have proven time and again that it is more profitable to invest in an existing customer rather than acquiring a new customer. So deploying a good loyalty programme should be an effective way to retain and influence customers to buy more, according to Aneesh Reddy, co-founder and CEO for Capillary Technologies, who here highlights four key loyalty pitfalls to avoid. This article is copyright 2014 The Best Customer Guide.

Loyalty programme rewards can take the form of discounts or points that could be redeemed for various free products or service. Some retailers offer rewards in the form of exclusive services such as extended return period or other customized offers.

But it is important to remember that loyalty programmes don't all result in profits. Some poorly planned programmes end up losing customers and money for the company. One mistake is confusing a 'reward' with a marketing or promotions strategy. Customers will not appreciate a promotional strategy in the disguise of a reward.

The objective of a loyalty programme is to appreciate and reward your customers for choosing your product/service over the competitors. To serve the right purpose, both loyalty initiatives and rewards must deliver value to consumers.

So, lessons we've all learned from loyalty initiatives that back-fired include:

  1. Loyalty-based discounts may not drive profit or sales
    One of the most common loyalty initiatives is offering discounts on repeat purchases to customers who previously bought a product or service. In this scenario, inflation kicked in increasing the cost of producing a product and subsequently the final price increased, too. This leaves the sale unprofitable and perhaps even costs the merchant money.
  2. Price reductions for loyalty cardholders during seasonal sales
    This strategy appears to improve sales volume but can significantly cut profit margins. An increase in sales may result in a larger number of returned goods. The amount of money and time spent in processing returned goods needs to be taken into account.
  3. Offering low prices initially and hiking the price later
    Many businesses offer low prices for new customers to lure them, only to increase the price later. Many times, prices are hiked after an annual or half-yearly contract. Many telecom companies have used this tactic, but eventually lost customers in the process.
  4. Demoting customers for lower consumption
    Based on the sales volume, loyal customers are given privileged benefits and are given elite titles such as Gold member, Platinum member, etc. Starbucks lost loyal customers because of its practice of demoting customers from Gold card to Silver card for reducing their consumption. Not only did the programme demote customers, it also dropped all accumulated points. This practice hurt the emotions of their former loyal customers, and they eventually disowned their once 'favourite' brand.

Loyalty programmes are different in every sector, and what works well for one market may fail miserably in another. Also, what works in the short term may not be profitable in the long run. An important factor to be considered while analysing the financial implications of loyalty programmes is customer segmentation: classifying customers based on their purchases against your profits, rather than your revenues, and build individual loyalty programmes for each of these segments. The time spent on customer service should also be determined based on this segmentation in order to make your marketing budget work hardest where it matters most.

Whatever the nature of the loyalty programme, as long as it is tied into the emotional context of the target audience, it is likely to result in greater customer engagement. So brands would be better off tracking and catering to their customers' emotional needs through their loyalty programmes than simply giving away pure monetary discounts.