Loyalty programs are standard in many industries. But what advantages and disadvantages do they offer in the service sector? What should you look out for when implementing them?
Loyalty programs work according to a simple principle: customers who reach a certain sales threshold with a company or call up a certain quota of services are assigned an elevated status that is linked to certain benefits.
Such programs are already widespread in the B2C sector. That's probably why most of us have a Miles & More or Payback loyalty card in our wallet. They are also becoming increasingly common in B2B after-sales. The benefits are clear: loyal customers are rewarded in order to bind them to the company in the long term. However, there are a few points you should bear in mind when introducing such a program. If it is set up incorrectly, it can even have a negative effect on customer loyalty.
Loyalty programs offer customers and providers benefits
Hierarchical customer programs typically award an elevated customer status to customers who reach a previously defined sales level ("VIP", "Gold", "Elite", etc.). When they reach this level, they receive a number of benefits that other customers are not allowed to enjoy. Usually in the form of discounts and premium services. Companies spend billions of euros on this every year. And studies show that this investment also pays off in the form of an increased repurchase rate, greater customer loyalty and a generally higher level of customer satisfaction.
But there is a catch: most of these hierarchical loyalty programs are characterized by the fact that the status can be lost again if the sales threshold is not reached. This is intended to provide an additional incentive to buy and helps to offset the costs of the program. However, this is exactly where things can get dangerous. If a customer loses the acquired status again, the reverse effect sets in!
Downgrades lead to disloyal customers
Intuitively, this should not initially be seen as critical. If the customer is downgraded back to their original level, their loyalty and repurchase rate will decrease to the same extent as they were previously increased by the upgrade. But this assumption is wrong! Studies have shown that the effect of a demotion exceeds that of a promotion to a higher level of the loyalty program.
In concrete terms, this means that the customer you have promoted to a higher level as a reward is more disloyal after his demotion than he was before the upgrade. So, in case of doubt, the company would have been in a better position if it had not promoted the customer to a higher level at all. This circumstance is psychologically based and has no logical justification, but it must be taken into account when designing a loyalty program.
What options are available to minimize this negative effect on the general effectiveness and efficiency of the loyalty program? One logical consequence would be to dispense with all downgrades in the system. However, such a system would provide false incentives. Customers would buy a lot in one year in order to achieve the status and could then retain it over the entire customer life cycle. In subsequent years, the sales volume would drop dramatically and it is questionable whether the expected sales level would justify the benefits that come with the elevated status. Consequently, it is not realistic or economically viable to develop a system without downgrades.
Longer valuation periods have advantages
However, there are certainly other levers that can be actively tackled. Many programs are designed to redefine customer status every year. As a result, many customers lose their status again after a very short time. As a result, the loyalty of many potentially valuable buyers is jeopardized by their premature demotion. They may also feel that they have not been given a fair chance to prove themselves as valuable customers within such a limited period of time.
Periods of 2-3 years in which the customer status and the associated loyalty level are evaluated and defined are more target-oriented. It can also help not to calculate in absolute time periods, but instead to use moving averages for the evaluation. This compensates for one-off effects. There may be good reasons why a customer has purchased fewer services from a company in one year than usual. This circumstance should be taken into account.
Give your customers control over the evaluation process
Customers also respond very positively when they are given control over the process. This means that customers are given the opportunity to control the process in their favor and according to their wishes. For example, early notification of an impending downgrade must be implemented, which then allows sufficient reaction time. But there are also other means!
Let's take an example from the B2C sector: as part of the Miles & More program, Lufthansa offers its customers the option of preventing an impending downgrade by allowing them to buy miles in order to maintain their status. This offers the customer a solution and they can decide for themselves whether to use these options or opt for downgrading.
In addition, apologies, for example in the form of a formal letter explaining the demotion and the reasons for it, also have a mitigating effect on customers' thoughts of leaving. And every company should invest this euro so that a customer relationship that has lasted for years does not end abruptly due to a downgrade in the loyalty program.
Source: Does Customer Demotion Jeopardize Loyalty?, Journal of Marketing (2009), Tillmann Wagner, Thorsten Henning-Thurau, Thomas Rudolph
