How to build a loyalty program for low customer defection?

Posted by Paul Anderson

How to build a loyalty program for low customer defection?

In the future, growth won’t be easy for the retailers – Janet L. Hoffman and Eric M. Lowitt. 

According to Accenture Research Report (conducted by Janet L. Hoffman and Eric M. Lowitt), the risk of customer defection in the retail sector is about to skyrocket. As they state it – ‘’Customers are intelligent, informed and savvier today. Retailers cannot attract/hold them through traditional approaches. Although customer retention is not a pipe dream, it is expected of retailers to come up with innovative and avant-garde solutions.’’ 

What the research states – 

In lieu of the current customer defection at an extraordinary rate, multiple research bodies have conducted related surveys. Here’s a snippet to a few of the key insights: 

National Retail Federation (NRF) conducted a survey examining the top priorities of the retailers worldwide.  Results weren’t surprising. Achieving sales growth through reduced customer defection occupied the first rank. 

Kanbay Research Institute stated retail industry’s growth rate has slowed from 16.7 percent in 1995 to 8.1 percent in 2005. 

Explaining this context further, National Retail Federation (NRF), forecasted a slower growth rate in the coming years, further substantiating the retail industry’s declining growth rate.

According to these research bodies, the US retail industry is specifically in an alarming position. With many experts predicting the industry to head towards a zero-sum game, (where retailers aim at defecting customers away from competitors), it is no less than imperative for the retailers to brainstorm and come up with forward-thinking value-generating customer retention programs. 

In the words of Janet L. Hoffman and Eric M. Lowitt, ‘’while there is no magic bullet to dramatically lower the defection risk, loyalty programs come as the most dependable and effective solution to chip away this obstacle to growth. ‘’

The idea of a loyalty program 

Having discussed the importance of customer retention critical for survival, next, we move on to building a customer loyalty strategy. Ideally, customer loyalty strategy should be a central component of every retailer’s growth objectives. (And it is also). But then is it actually benefiting? Have the retailers been able to implement it in the right way? Let’s see – 

Gartner Group, published – approx 72 percent of retailers have a loyalty strategy. Despite this, customer defection risk within the industry is high. 

Accenture research – predicted 70 percent of US consumers are faithful to one retailer. However, 85 percent of these “loyal” customers will switch their loyalty if properly enticed. 

Clearly customer defection risk is prevalent and high. 

3 steps to a better loyalty program (as suggested by Accenture research) 

1.    Align loyalty strategy with customers’ value

Most retailers create a ‘’sense of urgency” for the customers to make a purchase. For example, the CEO of a leading hypermarket retailer highlighted gift certificate as its loyalty program’s core benefit. This certificate had an expiration date. Due to which, majority of the loyal customers would get back to the store before the expiration date of that certificate. (They did not want to lose the points gained through regular purchase). 

Now the question is – is the above-mentioned tactic company-centric or customer-centric? Who is the actual receiver of the loyalty program’s benefits? Definitely, not the customer. 

According to Accenture Research, a large section of retailers (especially in the US) view customer loyalty programs as a process to get short-term sales. For instance, in the above-mentioned case, the retail company was aiming at increasing its sales for a month and hence included the expiration date criteria. Consequently, customers hurried to the store and the store profits boosted for an X no of days. 

How is this harmful? 

Accenture Research has stated – short-term focus leads to increased customer defection risk. Sooner or later, customers realize that these programs are not in their favor and conversely, compel them to spend more. Quite obviously, customers don’t feel appreciated and consider switching over their allegiance to some other retailer. 

Result – Company faces increased customer defection that affects revenues and margins. 

How to combat this problem? 

Retailers need to shift the focus from their profits to customers’ gain.  Their loyalty program should be framed, ensuring that the customer is the primary beneficiary of the loyalty program benefit. Then only can a retailer save its customers from being diverted to its competitors (who is silently figuring out the right enticement to attract).

2.    Do not use loyalty program as a defensive weapon 

Steve Riggio, CEO of Barnes & Noble blames the ineffectiveness of loyalty programs due to its wrong usage by the retailers. He explains, ‘’ Retailers use loyalty programs as a self-protective weapon.’’ Under the threat of high competition and a zero-sum retail game, retailers are deliberately using the loyalty program as a defensive measure to hold onto their customers. 

Result – the loyalty programs are weak and ineffective. They are not providing the kind of rewards that the customers expect, which is creating an open flank for the other competitors to jump in and poach the customers. 

In the words of a retail expert, ‘’there are numerous offensive-minded retailers who target the not-so-faithful customers of their competitors. They constantly track the purchase activities and preferences of the customers and at the slightest prospect, come up with product offerings that are too attractive to be ignored.’’ 

3.    Use the element of price carefully 

Its common sense that low price is one of the key reasons why customers stick to a brand. Hence, retailers who wish to achieve growth through high loyalty offer products/services at competitive rates. But according to Accenture Research while price drives loyalty, it also plays an important role in deflecting loyalty. 

In other words, a customer loyal to a brand for several years will not think twice before switching over his faithfulness in the lieu of low prices. This fact indicates that price most often can be a volatile factor to be used as one of the USP. 

Resultant to which, it is advisable for retailers to configure their loyalty programs accordingly. Instead of price, emphasis can be given upon service benefits such as free alterations, free shipping, home delivery etc. 

Final Thoughts 

As mentioned earlier, Customers are savvier and armed with more options. Industry experts predict that in the coming days, customers are poised to more stringently evaluate before committing their allegiance. With this mind, it becomes imperative for all retailers to align customers’ value with their customer acquisition and retention programs. 

Experts recommend investing in custom software development to design and develop a loyalty program that offers tangible value to the customers. Retailers who actively and smartly implement a customer-centric loyalty strategy to retain and acquire loyal customers will not just survive but also win in the retail’s zero-sum growth game.