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Protecting margins through loyalty programs

In a recent research report published by the Kilts Marketing Center of Chicago Booth school of Business, the authors suggest that in recessionary economic times, companies should favor marketing spending & promotions aimed towards brand loyalty as opposed to spending money on trade promotions to switch consumers. Additionally, they found that customers tend to choose “prevention” offers, such as price discount, instead of “promotion” offers such as buy one get one free. Thus, we see retailers and other direct to consumer companies are undercutting each other by slashing prices. While this helps them to boost sales and clear inventory, it also reduces the company’s margins and in worst case creates big losses.

In order to promote loyalty, retailers have heavily adopted loyalty programs such as co-branded credit cards & private label cards with membership rewards.  However, many companies haven’t realized that well designed and efficiently executed loyalty programs can help protect margins by creating a differentiated pricing. This approach has been adopted for some years by the hospitality industry. Hotel chains provide higher discounts to their platinum and gold members, while giving slightly smaller discounts to basic or silver level members, and none to non-members. Or they provide access to tier specific lounges at their hotels.  In current economic conditions, loyalty programs can help marketers achieve dual aims of promoting customer loyalty, while stopping the bleeding on the bottom line. This can be done through creative campaigns that are targeted accurately and executed efficiently. A few important aspects constitute a system that powers a successful loyalty program: 

1. Integration: Loyalty program should be integrated with the campaign management system, so that marketer is able to setup sophisticated loyalty campaigns and track them efficiently. Member purchases associated with a campaign should quickly and accurately trigger the rewards activity in their accounts. 

2. Flexibility & Consistency: Loyalty programs must support flexible discount and pricing rules and integrate with the front & back office systems seamlessly. Only then can a marketer easily ensure pricing consistencies across the organization. Tier based pricing, rewards and redemptions can help create differentiated pricing for various products, giving marketer greater control on the bottom line.

3. Intelligence: Finally, a marketer should have the ability to analyze member reward accumulation & redemption behavior in conjunction with their buying patterns and campaign responses. For example, platinum members are more likely to respond to a promotion offer than basic members, as platinum members tend to be less prices sensitive. Such insight would help marketer design more effective campaigns.

A combination of these three principles can assist marketers capitalize on their customer loyalty and counteract declining overall consumer spending. Companies cannot operate with same old marketing offers that are chasing limited consumer dollars.

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    • Hi Harshit,

      We have had good uptake by customers in a short amount of time since our solution was generally available. Customers are indicating some of the same urgencies that I talked about in the blog – that in recessionary times the focus is on maintaining customer loyalty as against customer acquisition from competition. Interestingly, the biggest traction has been in retail, although other direct B2C industries, namely Travel, Banking & Telco have also shown interest.