What are loyalty programs good for?

by Zeeshan Sheikh

Loyalty programs are useful only to the extent they create two things:

  • Consumer behaviours
  • Defensive moats which are strengthened by those consumer behaviours

What defensive moats might a business want to shore up? Hamilton Helmer identifies seven categories (or “7 Powers”) under which all others fall:

  • Economies of Scale
  • Counter Positioning
  • Network Effects
  • Switching Costs
  • Brand
  • Cornered Resources (including Customer data/insights)
  • Process Power

For Helmer, defensive moats are specifically those qualities of the business that cannot be eaten away by “competitive arbitrage”: that which competitors can’t just undercut you on. When so many loyalty programs, and loyalty program providers, are just offering shallow discounts, this is of particular importance.

But how could a loyalty program help create real defensibility? To name just a few examples:

  • If a customer is already primed to buy from you regularly (say, you’re a local coffee shop), “earn & burn” points incentivise repeat purchases and the points accrued create switching costs. (Note, however, those switching costs are obliterated as soon as the customer redeems the points.)
  • It’s impossible to treat all the customers like VIPs, especially at ecommerce scale. But a VIP loyalty program helps you identify your most valuable customers, and provides incentives for customers to become VIPs for rewards. This enhanced level of customer care turns customers into evangelists, which strengthens your brand.
  • If your company relies on Network Effects, becoming more valuable to customers the more customers are using the product, it’s a no-brainer to incentivise customer referrals.
  • A loyalty program can be the core of an omnichannel marketing/sales operation, one that seamlessly connects social media audiences, CRM, and personal communications across marketing and customer service to create Process Power. This is operational excellence that creates a great experience for customers.
  • And in a world where ecommerce companies are all running their operations on the same services—Shopify, Amazon, Stripe, etc.—the exclusive data they have on their customers is one of the few Cornered Resources they have left.

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