Rethinking Loyalty Programs: Why Discount-Based Strategies May Be Hurting Your Brand
In today’s competitive world, every business wants loyal customers who keep coming back. To encourage this, many businesses create loyalty programs. However, many make the mistake of using discount-based loyalty programs, hoping that giving percentage discounts will make customers loyal in the long run. Unfortunately, this approach can often have the opposite effect.
So, what’s the best approach? In this post, we’ll look at why discount-based loyalty programs aren’t effective and explain why points-based programs are a smarter choice for creating loyal customers.
Why Discount-Based Loyalty Programs Fall Short
Many businesses offer a percentage off for loyal customers when they show their loyalty card. This might sound like a good way to boost repeat purchases, but discount programs often lead to several issues that can harm your brand and bottom line.
Eroding Perceived Value
One big problem with constant discounts is that they can make customers see your products as less valuable. If customers always wait for a discount before they buy, they might start thinking your regular prices are too high. Rather than building loyalty, this trains customers to wait for deals, making it harder to sell at full price.
Creating Transactional Relationships
Discount-based loyalty programs focus heavily on savings, encouraging a "deal-seeking" mindset rather than genuine brand loyalty. When customers only buy because they want a discount, they are less likely to form a real connection with your brand. This transactional approach means customers are only loyal as long as the discounts continue.
Attracting the Wrong Customers
Discount programs are more likely to attract bargain hunters who are only interested in getting the cheapest deal. These customers aren’t invested in your brand and may quickly leave when they find a better discount elsewhere. True loyalty requires more than just the lowest price—it requires a relationship.
Lower Profit Margins
Frequent discounts also impact your profit margins. While discount-based loyalty programs may temporarily boost sales, they cut into profits when customers expect discounts all the time. Over time, this strategy can reduce profitability, even as sales appear to go up.
Why Points-Based Loyalty Programs Work Better
Unlike discount-based loyalty programs, points-based programs are designed to build long-term engagement. They encourage customers to come back without making your products seem cheaper.
Encourages Repeat Business Without Lowering Value
In a points-based program, customers earn points each time they purchase something. They can later redeem these points for rewards, like products, experiences, or exclusive discounts. This approach builds repeat business without lowering the product's perceived value. The regular price remains the same, and customers feel they’re earning something extra for being loyal.
Builds Emotional Loyalty
When customers work toward earning points, they feel a sense of progress and achievement. This creates an emotional connection to your brand. Customers who are emotionally connected to your brand are more likely to stick around and keep buying from you.
Increases Customer Lifetime Value
With points-based loyalty programs, customers have an incentive to buy more often. They want to accumulate enough points for meaningful rewards, leading to a higher customer lifetime value. Customers who regularly come back to earn points will naturally spend more over time.
VIP Tiers for Top Customers
One exciting advantage of points programs is the ability to create different reward tiers. For example, higher spenders might unlock exclusive benefits, which helps you cater to different types of customers. These VIP tiers help you provide extra value to your best customers without lowering prices.
Personalized Rewards for Engagement
Points programs can be personalized based on what customers like. For example, if you know a customer enjoys a particular product category, you could offer rewards that align with their interests. Personalized rewards make loyalty programs feel more special and engaging, keeping customers invested in your brand.
Making the Switch: How to Start a Points-Based Loyalty Program
Switching from a discount-based loyalty program to a points-based one doesn’t have to be complicated. Here are a few steps to help you get started:
1. Design a Points Earning System: Decide how customers will earn points. For example, they could earn points for each dollar spent or for specific actions like writing a review or referring a friend. Make sure the points system is simple so customers understand how to earn and redeem points.
2. Set Up Rewards Options: Determine what rewards customers can redeem with their points. Rewards could include free products, exclusive access to events, or special discounts. Make sure there’s a mix of rewards so that both new and long-time customers feel valued.
3. Create VIP Tiers: Add exclusive tiers for top customers, allowing them to unlock special benefits based on their spending level. These VIP levels can motivate high spenders to keep returning for more rewards.
4. Offer Personalized Rewards: Use customer data to customize rewards. For example, if a customer often buys skincare products, you could offer a skincare-related reward. Personalization makes customers feel special and valued, boosting their loyalty.
5. Track and Adjust: After launching your points program, track its success. Are customers engaging with it? Are they returning to earn more points? Use these insights to adjust the program as needed to make it even better.
Conclusion: Build Loyalty with Value, Not Just Discounts
Discount-based loyalty programs may seem like an easy way to drive sales, but they often fall short of building true loyalty. They can devalue your brand, attract deal-seekers, and cut into profit margins. A points-based loyalty program, however, can drive customer retention without lowering the perceived value of your products.
With a points-based approach, you can encourage repeat business, build emotional loyalty, and reward your best customers. This leads to a stronger, more profitable relationship with your customers.
If you’re ready to launch a points-based loyalty programs that builds genuine loyalty and increases revenue, it’s time to make the switch. Your customers (and your profits) will thank you!