So many online retailers are jumping into rewards programs that their efforts could soon prove to be a wash, a Jupiter Research report released last week has found. Roughly two-thirds of online retailers are expected to be running formal customer loyalty programs by 2007, up from 24 percent of online retailers today, so companies must offer more than token financial incentives to keep customers interested, the report recommended.
Loyalty programs improve conversion rates and average order value, but they do not guarantee an increase in profits. Online retailers therefore must keep close tabs on the capital they’re allocating, as well as customer reactions and motivations toward loyalty programs, said Patti Freeman Evans, lead analyst on the report, titled, “Online Retail: Formal Loyalty Programs to Become Commoditized by 2007.” That way, retailers can tailor their loyalty programs over time to increase their return on investment.
“What our current data shows is that in order to be profitable, you don’t necessarily need to have a loyalty program,” Freeman Evans said. She advised retailers to “be alert about why you’re doing this and what tactic you’re going to use because so many other retailers are going to have a loyalty program soon that it could become … that consumers expect points from everyone, just as they did from the airlines.”
Retailers with loyalty programs offering points, cash-back or rewards values will increase to 67 percent in the next 12 months, according to the report. That’s even though “consumers have had years of experience with airline and credit-card loyalty programs and are inured to difficult-to-redeem, commonplace or ‘dressed-up’ coupon offerings,” the report said.
Thus, the report stated, “The challenge will be to create a program that bolsters the retailer’s overall value proposition through a combination of experiential and recognition efforts.”
For instance, luxury apparel retailers may want to look into loyalty programs that offer good customers the chance to preorder fashion merchandise, which helps evoke a sense of exclusivity. “Apparel buyers say [preordering] is important to them,” Freeman Evans said.
For example, Neiman Marcus’ 20-year-old InCircle program is known “for offering once-in-a-lifetime products or experiences that customers can only get from Neiman Marcus,” the report noted.
In another example, the report cited Las Vegas casino company Harrah’s, which has learned from its best customers that they value shorter lines and free meals. Harrah’s has subsequently created “a tiered rewards program designed to create an aspiration using benefits like these to entice greater use.”
On the other hand, retailers must realize that loyalty programs are not necessarily needed if the store normally focuses on value pricing, on-time or early shipping and strong customer service, and frequently solicits customer feedback, Freeman Evans said.