Loyalty Marketing explained
Loyalty Marketing: this article provides a practical explanation of loyalty marketing. After reading the article, you will understand the basis of this powerful marketing tool.
What is Loyalty Marketing?
Loyalty marketing, or Total Loyalty Marketing (TLM), is a marketing approach whereby the organisation focuses on retaining existing customers by providing incentives. Loyalty marketing strategies include rewarding returning customers for continually using a company’s products or services. Examples of such rewarding promotions include discounts, free products, access to events or limited products and other rewards.
Loyalty marketing has been used for hundreds of years. However, the approach was first used as a marketing tool by consumer marketing organisations in the mid-1990s. Many of the loyalty programmes that have been developed, examples of which are mentioned in this article, have changed the way consumers build relationships with companies and how and how much they spend.
Many people have become accustomed to the rewards they receive from their airline or hotel loyalty programme. Research also shows that almost half of credit card holders in the United States use a rewards programme-based credit card.
Business expert Fred Reichheld, developer of the Net Promoter Score (NPS), wrote a book about the value of consumer loyalty and customer referrals to the growth and performance of large organisations.
Loyalty marketing definition
Loyalty marketing is a marketing approach based on strategic management, consisting of marketing efforts aimed at enticing customers to buy products again and again.
The Pareto principle is real, even when it comes to loyalty marketing. The top 20% most important customers will provide 80% of the revenue. That is why it is important to invest in the customer experience. This includes the use of personalised marketing techniques, such as personalised messages and rewards. This way, customers will feel special and welcome within the brand.
Total Loyalty Marketing (TLM)
Total Loyalty Marketing (TLM) is an integrated marketing approach. The authors of the book Total Loyalty Marketing are the Germans Anne M. Schuller and Gerhard Fuchs. The core of this concept is the loyal customer.
The main elements of the concept are business management, teams and business and marketing analyses. The company’s management determines the marketing strategy, supported by marketing analyses. The team of employees delivers perfect products to the consumers, while the business and marketing analyses are targeted at the company’s most valuable target groups consisting of loyal customers.
5 levels of customer loyalty
Total Loyalty Marketing (TLM) defines five different levels of loyalty.
- This is the first contact between the customer and the company. The customer enters the company’s environment and gets to know the organisation’s products
- First-time buyer. This is when the interested customer has made a purchase. He or she is now fully aware of the products sold by the organisation
- Frequent buyer. This is when the new customer makes a follow-up purchase because he or she is satisfied with the product.
- The frequent buyer continues to see value in buying products and enjoys the rewards he or she receives for doing so. The positive experience will be passed on to new potential customers, making the promoter a valuable asset to the organisation
- Loyal customer. The promoter is now a very loyal customer who manages his or her relationship with the company very consistently. The loyal customer is also a permanent user of the organisation’s products or services
Managing a loyalty programme
Implementing and managing loyalty programmes is expensive because they require technological, capital and human resources. This may include the development of an app, the producing and distributing of cards, replacement cards and leaflets, emails, software and more. These are capital-intensive methods.
Having an effective CRM is also essential for the successful implementation of loyalty programmes. Often, for large-scale programmes, external companies specialised in loyalty programmes are hired. This costs a lot of money, but the customer insights gained are valuable.
Examples of loyalty marketing programmes
Below, you will find some examples of loyalty programmes from different eras.
Rewards in food packaging
A well-known example of a very successful loyalty programme is the flippo. Manufacturer Lays, followed by other brands, regularly included small objects in the packaging of their food.
The brand’s customers were encouraged by these rewards to buy their products again and again. In the United States, Frito-Lay is an icon when it comes to putting rewards in products.
Premium programmes
At the end of the 18th century, American traders began to distribute copper tokens to customers, which they could collect and exchange for products in the shop.
This promotion proved to be effective and was adopted by business people all over the world. An example of this is the Grand Union Tea Company. They gave tickets to customers which they could then exchange for items from the company’s catalogue.
About a century later, the first trading stamp was introduced. The Sperry and Hutchinson Company was the first external supplier to implement trading stamps. They supplied to petrol stations and supermarkets.
Customers were given green stamps when they purchased a product, stuck them in a booklet and could then redeem the stamps for products from the shop.
Frequent flyers
American Airlines was the first airline to launch a frequent flyer programme in 1981. Customers earned so-called miles by flying American Airlines, which they could later redeem for airline tickets. Today, the programme has more than a hundred million members.
Loyalty apps
And in the past decade, several large companies have introduced apps. Customers can use such apps as a replacement and extension of the traditional card. These apps are usually downloaded and used on a smartphone. A well-known example of such an app is the Starbucks application. Customers can place pre-orders through their advanced loyalty app.
Tiered reward programmes
Tiered reward programmes, where the user can enjoy increasing benefits with each step, are very popular and work because they allow organisations to incentivise future spending. Customers often earn points. These points equal more rewards. For example, if a customer spends X amount on products, he or she gets X x2 in points. A great advantage, and also the strength of loyalty programmes as described by Fred Reichheld, is the referral to new customers by existing ones. Word-of-mouth tactics prove very effective in acquiring new customers.
Evaluating reward programmes
When using and managing loyalty marketing, it is important to keep track of its success. Some statistics are important and revealing in this regard:
- This metric represents the revenue generated by members of the loyalty programme
- This is the percentage of members that make at least one transaction within a given time
- This is the number of transactions where membership of a rewards programme has been used
In addition to closely monitoring the aforementioned statistics, getting a flying start with such programmes is also crucial. Often, the greatest results are achieved in the first six months of the initiative.
During this period, an organisation assesses whether or not the programme has achieved the desired effect. This is stimulated by rewarding new members even more. Generosity enormously helps increase the reach of word-of-mouth advertising.
Advantages of loyalty marketing
The use of loyalty programmes and loyalty marketing creates a strong competitive advantage for organisations A company that uses such initiatives has customers who are encouraged to buy from the same company.
Cost Efficient
If implemented properly, loyalty programmes save money. Even though the start-up and management are relatively resource-intensive, a loyalty programme is cost-effective in the long run because retaining new customers is cheaper than acquiring new ones.
In short, the cost per acquisition (CPA) is higher for a new customer than the cost incurred through a loyalty programme for existing customers.
Branding and credibility
Loyalty programmes are very effective for creating a strong brand. If customers have a good experience with a rewards programme, they will tell their friends and family about it.
This ensures a high credibility because they prove that these programmes actually deliver benefits. According to research by Collinson Latitude, around forty per cent of customers who take part in such a programme tell their friends and family,.
Stronger customer relationships
Loyalty programmes improve customer relations because they make the customer feel like they are important to the company. In addition, a rewards programme enhances the customer experience.
By offering special deals, free products and more benefits to the customer, the customer has a good and pleasant interaction with the brand.
Loyalty marketing summary
Loyalty marketing is a marketing strategy that focuses on retaining existing customers by offering rewards in the form of discounts, exclusive access, free products and more. Total Loyalty Marketing (TLM) is an integrated marketing approach developed by Anne M. Schuller and Gerhard Fuchs.
It focuses on loyalty marketing and reward programmes. The book describes five levels of loyalty: applicant, first-time buyer, frequent buyer, promoter and loyal customer. These levels reflect the ideal stages a customer goes through when it comes to loyalty marketing.
Examples of reward programmes can be found in large numbers as such programmes are very popular. The average consumer in the United States is already used to rewards programmes and expects nothing less.
The implementation of reward programmes started hundreds of years ago among American traders. The trading stamps concept followed a century later and at the end of the 20th century, American Airlines introduced the frequent-flyer programme.
Setting up and managing loyalty marketing techniques is resource intensive. Yet, these costs are lower than the costs of acquiring new customers. To successfully manage such an initiative, it is important that the organisation is well organised. A strong CRM is necessary and the activities may need to be outsourced to a specialised company to ensure a smooth implementation.
Now it is your turn
What do you think? Are you familiar with the explanation of loyalty marketing? Do you participate in any reward programmes? Or do you know people who regularly receive great offers or exclusive products from their favourite brand? Do you think the cost of implementing such a programme is worth it in the long run? What other ways do you think are very effective in strengthening customer relations and loyalty? Do you have any tips or comments?
Share your experience and knowledge in the comments box below.
More information
- Capizzi, M. T., & Ferguson, R. (2005). Loyalty trends for the twenty‐first century. Journal of Consumer Marketing.
- Duffy, D. L. (1998). Customer loyalty strategies. Journal of consumer marketing.
- Hart, S., Smith, A., Sparks, L., & Tzokas, N. (1999). Are loyalty schemes a manifestation of relationship marketing?. Journal of marketing management, 15(6), 541-562.
- Schüller, A. M., Fuchs, G., & Kleinsorgen, U. M. V. M. (2007). Total Loyalty Marketing (pp. 17-32). Gabler.
How to cite this article:
Janse, B. (2021). Loyalty Marketing. Retrieved [insert date] from Toolshero: https://www.toolshero.com/marketing/loyalty-marketing/
Published on: 14/03/2022 | Last update: 26/04/2022
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Ben Janse
Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.
