When developing an e commerce strategy for business we often get asked about the effectiveness of loyalty programmes.  Are they worth the effort? Do they really help to grow and retain your customer base?

Of course there are always variables that affect how we would answer this question. Do you have the resources to implement this type of programme? How would this type of programme affect your business model and current customers?  While these may play a role in whether you want to implement a loyalty programme for e commerce and traditional retail,  it appears the evidence suggests that loyalty programmes do make a positive impact and your business and they are effective.

Check out this article from Sweet Tooth.

One of the first things I am asked when I say I work in customer loyalty is, are loyalty programs effective? My response…. Yes, but it is my job to show people that loyalty programs are effective. I might be a little biased so let’s look at the data.

When asking about loyalty program effectiveness people like to focus on the big retailers like Sephora, Starbucks, and Home Depot. That is why for the purpose of this analysis I have used the National Retail Federation’s top 100 retailer chart.

Loyalty programs are helping America’s largest retailers:

The logical place to start is to see what percentage of the top 100 list is using a loyalty program. Of the top 100 retailers 51% have some form of customer loyalty program in place. This could be a savings card, a points program, or a credit card that rewards store credit.

We could conclude that if retail loyalty programs weren’t effective over half of the top retailers would not be using them. But let’s dig a little deeper and see how those retailers with programs are performing compared to the others.

Retailers Without a Loyalty Program

Let’s start by looking at the retailers who are not using a loyalty program. These retailers generated $496 billion in revenue or $9.9 billion each, on average. The non loyalty group of retailers are lead by Safeway (10), who actually recently eliminated their club card.

Now this is great but what about overall sales growth for these loyalty neigh sayers. The non loyalty program retailers saw an average growth rate of 3.3%.

Retailers Using a Loyalty Program

So, are retail loyalty programs effective? In comparison to the non loyalty retailers, the loyalty program retailers did $1.3 TRILLION in revenue during the same period or $26.7 billion on average. That is more than triple what the non loyalty retailers did.

There is a significant outlier in this set however, and that is Wal-mart and the rewards they offer through their MasterCard. Wal-mart’s revenue accounts for almost 25% of the total revenue. So for arguments sake lets take out the retail behemoth and re-compare.

Without Wal-Mart the retail loyalty programs still did $1 trillion in revenue and had an average revenue of $20 billion. Still twice as much revenue as the non loyalty retailers.

What about growth though, all that revenue doesn’t mean much if the non loyalty retailers are growing and the loyalty program retailers are not.

Well I am glad to say that the loyalty program retailers are on average growing as well, but despite the larger sales numbers are actually growing at a lesser rate than the non loyalty retailers. They are growing revenue at 2.7%.

Loyalty Programs Are At The Top

Although the loyalty program retailers do have a lower growth rate I would still classify them as effective. 9 out of the top 10 retailers have a loyalty program in place, and 30 of the top 50 are using loyalty. It is difficult to grow at a rapid rate when you are already at the top of an industry. The chart above demonstrates where loyalty programs are on the list relative to non-loyalty programs.

The other thing to note when looking at the growth rate of the top retailers is assessing the age of the company. Older companies are reaching their peak and using loyalty to get more profitability out of each customer rather than acquiring new ones.

The rapid growth of many younger non loyalty retailers is from rapid customer acquisition which is not a sustainable long term strategy. These younger companies will one day reach the point where customer acquisition is no longer possible, and will then look to retention strategies such as loyalty programs.

The Final Verdict:

Loyalty programs are effective! They are helping retail giants stay at the top of the list and stay relevant in an emerging ecommerce world. Stay tuned for when I look at the Internet Retailer top 500 to show how loyalty programs are working in the ecommerce world.