Rising inflation has hit the values of loyalty programs, so how do you adjust your strategies to make sure they still deliver value?
Ask any economist about the biggest problems facing the economy right now and at the top of the list will likely be inflation. From fuel to groceries and eating out, the cost of living in America is surging across the board. For retailers, this creates all sorts of problems. Prices have to go up to account for rising costs, but their customers aren’t getting any richer. Moreover, the more prices go up, the more pressure it puts on essential promotion tools such as loyalty programs. So how can they get around this?
Loyalty programs have always been vital for retailers. Research from Harvard Business Review, shows that loyalty programs can boost revenue by up to 75%. They can increase spend per customer, improve customer satisfaction and benefit customer retention efforts. According to Statista, people belonged on average to 16.7 loyalty programs. Around half of most companies’ revenue comes from their 8% most loyal customers and the customer loyalty industry is worth four million worldwide.
The arrival of inflation rates heading towards 10% in 2022 caused many retailers to look again at their loyalty statistics. With current inflation rates at around 6%, customers have had to change their buying behavior. Going forward, we can expect inflation to cool, as the major inflationary shocks caused by oil supply and the war in Ukraine have already played out, but that doesn’t mean prices are slowing. They are still rising, but by a slightly smaller margin than previously.
All of this is happening at a time of comparative wage stagnation. This will have a number of implications for loyalty programs in the future.
Impact of inflation on loyalty programs
The precise impact on loyalty programs depends on their type. Traditional points based loyalty programs will see their value decline as dollar amounts reduce. These will be less valuable for customers giving them less of an incentive to stick around.
Those which are based on percentage discounts, on the other hand, could become more valuable. 10% off a ten-dollar item, for example, will be bigger if it rises in price to $15. Meanwhile, retailers or restaurants who offer free items when customers spend over a certain threshold could end up shelling out for more free stuff.
Companies have reacted. There are reports of businesses raising the bar for loyalty programs. For example, REI charges $30 for lifetime access to special early-release collections, free standard shipping, an additional discount which is paid annually as a dividend and flat discounts on services for rental and repair. REI has attracted over 20 million members with a goal of reaching 50 million by 2030. Similarly, with Dick’s Sporting Goods’ loyalty program called The ScoreCard, customers can collect points for every dollar spent online or in-store which unlock exclusive discounts and product offers.
When customers spend over $500 in a year or if they hold a Dick’s ScoreReward credit card, they will get to the second program tier. The company is planning to leverage the wealth of first-party data with personalized offers and product recommendations.
￼ancôme has an attractive ShopRunner loyalty program so that when members connect with the brand, they earn points. When members spend a dollar, they earn 50 points. In addition, Lancome combines this with a tiered loyalty system where members are privy to early product access, multiple brand discounts and invitations to Lancome partiers and so on.
Customers who may feel put out by these changes may decide to look elsewhere. According to Businesswire, 84% of customers say they are more likely to stick with brands that offer a good loyalty program. It stands to reason that when those loyalty programs are withdrawn customers will become more likely to look elsewhere. Data from Wirecard suggests that 46% of customers’ do not like rewards programs that include a long wait for a reward, 34% are put off by a confusing redemption process while 27% find it tedious to track points.
Changing loyalty programs, therefore, can be bad news. Customers are more demanding and more footloose. Although many will show continued loyalty to a brand, that loyalty can be fickle if the offering becomes less attractive. If you’ve changed your loyalty program offering, you can expect them to look elsewhere to see if they can get a better deal.
Unfortunately, the fall out will go beyond a few lost customers. In the age of social media, customers can become extremely vocal when they feel hard done by. When major brands cut back on loyalty programs, they can expect a reaction on social media and even a few articles in the press. Even relatively small brands might see negative PR as a result.
Related: Tackling inflation concerns with loyalty programs
How to adjust loyalty programs with inflation
None of which changes the reality on the ground for retailers. Whether their customers like it or not, they are having to deal with the realities of a retail environment in which the cost of doing business is constantly rising. Rewards programs are only worthwhile as long as they are delivering value. If they stop doing that, they have to make a change.
As mentioned previously businesses are choosing several strategies to do this including
- Adjustments for rewards thresholds: Changing the value of the reward to reflect evolving market realities.
- Rewards adjustments: Changing the type of reward on offer to something less exposed to inflation.
- Redemption options: Giving people more redemption options can keep people around. Having reward programs that are hard to access or use has always been a common reason for abandonment. Convenience becomes even more of an issue if the value proposition is becoming tighter.
Whatever strategy you decide to take, communication has to be good. A blanket change of loyalty programs can create a harsher backlash from customers. Without any explanation, they will start to feel as if they are being taken for granted. It creates ill feeling between brand and customer prompting the latter to look elsewhere.
If, on the other hand, you are clear and open about why you are making the change, customers can be forgiving. They understand the market realities businesses face. They know full well the cost of doing business is rising, because they are seeing rising prices every time they shop. If you’re up front and honest about the pressures your business is under they will be more forgiving.
At the same time you can adjust your rewards strategy to provide customers help against inflation. Loyalty programs can offer flexible payment options or a chance to protect themselves against future price rises and achieve a measure of cost stability.
For example, you could make it easier to use points rather than cash to offset price rises. Connecting loyalty programs to the point of sale can encourage customers to collect points at the checkout which can be used to access future discounts.
These loyalty programs can do much more than just convert sales. They can build trust and engagement between customers. A poll conducted by the American Psychological Association shows that adults cite inflation as being the top cause of stress in their lives. Any gesture you can make to alleviate those pressures will be rewarded with higher customer satisfaction levels and loyalty.
That can be vital. Data suggests that customers who have a high degree of customer satisfaction spend around 140% more. Some customers are developing an emotional bond with their brands, and that bond can have major benefits for brands.
For an extreme example of how beneficial this can be, look at the small UK fashion brand Hope. When it faced closure due to higher prices its own customers raised more than £100,000 in 22 days to keep the company afloat.
Satisfied customers, therefore, can do much more than just spend more. In extreme cases, they could be the difference between survival for small brands.
Creating personalized, effective and valuable rewards programs can still be valuable, and the latest technology makes that much easier to achieve. By connective sales points in both brick and mortar stores, harvesting data and opening up lines of communication with your regular customers, you can transform the relationship between you and your customers.
So, while inflation comes with a host of challenges and risks when it comes to loyalty programs, if handled correctly, it could be a great opportunity to develop new rewards that match the hope, fears and aspirations of your customers.