Are Loyalty Programs viable ?

What exactly is loyalty? Can it be described as a habit of using the same products or services over and over again? But is it exactly a habit? For instance, consider the example of Samsung mobiles- at one point of time, no one felt it can ever match giants like Nokia, however today it is compared with the likes of Apple when it comes to product innovation and design. Nokia, in the meantime, introduced large number of new models in low price range and yet its market continues to erodeNokia has lost a significant portion of its market share in 2010. As of Q1 2012, its market share was 19.7% compared to the market leader Samsung at 20.7% ( Source: Gartner).  Was consumer loyalty not meant to protect Nokia from this? So what exactly is the secret? 

Why do we use Facebook- the darling IPO of Wall Street? It is because we love to use it. It gives us access to what people in our social circle are doing every minute. In fact we like it so much that we do not even bother about the advertisements that appear on the right side of our Facebook wall or the safety of our data. It is today the most popular website in the world with 955 million users as of June 2012.

Loyalty programs appear to be the buzzword on which most corporate houses like to spend a significant portion of their revenues. In fact every marketing manager appears to be very keen on developing loyalty through discounts, privileges, bundled offers and so on whether it is B2B or B2C selling across any channel. If we consider the original margin for a product to be INR 100 (per unit) and cost of implementing the loyalty program to be X (per unit), the new margin for the product becomes INR 100-X. The essence is to capture higher market share by increasing sales and compensate for lesser margin. However in a competitive market, the other players will also react in a similar manner incurring a loyalty expense of X+1 and in effect neutralizing your chances of improving market share. So is loyalty program really effective? Now consider the company spends the same amount X in R&D in improving the product, its margin will still remain 100-X but it will be in a much better position to challenge its competitor due to an improved product. 

Let us now consider the success story of Parle-G glucose biscuits which still remains the most sold brand in its segment worldwide.  The company did not revise the price of its biscuit for more than 10 years for fear of losing market share despite increasing input costs. So if consumer loyalty can shift so easily, is it really worth spending on? 

There is something very significant to learn from the success story of Maggi- the two minute noodle –which captured the imagination of several generations of Indians at the same time. So do consumers buy it because of a successful marketing campaign or is it because consumers are loyal towards it? However if loyalty was the reason, why has Nestle not been able to replicate the same success in its other product lines like pastas, soup and ketchup which are also sold under the Maggi brand ? Why does it often have to bundle its other products with noodles in order to promote them?

In my view, loyalty is a myth. In fact it is one of the facts that marketers refuse to accept. Innovative products sell themselves and in process create consumer delight, not merely satisfaction. Perhaps it is this delight that generates what brands call loyalty and the reason why you will find thousands line up in front of Apple stores worldwide when iPhone 5 gets launched. 

Are loyalty programs viable in competitive markets? It apparently only adds on to your costs in a competitive market, so focus should be on building products that create value. Great products generate great sales and consumers become your best marketers when they speak about your product in their social circles. If you can create value for your consumer, he will definitely be willing to share his wallet with you. The question therefore is, do you call this “Loyalty”? 

Success is all about building great products – consumers buy great products, not great offers!

You will love reading: Brand is an experience.  Must read article Online Marketing


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