Do Rewards Programs Work for Small Biz?

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Reward Programs, which offer incentives to customers essentially for their patronage, are a business onto themselves.

A survey by market research firm Colloquy shows that 1.8 billion U.S. residents are enrolled in different loyalty programs. Moreover, the recent recession has the American public clamoring for more incentive opportunities.

“The consumer perspective has shifted,” Kelly Hlavinka, a managing partner at Colluquy, tells MainStreet. “People are starting to ask retailers ‘what’s in it for me?’”

As such, small businesses may be enticed to incorporate rewards programs into their marketing campaigns. But entrepreneurs need to beware.

Do rewards pay off?

Michael McCall, Professor and Chair of Ithaca College’s Department of Marketing and Law warns that while these incentive programs can lead to consumers’ repeat patronage, they do not necessarily establish the brand loyalty a business is looking for.

“Early on, there was an advantage to offering them, because they helped you stand out in the crowd,” McCall, who recently published the hospitality paper, Building Customer Loyalty: Ten Guiding Principles for Designing an Effective Customer Reward Program, says. “Since then, what we found is that businesses have these programs by and large because everyone else does.”

Doing something just for the sake of doing it likely won’t lead to long-term success since many businesses, according to McCall, end up instituting programs they themselves don’t fully understand. Moreover, a flawed incentive program can negatively impact a business’ profit and loss statements. You can’t, McCall explains, give away more than you actually sell.

This doesn’t mean, however, that small business owners should abandon their incentive initiatives entirely.

When do rewards work?

“Rewards matter to people right now,” Rob Rosenblatt, General Manager for Chase Bank’s Loyalty Program (Stock Quote: CCF), tells MainStreet, acknowledging that his bank saw an increase in card use, site traffic and points redemption after Chase revamped its Rewards Program in May 2009.

Mona Hamouly, a spokesperson for American Express (Stock Quote: AXP), agrees. “Through our own research, we have found that consumers with rewards credit cards are more loyal customers and they tend to spend more on those cards,” she tells MainStreet.

This sentiment is echoed by many consumers, who admit to cashing in on these types of incentive programs.

“I love credit card rewards,” Oregon resident Tyler Tervooren tells MainStreet. “I’m using sign-up bonuses from a few new credit cards to take a trip next year to climb Mt. Kilimanjaro. I’ll be going to Dallas this fall for a wedding where I’ll fly and stay almost for free, using rewards.”

Both Chase and American Express have resources available to supply these demands, including research and marketing departments dedicated entirely to creating their programs. They also have a larger customer base to poll for suggestions. Chase, for example, conducts satisfaction surveys online when cardholders redeem points. Small business owners may not have the time or the money to conduct such large scale market research. However, they can emulate the big banks just by following a few simple steps.

The Rules of Rewards

For starters, when developing your rewards program pay close attention to what exactly it is that you’re offering.

“Businesses need to say ‘what is high value to [the customer], but low cost to me,” McCall says. He explains that while this type of thinking is cost effective, it also lures in customers looking for something beyond the traditional offering. A hotel chain, for example, could offer to pick up frequent visitors from the airport in a company car or limousine in lieu of a free night’s stay in their $300 per night suite.      

“You need to do something that makes the customer feel important,” Hlavinka agrees, saying the best rewards are the ones that emotionally resonate. So, if you were to pick up your customer in a company car, you may want to have the driver wait right outside their gate, holding a sign that bears their name, a move that is sure to make them feel valued and special.

The next step is recognizing that not all customers are created equal. McCall points out that a Las Vegas nickel slot player shouldn’t be entitled to the same incentives as a high roller. Similarly, someone who flies first class shouldn’t earn the same amount of rewards points as the passenger in coach. They are, after all, spending drastically different amounts of money.

Programs with the best returns are often those that reward customers for what they spend and not, for example, how far they travel.  JetBlue caught onto this and now awards points based on dollars spent (as opposed to miles travelled), a change that distinguishes them from many competitors.

Finally, McCall suggests that retailers avoid putting a dollar amount on the rewards they are doling out to customers. This may seem like a good marketing move, but, by doing so, business owners run the risk of turning loyal customers in to price sensitive ones.

“If you offer $50 off on your $200 hotel room, the customer becomes fixated on the fact that your hotel rooms cost $200,” he explains, as opposed to just receiving a complimentary gift bag filled with goodies they weren’t expecting in the first place. McCall add that in the future, they won’t want to pay full price for the service or product. In fact, they may try to get this service or product for less from one of your competitors. This negates the whole point of the rewards program, which is, above all, to ensure brand loyalty. As McCall points out, “a loyal customer is the best marketer your business can ever have.”

Which Rewards Programs got it right? Check out this MainStreet article “The Best and Worst Rewards Credit Cards.”

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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