Why Loyalty Schemes DON’T Work: The Real Remedy to Rising Customer Acquisition Costs

Customer acquisition costs (CACs) are rising.?

In fact, they have risen to an average of $29 per user.?

A staggering 222% rise over the last eight years.

What does this mean for businesses?

Increased expenditures required to attract and convert new customers = reduced profit margins and longer payback periods, making it much harder to achieve sustainable growth.

Whilst I could write a newsletter on why CACs are rising, it seems much more productive to concentrate on what you can do as a business to combat this trend.

As you have probably figured out, increased CAC requires a new focus on repeat sales and customer loyalty.

? By leveraging existing customer relationships, businesses minimise the need for costly marketing efforts to attract new customers.

One of the most common ways that businesses attempt to do this is through loyalty schemes.

First, I will explain why this popular option is no longer effective.

Secondly, I will explain the alternative option you must start actioning.

Why Loyalty Schemes Don’t Work

On paper, loyalty schemes can lower your CAC in a variety of ways.

e.g. they can…

• Encourage repeat purchases with rewards and incentives, thus amplifying customer lifetime value (CTLV) and optimising the initial acquisition costs.
• Use referral bonuses to harness cost-efficient word-of-mouth marketing.

In reality, however, loyalty schemes do not cultivate customer loyalty.

In a recent survey investigating attitudes of millennials towards customer loyalty schemes in millennials, KPMG found…

• 96% of respondents agreed that customer loyalty programmes can be improved.
• 75% said they would switch brands for a better loyalty programme.
• 59% said they have signed up and yet don't use it on a regular basis.

Does this scream satisfaction and loyalty to you?

To me, it suggests that the modern consumer sees through the attempts of loyalty schemes to bribe people into spending money with them over their competitors.

In an age dominated by search engines, social media, and AI – where people have countless choices at their fingertips – consumers expect a lot from brands.

Loyalty, therefore, cannot be a separate initiative – an afterthought that has been lazily added on to your brand.?

Rather, it must be woven into the very fabric of your brand's identity.

Think about this as an analogy…?

1. A person performs a good act because they intrinsically want to do it.
2. A person performs a good act to film it, upload it on YouTube, and get clicks.

Who is more likely to continue doing good acts?

Clearly, it's 1.

That’s because when there is a reward, the act loses its meaning.

The act becomes primarily focused on obtaining the external incentive rather than being driven by personal values.

This is exactly what happens with loyalty schemes.

People will simply spend with a brand to accumulate points or other rewards; this is a fickle relationship that doesn’t guarantee any allegiance whatsoever.

Instead, if companies want to cultivate genuine loyalty, they need to create amazing customer experiences.

People must feel like they want to spend with the brand, not do it for a short-term material rewards.

That’s how you create loyal brand ambassadors that provide repeat business but ALSO?become advocates, influencing others to consider the brand.

Experiences → Loyalty

The effects of a great customer experience are the same in both the physical and digital world.?

The only difference between creating a good experience for your customers in the physical vs. digital world is the factors that contribute to it differ.

A good customer experience at the mall is created through offering an amazing range of popular brands and helpful shop assistants, whilst good user experience for an eCommerce store is created through intuitive site navigation, quick load times, and high-quality imagery.

Importantly, however, the feeling and the action they produce are the same.?

In both instances, a good experience will conjure customer satisfaction and loyalty (feeling) and make you more likely to return to use that business and/or tell your friends (action).

Good UX, for instance, is crafted with a deep understanding of users' needs, preferences, and behaviours.

It anticipates customer requirements and effortlessly guides them through a product or service, thus fostering a sense of ease which culminates in an overall positive experience.

A recent study found that 72% of people – on average – will tell 6 or more people about a good brand experience.

In other words, customers who have a memorable experience whilst interacting with your brand (digitally or physically) are far more inclined to become brand advocates.?

Once brand advocates, they will voluntarily return to use your brand and promote it to their networks, thus amplifying your reach without the need for costly advertising campaigns.

↓ CAC

Key Takeaway

Whilst loyalty schemes may still have some value, they are not a one-stop solution to solving your customer retention issues.

The future of customer loyalty lies in a holistic and dynamic approach.

Businesses need to focus on building emotional connections and delivering consistent value at every touchpoint.

To do so, you must look to align your brand values with customer aspirations and give them a reason to become loyal brand advocates.

If you are going to survive, you must build a tribe.

If anything has caught your attention in this newsletter, please feel free to share your thoughts in the comments or reach out to me directly on LinkedIn!

Or, you can book a 30-minute consultation with me here!