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Customer loyalty programs provide organisations with a number of benefits:
Customer insight - this enables organisations to segment their customer base using metrics around value of purchase, frequency of purchase, when they last visited the store, analysis of items in their basket, analysis of items not in their basket.
All of this data enables a business to target their customer base more effecitvely and predict with a high level of accuracy the stock levels of products reqruied for each store on a daily, weekly and monthly basis, providing the added benefit of optimising and improving effiiciences in their supply chain.
The down side is that loyalty points are held as a long term debt on the balance sheet and the mangers of the problem need to look at effective methods for managing this figure, otherwise it can be detrimental to the organisations business. For example after sept11, 2001, a couple of airlines had loyalty point debt in excess of US$400m which effectly made them bust - however it asl o saved them as their credit card partners could not afford this parternship to fail as the value of the transactions using the jointly branded credit card was too hig to loose, so they guaranteed the airlines.
One of the most effective programs is the UK superstore - Tesco - who use their customer data to shorten their supply chain, releasing cash from their held stock figures, they also send out targeted offers to their customer base every quarter and through these mailings flush out their points debt by providing cash value vouchers with a time limited redemption period.
American Express charge their members to hold points - offsetting the cost of running th program and partner with a number of organisations to create offers to keep their points values down.
therefore, there are anumber of benefits for "loyalty point programs" however customers do switch between the brands offering these programs as they see the points based programs as a minor benefit and are likely to hold multple loyalty cards fro multiple supermarkets, mulitple airlines, multiple hotel chains - so they do not induce loyalty the way engagement and emotional loyalty do.
Points based programs should be classed as a pay back for obtaining customer insight data which assists a company to plan better and provide more targeted products and services - however they should not be classed as "loyalty programs" as they do not build the same loyalty to a brand that an engagement program will do.