Loyalty cards – do they work and increase profits?
Posted on 3rd Jun 2022
Should I use loyalty cards & will they make more profit?
Customer loyalty schemes have become increasingly common in recent years. From supermarkets (Tesco) to fast food (McDonald’s) and from coffee shops (Costa Coffee) to retailers (M&S) – you name it ‘everyone’ now seems to have a scheme.
Given that all the big brands have a loyalty scheme some business owners feel that having one is the ‘right’ thing to do and launch their own version.
The most common loyalty scheme which they opt for are the paper Punch Cards.
The question is do the paper Punch Cards actually work as a customer loyalty scheme?
In this article, I’ll outline the importance of customer loyalty, the benefits and pitfalls of the Punch Cards and lastly how to launch a Punch Card scheme.
Let’s get started….
WHY IS CUSTOMER LOYALTY SO IMPORTANT?
For businesses that are looking to grow rapidly, there is a tendency to solely focus on getting new customers. That is a mistake.
By doing so a business is potentially ignoring one huge source of extra sales and profit – the existing customer base.
By keeping customers for longer a business can look to the increase the sales and profits in 4 possible ways.
1 Customer Retention
By keeping customers as a customer longer means they will come back, again and again, to buy. Each purchase means more profit.
2 Customer Upsells
It’s far easier to sell to a product or service to an existing customer than it is to a new one. The reason for that is trust. Each purchase which goes well increases the trust which an existing customer has with your business.
It is this increased trust which makes it easier to successfully sell new goods and services to the existing customer base.
3 Better Return on Marketing
To get a new customer (especially one who is the ‘ideal’ customer) is very costly. Costly in both time and cash.
In comparison, it’s a fraction of the cost to keep an existing customer a customer for longer. The modest amount spent on marketing to retain a customers will almost certainly represent better value for money compared to marketing to get new customers.
4 New customers
The best type of sales enquiry is where someone who has been enthusiastically recommended to your business by one of your existing customers.
This is called ‘word of mouth’ marketing and starts to happen when your existing customers are so delighted by what you do. They aren’t just loyal – they become raving fans.
You will also find that the conversion rate for prospects who have been recommended in this way is very high. It is because the prospects are placing a large amount of trust in whoever made the recommendation.
The PUNCH CARD LOYALTY CARD SCHEME
Punch Cards is essentially a ‘points based’ scheme.
Customers are each given a pre-printed paper card which is then punched or stamped whenever they buy.
Once the card has been fully punched or stamped then on the next visit the completed card can be exchanged for a free ‘reward’. The reward typically means the customer gets something for free.
Café Nero where 9 stamps complete the card which can then be redeemed in exchange for a free drink.
The MAIN BENEFITS & PITFALLS
The main benefits and pitfalls of Punch Card Loyalty cards are:-
- Low Cost as printing the paper Punch Cards doesn’t cost very little
- Flexibility as stopping or changing the scheme is quick and easy to do.
- Can’t make personalised offers as the scheme doesn’t gather customer data.
- Susceptible to fraud by copying the stamps or punches.
- Don’t know if the Scheme really changes customer behaviour and means the business has more (or less) profit.
This is because no customer data is collected as customers are rarely asked to provide their data in return for a card nor is a record kept of which customers redeem their cards.
THE COST OF LOYALTY CARDS
The reward a customer gets is essentially a sales discount and that generally means lower profits.
- To make more profit the loyalty cards need to generate a lot more extra sales revenue.
The trouble is business owners underestimate how much a sales discount reduces the profits of a business by. As a result, they completely underestimate how much sales have to rise by to just offset the effect of the sales discount – never mind increasing profits.
The Sales Discount Matrix (see below) illustrates this with some numbers.
THE SALES DISCOUNT MATRIX
GROSS PROFIT %
A business with a modest gross profit margin of 30% decides to launch a loyalty card scheme and the value of the reward means customers will effectively get a sales discount of just 5% for a completed card.
Sales must rise by at least 20% before profits start to increase.
If sales don’t rise by at least 20% then profits will be lower than what would have been if the loyalty card scheme hadn’t been launched. Ouch.
The Sales Discount Matrix shows the lower the gross profit % a business has the much higher the sales must rise to increase profits.
HOW BEST TO IMPLEMENT A PUNCH CARD LOYALTY CARD SCHEME
To reduce the risk of your Punch Card Loyalty Card Scheme costing you money then there are 3 factors which must be considered.
1 Decide on the purpose
Before launching your Punch Card Loyalty Card Scheme you must have clarity as to what its’ main purpose is. What are you trying to achieve?
Is it to make more profit by…..
1 Attracting new customers?
2 Get existing customers to repeat buy more frequently?
3 Get existing customers to spend more?
4 Get existing customers to stay a customer for longer?
2 How will the scheme work
Depending on what’s most important to you, will determine HOW the scheme will work in practice to give it the best possible chance of success.
1 Attracting New Customers
The Scheme needs to be heavily promoted to raise awareness with prospective customers.
To track its effectiveness in doing a requirement could be that customers have to give their data in exchange for a card. How likely this is done in practice is questionable.
2 Getting existing customers repeat buy more frequently
Use deadlines to influence customers buying behaviour. Having a deadline means a customer would need to have completed and redeemed their card by a certain date to get the ‘reward’. Any redeemed card guarantees a minimum amount profit on sales to that customer.
3 Getting existing customers to spend more
To earn each stamp each transaction value must be more than a minimum amount.
To get the reward when redeeming a completed Punch Card loyalty card a customer may be required to buy something else.
4 Getting existing customers to stay longer as a customer
Unless customer data is collected it is impossible to know if this happens.
3 Crunch the numbers
Before launching your Punch Card loyalty card scheme crunch the numbers so that you know how much sales revenue needs to rise by for the business to make more profit.
The most important bit is to calculate the sales discount percentage.
To do this:-
Calculate the value of the ‘reward’ a customer gets when they redeem the reward
Divide it by the minimum sales required to complete a card.
Once the sales discount % and the gross profit % are known you can use the Sales Discount Matrix to work out how much sales have to increase by.
It might well be that having crunched the numbers, there is a better option to achieving your objective than a Punch Card loyalty card scheme.
If that’s the case, then you don’t go ahead with it.
If you decide to go ahead with Punch Card Loyalty cards then:-
Make sure the terms & conditions are clear and hard for the scheme to be abused
Make sure you carefully monitor performance. If you find the scheme isn’t actually working as planned then you have a choice – either change it quickly or stop it altogether.
I believe for most small businesses Punch Card Loyalty card schemes are unlikely to be best option when it comes to increasing sales and profits.
They are best suited to those businesses which have high gross profit margins AND where there is potential for increased sales from either more return visits and/or upsells.
They will therefore be typically suited towards food and drink businesses.
Whether it be buying a sandwich or coffee I believe a lot of buying decisions are be based on location and convenience rather than the Punch Card loyalty card in your pocket. In that regard the Punch Card makes little difference….and the ‘reward’ for a completed card represents profit needlessly given away.
To ensure profit isn’t needlessly given away it’s important that you have the right terms & conditions (such as deadlines) in place to give yourself the best possible chance of your loyalty scheme making more profit and not less.