Thinking of creating an online loyalty program for your Internet business? With the plethora of online rewards programs offering cash-backs, rebates, discounts, coupons, points, bonuses and various permutations and combinations of these, you can be forgiven for being confused about which program to implement.

Whether you’re planning to launch an entire web business based on a loyalty rewards model, or are simply looking for a reward for a ‘refer a friend’ program, you have plenty of choices. And although the standard advice applies – you’ve got to test! – split-testing different rewards programs (especially if your entire business model rests on a loyalty program) isn’t as easy as split-testing two different headlines!

Consequently, you’ll probably want to choose one loyalty program at the outset that is most likely to work for your business. To that end, let’s look at some of the most common types of online loyalty programs and their advantages and disadvantages.

1. Cash-Back or Rebate Programs

A cash-back or rebate program is a program in which you reward customers with a cash rebate. This could be a dollar amount or a percentage. You might do this in a number of ways – you might rebate a certain amount of cash in return for the customer buying a specific product or service, you might pay a cash rebate for the customer reaching a certain threshold dollar amount in purchases from you, you might pay a cash-back for the customer buying a certain amount of products or services during a period of time, or you might offer a rebate based on some other criteria.

Advantages:

• Easy to communicate and simple for customers to understand
• If based on volume of sales, avoids the perception that you are discounting specific products or services
• Relatively easy to administer
• Can encourage ongoing purchasing since rewards are not immediate
• Allows for tiered offers that reward higher value customers

Disadvantages:

• Unless the cash-back is instant (in which case it would be more like a discount), there is no instant gratification
• Can reward unprofitable, as well as profitable, customers
• Can be expensive since offering rebates eats into margins
• Can easily be copied by competitors
• Can undermine premium branding

Example:

eBates.com is a web business where the whole business model is based on offering cash rebates to members.

2. Discount Programs

Discount programs involve reducing the price – by means of a percentage off or dollar saving – of a product or service, or a group of products or services.

Advantages:

• Easy to explain and simple for consumers to understand
• Provides instant gratification
• Easy to administer
• Flexible – can be switched on or off with no necessary expectation of ongoing discounts

Disadvantages:

• May indicate that prices are too high
• Can undermine the perceived value of the products or services being discounted
• If offered too regularly can ‘train’ customers not too buy unless there’s a discount
• Expensive, eats into margins and can lead to price wars
• Can easily be copied by competitors

Example:

Amazon.com regularly holds sales where it offers discounts

3. Coupons

Coupon programs are effectively the same as discount programs. When customers use a specific coupon code at the point of purchase they get a reduction in the price of the relevant product or service. This could be a dollar amount or percentage off and there is usually a time limit. In other words, a given coupon code may expire if it isn’t used within a certain period of time. Coupons are usually used with particular products or services, although they can also be used with categories of products or services.

Advantages:

• Easy to explain and simple for consumers to understand
• Provide instant gratification
• Easy to administer
• Flexible – can be switched on or off with no expectation of ongoing coupons
• Can facilitate viral marketing (where customers are motivated to ‘hunt’ for coupon codes)
• Less likely (than discounting) to undermine value proposition

Disadvantages:

• May indicate that prices are too high
• Can still undermine value proposition if overused
• If offered too regularly can ‘train’ customers not too buy without a coupon
• Expensive, eats into margins and can lead to ‘coupon wars’
• Can easily be copied by competitors

Example:

GoDaddy.com is just one of the many domain name registrars that regularly offer discounts to customers who use coupon codes

4. Points Programs

Points programs let customers accrue points when they purchase certain products and services. Each purchase has a corresponding amount of points and when customers accrue a certain amount of points they can trade those points for rewards including dollars, products or services, or discounts off products or services.

Advantages

• Basic concept is easy to explain and understand
• Encourages ongoing purchasing since rewards are not immediate
• Can involve multiple vendors
• Supports uniqueness of brand
• Avoids disadvantages of discounting
• Doesn’t directly eat into margins
• Can use points promotions on brands that do not allow discounting

Disadvantages

• Can be difficult and expensive to implement and administer
• Potentially confusing to customers
• No longer unique, since there are so many points programs on offer
• Unredeemed points are liabilities on your balance sheet

Example: ScoreCardRewards.com

5. Bonuses

Offering bonuses is popular among information marketers – particularly among affiliates promoting big launches in the Internet marketing niche! Rewarding customers with bonuses is basically where you offer additional products or services in order to entice them to buy the main product or service. This could be in the form of a ’2 for 1′ offer or the offer of a separate product or service.

Advantages

• Easy to explain and understand
• Easy to implement and administer
• Can undermine the value of the main product or service
• Depending on the cost of the bonus, can be significantly cheaper than offering other rewards

Disadvantages

• Choice of bonus may not appeal to customers
• Not as easy to implement on a ‘systematic’ basis
• Ad hoc nature of bonuses can undermine the objective of building customer loyalty
• Can undermine the value of both the main product and the bonus
• If overused, can lead customers to expect a bonus before buying

Example: SiteSell.com periodically promotes ’2 for 1′ offers

Source: CRMTrends, “Loyalty Programs”, CRMTrends

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This entry was posted on Monday, June 28th, 2010 at 8:01 am and is filed under Ecommerce, Feature, Internet Marketing Niche. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.