Will Loyalty Programs Work When It Comes to Deals?

Customer loyalty programs have a long history. In theory, a customer loyalty program seems like a winning idea, because it provides an incentive for a customer to continue to do business with one company over another.

The hospitality and travel industry, where hotels and airlines intensely compete with one another, is a prime example of the proliferation of customer loyalty, aka frequent traveler programs. Similarly, credit card companies are increasingly using “points” programs to encourage card holder to consolidate their purchases onto a single card so they can redeem the points for rewards.

Brick and mortar retailers have followed suit, and now consumers can find loyalty or frequent buyer programs associated with drug stores, restaurants, book stores, and retailers of all kinds.

Translating Loyalty to the Online World

Now the loyalty program has become increasingly common in the online world. Last November, I wrote about Amazon Prime, Amazon’s version of a customer loyalty program. While Amazon charges a $79 annual fee for the program, it has been loading it with attractive benefits. Originally a way for frequent buyers to avoid shipping charges, Amazon Prime now bundles in a Kindle lending library and thousands of free on-demand videos as part of the program.

It should come as no surprise, then, that the daily deals providers are getting into the loyalty act. Late last year, LivingSocial introduced “LivingSocial Plus.” Groupon recently started testing “Groupon VIP.” Both programs are paid customer loyalty programs, like Amazon Prime, but they operate differently.

With LivingSocial Plus, a deal-hungry user pays $20 per month to receive $25 of “Deal Bucks” credits that can be applied to the next purchase. (Basically, that’s $5 “free.”) Members also get access to “closed” deals. The $20 fee can be applied to deals for up to five years, but the additional $5 the member receives must be used during the month it is received, according to Daily Deal Media.

Groupon VIP, meanwhile, costs $30 per year, but it doesn’t appear to offer a specific financial incentive as does LivingSocial Plus. Instead, Groupon VIP members reportedly will get early access to some deals and exclusive access to other deals, as well as the opportunity to get a hassle-free refund for unused vouchers.

An Evolutionary Step?

It’s interesting to note that the two leading deal providers chose to implement a customer loyalty program at about the same time. These leaders are clearly battling it out for superiority. They both face a slew of competitive look-alikes that typically operate on a more local level and cut into the big guys’ market. By pursuing customer loyalty at this stage, LivingSocial and Groupon seem to be taking an evolutionary step. The move suggests that the deals market may have matured enough for deal-seekers to pick their favorites and begin to align with one provider.

But is banking on loyalty in the deals market a good bet? If you analyze the motivation of the deal seeker, maybe not. This is what Forbes magazine has to say about Groupon VIP:

“A typical deal seeker will probably be willing to scan other deal sties to find an even cheaper deal rather than paying a fixed price to an individual source. An intermittent buyer would not be bothered much to sign up for a ‘VIP’ status in the first place.”

The move by LivingSocial and Groupon is, in fact, somewhat analogous to the airlines, which have essentially become commodity providers with little to differentiate them in terms of price and service. The airlines routinely award miles for each trip in the hope that the consumer will remain loyal. But these days, consumers and even business travelers choose the most convenient route at the lowest price, which negates the impact of an airline’s frequent traveler program to a large extent. Some airlines have added unique twists or sweetened the deal on their loyalty programs, allowing members to accumulate miles faster, but it remains to be seen if this will make an appreciable difference with consumers.

I think there are a lot of good things about loyalty programs that could benefit online marketers who apply them judiciously. But I’m not sure about deals-based loyalty programs. Deals are, by their very nature, a game of who can offer the most attractive discount on a meal or service in a particular area. Consumers who find deals compelling are likely to keep their options open, receiving and considering deals from many providers. That makes me skeptical about the real value of any deals-based loyalty program. When a category is highly commoditized, loyalty is a much harder sell. Just ask the airlines.

About Barry Silverstein

Barry Silverstein is a freelance writer/marketing consultant. In addition to writing for ReveNews, he is a contributing writer to Brandchannel.com, the world’s leading online branding forum. He is the author of three marketing books, The Breakaway Brand (co-author, McGraw-Hill, 2005), Business-to-Business Internet Marketing (Maximum Press, 2003) and Internet Marketing for Technology Companies (Maximum Press, 2003). Barry ran his own Internet and direct marketing agency for twenty years. You can find Barry on Twitter @bdsilv.