Loyalty programs and profitability – part 2: Is a loyalty program always profitable? The never-told truth of the loyalty programs.

To answer this question, we should look at the relationship between customer longevity and operator’s profit per client, but it becomes clear that the relationship between loyalty and profits is by no means assured. A telecom operator executive should expect to find a positive correlation, so the important question would be how strong is it? We’ll find the answer by challenging the 3 classic loyalty claims:

Claim 1 – It costs less to serve loyal customers. In the telecom industry, it is becoming clear that the cost-to-sales ratio for the company’s long-standing clients is barely different from what it is for the newer ones; the subscriber acquisition costs compared with the loyalty and retention costs may justify the investment. Therefore, it is extremely important to define a well-established program with accurate financials targeting the right customer behaviors. We have to say that this finding ( the link between loyalty and lower costs) is industry specific as this may differ in other non-telco sectors.

Claim 2 – Loyal customers don’t pay higher prices for the same bundle of P&S. If loyalty doesn’t necessarily lower costs, than perhaps it generates revenues. Many telecom proponents of the loyalty programs argue that the customers who stick to a operator do so because the cost of switching to another operator is too high. This is no longer valid in the telecom industry.
Customers seem to strongly resent operators that try to profit from loyalty. Surveys consistently report that consumers believe loyal clients deserve lower prices. This may well explain why telecom companies in mature markets, which routinely offer customers special deals initially only to raise prices later, all experience high rates of customer churn.

Claim 3 – Loyal customers market the company.  The idea that the more frequent customers are also the strongest advocates for the company holds a great attraction for marketers. Word of mouth marketing is supremely effective, of course, and many companies justify their investments in loyalty by seeking profits not so much from the loyal customers as from the new customers the loyal ones bring in. But once again, not in telecom.

Overall, the link between customer longevity and the propensity to market by word-of-mouth is not strong in telecom operators. Pricing complexity, wide service offering and customer behavior diversity makes difficult to be fluently transmitted through word-of-mouths. Conclusion: If we don’t reduce costs and we don’t boost revenues, does it really make sense to launch a loyalty program? The answer is clearly yes, and the reason is that loyalty programs provides more than financial upsides. Operators need to judge customers by more than just their consumption actions.

Conclusion: If we don’t reduce costs and we don’t boost revenues, does it really make sense to launch a loyalty program? The answer is clearly yes, and the reason is that loyalty programs provides more than financial upsides. Operators need to judge customers by more than just their consumption actions.