How do Loyalty Programs make Money?

Ever wondered how do loyalty programs make money? It can be any loyalty program. Whether the program just shows you the discount offers such as loyalty cards or it can be an eCommerce loyalty program.

We will be seeing all the ways they can make money. Our main focus here will be on the eCommerce side rather than loyalty cards and all those stuff. So, if you are wondering whether you should add a loyalty program to your website or not, you are at the right place. We will see how you can leverage the power of loyalty rewards to make some profit.

Let’s start with the overview before we move on to the actual article.

Overview of the Loyalty Program

Like we mentioned above, there are various types of loyalty programs. The first and the most popular one goes with an eCommerce website or a website where the customer can purchase the product/service.

Here, the concept is simple. For each purchase, there are some points allocated to you. When you make the purchase, you will get some points. Now, you can redeem that points for a free product or you will get a discount based on the number of points you have.

This is the first type of program that is most popular. Along with this, some websites may also offer a paid loyalty program where the customer has to pay first for a one-year membership. When they buy the membership, they will get many advantages of it. For example, if they buy the program, they will get free shipping or they will get access to the sales before time. Regular shoppers who are purchasing from the store will surely go with this program as they are already a customer and purchase enough from the store to recover the charges of membership. They will even get more out of it.

Paid Membership

When we talk about the paid membership, the concept is simple. When people pay money to the website for the loyalty program, they are directly funding the website. In simpler words, they are maintaining the cash flow before you even make the purchase.

So, there is one benefit of having this type of loyalty program. Other than this, not 100% of people who are part of the paid loyalty program will buy from them. For example, if the charge for membership is 50 bucks, there are good chances that the people won’t even buy enough that they can get the discount wroth 50 bucks.

Therefore, you might be wondering, then why do people buy the loyalty membership? Well, most of them buy it to access other services such as fast-delivery or advance access to sales. Some people even offer free access to video streaming or a course. People might also buy from you due to this reason.

Sales are the Crucial Part

For any business, sales are the most important thing that you should look for. If you don’t have enough sales on your website, you will lose money. What’s the best way to increase sales? That’s by offering a discount.

When you offer the discount, you are luring people into buying your product. If the discount is huge, people will even buy the product that they don’t need or won’t even need in the future. A discount offer is a thing that can lure any customer into your trap.

So, if you want to run the business, you will have to focus on the sales part. Of course, many other things matter such as the quality of the product and customer service. But as of now, we are focusing on the sales part only.

Therefore, people offer a loyalty program to increase sales. But the main question remains the same, do they make a profit?

Do Loyalty Programs Make Money?

In any business, there is a thing called Customer Lifetime Value (CLV). It’s the total amount of the sales you make from every single customer. The total amount of sales you make per customer will decide the profit of your website. In simpler words, these are regular customers.

If they are purchasing enough stuff from you, you have already made enough profit from that particular customer. So, there will be no issues in giving them a bit of discount on their next purchase. Instead, this will encourage them more to buy from you. Therefore, it’s a way using they can increase the sales and give the customer what they want.

Further, this is not just limited to the CLV. Most of the discounts won’t cut the margin. In simpler words, even if the customer is getting a 40% discount, the store owner is not making any loss. This is how the market works.

So, even if all the loyal customers buy from them, they are still making a profit. No doubt, the profit margin is less, and sometimes it’s even 0. However, this will increase CLV. In simpler words, that particular customer will buy more from you as you are regularly offering them a huge discount. Maybe, you can offer it on every program.

Brand Collaborations

This is rare but many stores still do it. Many stores that have a loyal fanbase can collaborate with brands to offer the discount. The brands are getting more sales as the people who didn’t want to buy their product brought their product because of the discount. So, the brand gets the money by making the sales. On the other hand, the website owner can be paid directly by the brand to get the sales.

Final Words

To conclude, this was all about loyalty programs, and do they make money or not? The short answer is yes. No matter which practice they go with, they will make the money in the end. Most of them make the money by increasing the Customer Lifetime Value while others have a very low-profit margin. So, they did not make a loss but they will surely increase the sales.

If you are looking to build one, Finwin Technologies can help you. Contact us today and let’s get started.