Why it is not a good idea to run a loyalty program without the support of an external company? - Tomasz Makaruk

Why it is not a good idea to run a loyalty program without the support of an external company?

Running a loyalty program without the help of specialists from an external company is not a good solution. By relying on cooperation, you gain professional support, which reduces the implementation time and minimizes the risk of errors. What is more, such a service also allows you to lower the costs, as you are not required to invest in special tools and infrastructure. However, in order to choose a good partner, you should follow a few key criteria. First of all, pay attention to their experience in similar projects, information security management systems, IT system features, logistic facilities and the legal and tax security system they offer.

What are incentive and loyalty programs?

Loyalty programs enjoy great popularity. According to the analysis made by i360 specialists, there are currently over 120 initiatives in Poland, in which we can find the phrase “loyalty program” in their terms and in which they award customers for repeated purchases in the long run.
Loyalty programs are long-term campaigns. They are divided into two types. The first one is aimed at consumers (final buyers), known as B2C (Business to Consumer). The other is addressed to sales agents (distributors, owners, decision makers, sales staff, sales representatives, etc.) and is also referred to as an incentive program or B2B (Business to Business).
The most popular loyalty programs in Poland (as at the end of 2020) are: Orlen Vitay, Moja Biedronka, Lidl Plus, Klub Rossman and Payback.

How to implement a loyalty program?

The process of organising a loyalty program is very complex and time-consuming. As part of these activities, you need to: define a precise goal, analyse the competition’s activities, get to know the preferences of future participants, calculate the incentive factor, determine the legal and tax model, create (or purchase) an IT system license, prepare and test advertising materials, sign contracts with suppliers of prizes, and organise the logistics of their distribution. Of course, the next step is to fund all of these stages. Alternatively, you can try to convince the Management Board to allocate the budget for that purpose. In the future, you should measure the effectiveness and efficiency, establish a risk management plan and ensure regular and effective communication with the participants.

Most organisers initially wish to carry out all the said activities on their own. This approach may work sometimes. However, you need to have appropriate competences, skills and human resources to professionally deal with issues as diverse as the tax model, IT system or marketing strategy. Naturally, doing it yourself is the cheapest way, but it doesn’t always turn out to be the best one. You will probably make some mistakes resulting from inexperience in this respect. Loyalty programs are usually implemented once; if it is necessary to re-implement it, there must have been a lot of oversight.

So what can you do instead? One of solutions is to join an already existing multi-partner or coalition program. Thanks to this, you are automatically relieved of any activities related to launching and running the program. Since the organizer joins an existing initiative, they do not have to take care of that aspect.

This model can be compared to buying a car, for example. Let’s assume that implementing the program yourself is a situation in which you simply own a car. You have full rights to the vehicle and you can do whatever you want with it, but you also have to bear all the associated costs. Joining the program is more like buying a bus ticket. You do not own the vehicle and you have no control over the route, but the travel costs a small fraction of what you would have to pay for a car. Furthermore, you do not need to maintain the bus, and in the case of its failure or traffic jams, you can always get off to change the means of transport.

These examples are however extreme. There are also some intermediate solutions. These include hybrid models, which involve outsourcing of some activities related to the preparation, implementation and operation of a loyalty program. Depending on your own capabilities (competence, human resources or implementation time), you can delegate various tasks to third-party specialists. Usually those are the preparation of an IT system, planning of a marketing strategy or purchase logistics, issuing prizes and handling complaints related thereto.
Which loyalty program implementation variant is the best? It is difficult to clearly answer this question. The final decision should always be made in accordance with the organiser’s needs and capabilities, while considering issues such as the budget.

Why it is not a good idea to run a loyalty program without the support of an external company?

The easiest way to answer the question in the title is to refer to the argument of experience. External specialists handle these matters throughout their careers. They know everything about implementing, managing, running and monitoring the program, as well as observing the competition or closing the program. By deciding to work with such a company, you can take full advantage of its experience, knowledge and competences. These people already know all the possible mistakes that can be made, so they will do their best not to make them. It would be rather impossible on your own, especially if you have never done it before. Therefore, you buy many years of knowledge in this field and perfectly adapted service that will help you achieve the planned objectives.

Another argument against trying to implement the program on your own is the need to invest in tools. Implementation entails a lot of expenses, from desks for new specialists who need to be hired, to software, to storage spaces and their equipment. It is certainly recommended to use the existing and proven external infrastructure.

The third argument, directly related to the previous one, is the lower cost of implementation. Investing in all the necessary tools, hiring new employees or renting a warehouse exposes you to huge additional expenses. Paying for a ready-made solution is always a cheaper option.

The final arguments are time saving and high quality. Attempts to do things on your own, learning from your mistakes and organising everything from scratch are always more time-consuming. The support of a third-party company that offers ready-made and proven solutions guarantees a quick development of your initiative and minimises the risk of shortcomings or mistakes.

What to pay attention to when choosing an agency to operate the loyalty program?

Choosing the right partner to implement or run a B2C loyalty or B2B incentive program is of great importance. You can expect unpleasant consequences if wrong people are entrusted with the operation of all or some of works in such project. Each mistake will have a negative impact on the implementation time, its cost and prestige.

Cooperation partners are usually selected according to subjective criteria. The communication style and mutual trust are usually most important. However, if you want to approach the verification of candidates in a more objective way, you can use five basic determinants. These are:

  • experience in carrying out similar projects;
  • information security guarantees that should be provided by any entity dealing with the organisation and management of loyalty programs;
  • operation of an IT system;
  • candidate’s own logistic base;
  • legal and tax security system developed according to individual tax interpretations;
  • a developed legal and tax security system supported by individual tax interpretations.

Another crucial (although often overlooked) issue is whether the project will be handled during the works by an experienced team of managers led by a managing partner.

Experience in carrying out similar projects. Learning from your own mistakes does not always pay off in your professional activity. Therefore, one of the most important requirements in the tenders for the operation or implementation of a loyalty program is experience.

When you want to establish a long-term cooperation in which the exchange of sales and personal data plays a huge role, you should not focus on the experience in servicing competitive Clients due to industry exclusivity. Then the most important criterion is experience in running similar projects, but in different market categories. To be sure, it is always a good idea to check the references at the source, taking a moment to talk with project leaders of other Clients.

Information security management system. A very important process in the implementation of a loyalty/incentive program is the exchange of sales data. It is necessary to calculate points or prizes for participants. Sets of such data (often very detailed) are divided into regions or even product units and should be properly protected. You cannot expose them to loss or disclosure to third parties. Also bear in mind that the managing entity must generate relevant reports as the basis for the payment/issuance of prizes and for making further decisions on the program operation. In practice, the integrity and completeness of the information collected is mandatory in addition to confidentiality.

It is imperative to choose only ISO 27001 certified entities. These documents certify the compliance of information security systems with the globally accepted standard. It is also reasonable to check the certification body that performed the audit leading to the issue of the certificate.

Operation of IT system. There are two types of IT systems on the market – proprietary and out-of-the-box ones. The former type are programs designed for the needs of a specific entity. The latter consists of versatile, generally available solutions, usually working as software as service. This means that the bidder does not own the software, but only uses the designated scope of its services via the Internet.

Naturally, the most reasonable solution is to work with companies that have proprietary proven professional IT systems. They should additionally be hosted on dedicated servers, at one of the most recognised hosting centres in Poland. Such a solution is safer and does not involve any increases in sub-supplier’s margins.

Own logistics centre. The key element of loyalty or incentive programs are, of course, prizes. These have to be stored in some way, so you need at least minimal storage space. What you’ll also need is space for recording and issuing products and work areas for preparing them for shipment. If all this logistics is to be outsourced to an external company, you must remember that the address details of Clients will be often disclosed. This solution is convenient, but can lead to loss of confidentiality.

Outsourcing in this form also generates additional costs, which will have to be covered to a greater or lesser extent. A partner that uses an external logistics centre is also less flexible when it comes to hours of operation, delivery dates or time needed for shipment, which may affect the entire work schedule.

Legal and tax security system. Running a loyalty program generates many risks, but one of the biggest of them involves legal and tax security. It is crucial to handle with diligence issues such as tax documentation of income from the issue of prizes, VAT-related matters, the method of preparing invoices for the service part of the program and issued prizes, and preparation of accounting notes.

Before you begin cooperation, check whether the selected entity has an implemented legal and tax security system. In addition, you should make sure that it is supported by individual tax interpretations etc.

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