A loyalty program rewards repeat customers, boosts retention, increases purchase frequency, and raises lifetime value through points, tiers, subscriptions, or referrals. This guide covers benefits, income impact, implementation steps, costs, metrics, and common pitfalls businesses should consider before launching.
By Brad Nakase, Attorney
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In 2001, the Net Promoter Score’s creators, Bain & Company, discovered that a 5% increase in customer retention may result in a 95% increase in earnings.
For smaller firms that might not have the funds to launch costly acquisition campaigns, customer loyalty is therefore invaluable.
With the first recorded instance dating back to 1793, loyalty programs are among the most effective strategies for cultivating client loyalty.
Loyalty programs may be described as customer retention schemes. They are used by companies & brands to stay connected with customers and potentially increase the frequency of their purchases. They are characterized as marketing strategies that reward (either directly or indirectly) repeat customers.
These incentives can be early access to sales and merchandise, promotional offers, or discounts. They can be credit points that can be used towards purchasing goods or services.
It can take numerous forms. The underlying principle remains the same: to reward loyal customers, increase interaction, & ultimately generate more revenue.
There are a host of well-known benefits of loyalty programs for businesses. Even though these advantages can be huge, they can also be used as a retention tactic. In fact, 75% of consumers would move brands for a stronger loyalty program.
Furthermore, 73% of today’s buyers actively seek to redeem rewards, whereas historically redemption rates have been around 50%. These benefits of loyalty programs for businesses are probably going to be even more noticeable in the future. According to 66% of respondents, having the opportunity to earn and utilize rewards affects how much they spend.
Let’s examine in more detail how a loyalty scheme may benefit your brand and how to launch one.
The significance of retention cannot be emphasized enough. Retaining current customers is five times less expensive than acquiring new ones, and it also results in larger revenues—loyal customers typically spend 67% more than new ones.
You are therefore losing out on large-value, low-cost customers if your company has a high churn rate, which is the percentage of clients that discontinue conducting business with you during a specific time period.
By reducing your turnover rate and increasing client retention, loyalty programs can convert one-time purchasers into loyal ones.
Starbucks has done this with its Starbucks Rewards program. Customers earn points (or “stars”) for every purchase. These points can later be redeemed for free food & drinks. That encourages repeat business, boosting retention, and lowering attrition.
The total amount of money you make from a customer’s lifetime association is known as customer lifetime value, or CLV. It measures the current value of a customer to you as well as the potential future value of this enduring relationship.
Loyalty programs increase your customers’ average order value and frequency of purchases, which raises your CLV. Churn is reduced by loyalty. Rewarding customers remain loyal. More often than non-members, they shop. Over time, participants of loyalty programs also spend more (13–20%), according to the Harvard Business Review.
Changes that are small have a tremendous impact. Customers who return spend sixty-seven percent more than those who don’t, and those who use rewards expend as much as 25% more annually than those who don’t.
For loyalty programs to optimize CLV, they should make it simple to receive rewards to promote increased spending and make good use of data.
More frequent purchases are encouraged by loyalty programs, especially for low-margin goods with short sales cycles.
Coffee shops are a prime illustration of this: consumers are more inclined to buy takeout coffee more frequently if they are aware that doing so will increase their loyalty incentives. Customers are encouraged to return more often to the complimentary reward by the McDonald’s McCafé Rewards system, which delivers a complimentary drink after five purchases.
Loyalty programs have the potential to raise the value of every purchase in addition to the frequency of transactions.
We call this Average Order Value (AOV). Businesses can increase their AOV by incentivizing clients according to their overall spending.
As an illustration, Nordstrom’s The Nordy Club scheme encourages customers to spend more money each transaction by giving members extra points for every dollar spent at its “bonus points events.”
With a few clicks, savvy customers can now compare hundreds of costs too easily. You’ll find yourself facing a pricing war if they’re simply considering the products that you sell rather than your business and reputation. The bigger retailers, such as Amazon, will prevail.
The ability of customer loyalty programs to prevent you from having to compete just on pricing is one of their greatest advantages. By appealing to your clients’ emotions, you may differentiate your brand and store and provide a far better (and more individualized) shopping experience.
Let’s get into more detail.
Research indicates that a customer’s decision to buy is quite emotional. Are the things you sell ones that people purchase out of desire rather than need? Appealing to their emotions is essential if such is the case.
Giving your customers loyalty bonuses is a great way to thank them for something they didn’t notice before and to surprise and excite them.
Every time you give a customer a reward, you’re appealing to their emotions. That’s how you begin to form a bond. They start to view you as a lot more than a variety of products as that progresses. As a result, their loyalty is strengthened, which promotes repeat business and increases your earnings.
You can also make your loyalty program an effective acquisition channel by rewarding customers who refer others to your firm.
Referral bonuses, which can convert consumers into brand ambassadors, are frequently offered by loyalty programs. For instance, Dropbox’s referral scheme allowed for exponential growth by providing more data storage for both the person who recommended it and the person being recommended.
Points are given by certain loyalty programs for actions that indirectly help the business in addition to purchases. Customers are rewarded by TOMS Shoes, for instance, for social media shares & online engagement. It results in a win-win situation where customers benefit, & the business gains exposure through word-of-mouth marketing.
There is more to a loyalty program than merely prizes. It’s a data engine. Each purchase, redemption, & interaction provides businesses with information about what customers. Their taste, how frequently they make purchases, & what makes them return.
Loyalty members use their membership number, account, or application to purchase. This implies that you can learn:
Marketing becomes smarter with this info. Personalized offers that align with actual habits are sent rather than blatant discounts. Coffee on Mondays? On Fridays, there is a free upgrade. Every two months, skin care? Prior to their expiration, remind them.
Pricing is also sharpened. When to offer discounts, which incentives generate the most revenue, and when to charge full price are all determined by businesses. They can intervene before permanently losing a customer if spending declines.
Provide a little incentive to your clients for revealing specific information about themselves, like their birthday.
The majority of firms encounter seasonal variations in sales. Increasing revenue during the slower months can be difficult. Loyalty programs that offer special perks & rewards in off-hours can help counteract this pendulum effect.
Travel companies such as hotels or airlines may offer double points for bookings made in these periods. This is to encourage people to travel during their slow times.
Finally, loyalty can be your tool to promote the brand among customers and to communicate more with them.
Consumers are given multiple chances to engage with brands or to fall in love with them through regular prize draw notifications, special offer notifications, and event notifications.
After certain trigger events, like qualifying for the newest loyalty tier, brands can easily send their customers personalized texts and emails.
Those are all great advantages. Offering discounts and prizes through a loyalty program, however, may seem like it should reduce revenues rather than increase them. You are, after all, offering discounts.
However, well-designed incentive schemes do more than merely offer discounts to attract a few more customers. They encourage consumers to spend more frequently without reducing profit margins.
Rewards are liked by people. If they’re on the verge of earning one, they’ll pay more to get there. This is furthered by tiered programs, where the benefits of loyalty programs for businesses improve with increased spending. No one wants to leave free things on the table; it works.
When customers make more purchases, discounts cover themselves. Customers who purchase 20% more than they did before will not care about a tiny incentive with each order, and research indicates that those who use their points spend fifteen to twenty-five percent more annually.
A tiny discount can quickly turn into a significant source of revenue when applied to thousands of clients.
The trick is that not all rewards are monetary. Even though they are inexpensive, a VIP card, early entry, and a complimentary tote bag feel important. Consumers are satisfied. The profits do not change.
The inappropriate clients are also filtered out by a loyalty program. Rewarding loyal customers is preferable to offering discounts to first-time customers who never come back. Revenue becomes predictable as a result.
The best part is that loyalty programs produce customer data, which leads to more intelligent marketing. You can deliver tailored offers to the customers who are most inclined to purchase rather than lowering prices everywhere. Fewer squandered discounts & more sales.
That is the logic behind how loyalty programs boost sales.
However, are they worthwhile? We would say that, when done well, the quick answer is yes. Feel free to call us prejudiced.
Customer lifetime value (CLV) rises, and you become less reliant on increasingly costly acquisition channels with a comprehensive loyalty program.
A strong loyalty program consistently yields significant financial benefits, according to research.
Revenue growth for businesses with loyalty programs is 2.5 times faster than that of competitors without them. Additionally, Bain & Company discovered that a 5% increase in retention might result in a 95% increase in earnings, as we previously mentioned.
However, loyalty programs are not equally beneficial to all businesses. They work well in sectors like these when there is fierce rivalry and recurrent business from customers:
But in sectors like home repairs and legal services, where purchases are made seldom or out of necessity as opposed to brand choice, they might not be as successful.
Due to improper structure, many loyalty programs collapse even in the sectors where they perform best. Many loyalty programs are excessively complex, offer too many discounts that reduce their profit margins, or lack obvious incentives.
(We’ll discuss loyalty programs’ possible drawbacks later in this post.)
Financial incentives and emotional engagement are balanced in the finest customer incentive schemes. They provide savings as well as exclusive benefits, VIP privileges, and customized prizes. Excellent for profit margins and appealing to consumers.
In addition to being beneficial for your company, loyalty programs are also beneficial for your clients.
Additionally, you will be able to better customize the loyalty scheme to meet the wants of your clients, the more you comprehend the advantages that loyalty programs offer.
1. Savings and incentives
Customers’ most evident advantage is that loyalty programs help them save money through price reductions, redeemable credits, and VIP benefits. For their most devoted consumers, many firms provide exclusive benefits like free delivery or free returns with the goal of providing them with further value.
2. Benefits and exclusive access
However, loyalty programs may additionally offer special benefits that improve the customer experience. They are not simply about discounts, and it’s usually ideal for your company if they aren’t.
Special events for members only, early access to forthcoming products or deals, and preferred customer service are a few examples of this.
For example, Nike Membership members have first dibs on a few things before they’re made available to the general public.
3. Experiences are customized for each user
Data is collected through loyalty schemes. Organizations can then deliver personalized offers & suggestions. They are tailored as per the preferences of individual consumers.
Amazon Prime offers personalized recommendations based on watching & purchasing history. It aids the subscribers in the discovery of new things that may be of their interest.
4. A feeling of enjoyment
Earning points, achieving new membership levels, and finishing challenges are examples of gamification aspects that often play a role in loyalty programs and can make them more interesting. Starbucks Rewards, for instance, has a tiered structure in which users must “level up” to become Gold.
By adding gamification to the loyalty program you have, you can provide your consumers with something that is truly enjoyable.
5. A sense of connection
When properly implemented, loyalty programs build a community of clients that values the same things you do.
For instance, Patagonia’s Common Threads Initiative makes clients feel like they’re a member of a group of people who share their commitment to lessening their influence on the environment.
Value-based, tiered, subscription-based, and points-based are the four primary categories of loyalty programs. They all have advantages and disadvantages.
1. Earn and burn: Points-based
Perhaps the most popular kind of loyalty program is one that is based on points, also known as “earn and burn” systems. As a result of their purchases, customers accrue points that can be exchanged for incentives or savings.
Sephora’s Beauty Insider scheme, for instance, lets users earn points for each dollar spent. These points can subsequently be “burned” or converted into a range of benefits, such as special offers and discounts.
The simplicity & directness of points-based systems make them easy to comprehend and participate in.
Customers, on the opposite side, might stop participating if they believe their points are becoming worthless or if it takes too much work or money to obtain a decent reward.
2. Value-driven loyalty initiatives
Similar to point-based loyalty programs, value-based ones compensate customers for more than simply their purchases.
Rewards are instead determined by how much the buyer adds to the brand. This could involve reviews, social media shares, recommendations, or other interactions.
An example of that is the MoxieLash Insider program. It also has some behavior-based incentives, such as for downloading the app or following the company on Instagram.
When the benefits and rewards reflect brand values, these programs can help to deepen consumer relationships.
3. Multi-tiered loyalty initiatives
Membership tiers in tiered loyalty programs provide progressively greater incentives and rewards as a customer’s spending increases.
One such example is the Astrid and Miyu rewards scheme, often known as Astrid & You. To encourage their clients to return, Astrid & Miyu revamped their program and included four additional levels with enticing benefits.
These initiatives do a great job of boosting expenditure and recurring business.
To encourage clients to move up the ranks, companies must make sure the top tiers provide truly alluring rewards, even though they can be difficult to administer.
4. Subscription-style loyalty schemes
Loyalty scheme members who subscribe to a paid subscription model pay a one-time or recurring cost to access additional benefits. A popular example of this is Amazon Prime, which charges an annual subscription to provide subscribers with benefits such as free delivery, streaming, & early access to sales.
Subscription models may create a sense of exclusivity and a regular income stream. However, because of the initial cost, they may limit the number of registrations. The advantages should exceed the cost.
A customer loyalty scheme has to be well thought-out. You have to consider your industry, customers, business size, when to start a program, & what kind of software you need.
1. Different kinds of loyalty programs work best for different sectors/businesses
The most suitable kind of loyalty program for your business will be different depending on your industry.
Because they make a lot of purchases, retail companies might choose point-based schemes, but hotels and airlines frequently use tiered systems to reward and keep their valuable clients.
A loyalty program offers a limited likelihood of increasing your clients’ buy frequency for low-frequency products with extended purchase cycles, such as pricey home appliances. Therefore, in these situations, referral-rewarding loyalty programs are frequently the best.
2. Give the issue you’re trying to address significant thought
We discussed several advantages that loyalty programs may offer your company at the start of this post.
Consider the specific benefits of loyalty programs for businesses that are most important to you.
Use this wisdom to map out your loyalty program. If you’re looking to incentivize for average order value, for example, it makes sense to reward customers for their spending, not at a per-purchase level.
3. Know that not every consumer is going to respond to the same incentives
The secret to building a great reward program lies in knowing what the clients want, need, and how they behave. Are they just happy to be saving money by a discount/free shipping? Or are they the type of people who want experiences (front-row seats at concerts, etc.)?
4. Adapt your expectations regarding which loyalty programs are more feasible to administer, given the scale and resources of your business
Smaller companies may prefer more straightforward, manageable programs, like a points-based system, whereas larger companies are more likely to possess the resources to create complex, multi-tiered programs.
Loyalty programs are another weapon that small businesses can use to level the playing field with their larger rivals.
5. When a loyalty program should be put into place
A single consumer has the potential to make repeat purchases and recommend you to friends. This means that it’s never “too early” to consider a loyalty scheme for your company. You also don’t want to jump into it.
To improve your program over time, we recommend always starting small, getting the basics right, & then expanding on that solid foundation. Rather than scrambling to dive in with too many resources too early, make sure you have the right ones to lead the charge.
6. Software for loyalty programs
Numerous pieces of software are available to assist with the setup, administration, and evaluation of your loyalty scheme. Complexity of the loyalty program you desire, the size of your company, & your budget all play a role in the software you select.
1. The average order value
A customer’s AOV (average order value) is the average amount they spend on each transaction. Divide the entire revenue by order volume to determine it.
A successful loyalty program should encourage consumers to spend more money each time they make a purchase. Naturally, you would anticipate an increase in your AOV in the event that the program is effective.
2. Frequency of purchase
A well-designed loyalty program encourages consumers to make more purchases in order to earn rewards.
Things are going well if your clients are making transactions more frequently since you launched your loyalty program.
Divide the total number of orders by the number of distinct consumers during a given time period to determine the purchase frequency (PF).
3. Customer Lifetime Value
The entire amount of money you can anticipate receiving from a customer over the course of their association with your company is known as customer lifetime value, or CLV.
You would anticipate that the CLV of customers who participate in your loyalty program would be greater than the CLV for those who do not, as these programs should enhance retention and raise the frequency & value of transactions.
Because it takes into account a number of variables, including frequency rate, average purchase value, & average client lifespan, calculating CLV can be a little more difficult.
4. Earnings and new clients through word-of-mouth
Creating brand champions out of consumers is one of the major advantages of loyalty programs. Referral codes or special monitoring links will show you how much more money is made from referrals.
5. Redemption rates
They quantify the proportion of clients who use the benefits they have accrued via your loyalty program.
If your loyalty scheme has a poor redemption rate, it may indicate that your rewards aren’t attractive enough or that the method of redemption is too difficult. Redeemed rewards frequently result in more sales.
By dividing the total number of incentives earned by the total number of redemptions, redemption rates are computed. Typically, this is stated as a percentage.
6. Involvement in the Program
Customers who value loyalty schemes would be more incentivized to use these, as they would be regularly monitoring their points accumulation, redeeming, and joining in on program-related activities. The probability of repeat purchases increases with the depth of customer engagement.
7. Churn Rate
A customer’s churn rate is the proportion of customers who discontinue conducting business with you over a specific time period.
If your loyalty program is successful, you should see a reduction in your turnover rate because it will boost client retention.
Each and every loyalty program has a price. It is essential to comprehend these expenses up front so that they can be weighed against the anticipated advantages.
1. Costs Up Front and Ongoing
Costs associated with loyalty programs fall into two primary categories: one-time and recurring.
Costs Up Front
Ongoing Expenses
2. Finding the return on investment for your loyalty program
Knowing the net benefits of your loyalty program—that is, revenue resulting from increased sales or customer retention—and subtracting your program costs will allow you to calculate its ROI. The incremental revenue from the program (additional sales, cross-sells, upsells, etc.) is offset against the costs of incentives and any other direct expenditure related to those sales to arrive at net profit.
When you take into account long-term advantages like higher customer lifetime value (CLV), ROI estimates can become complicated. For this level of accounting, the attribution models become more complicated.
Also, you might want to consider the indirect benefits of loyalty programs for businesses, such as enhanced customer satisfaction & brand reputation. While difficult to quantify, these items can have a material impact on a company’s long-term growth.
Although there is nothing inherently wrong with loyalty programs, it is good to understand both their pros & cons. Here are some of the more common pitfalls loyalty programs can have and how to avoid them.
1. Unrealistic Expectations
There is a long lead time before the impact (hopefully positive) of loyalty schemes begins to be felt – many firms expect instantaneous benefits from their loyalty schemes; however, these activities take time to gather momentum and bear significant results. Setting realistic and achievable expectations is key.
Businesses should conduct in-depth financial forecasts and market analysis before implementing a loyalty program in order to prevent this.
2. Ineffective communication
Ineffective communication is another prevalent problem. Customers are unlikely to participate if they are unaware of the program’s advantages or how to accrue & use rewards.
Avoid this error by having a well-defined strategy in place. Explain the advantages of your loyalty program to clients before it is launched.
Use a variety of communication methods. SMS, specialized website pages, app notifications, email, & (where applicable) in-store displays.
3. Insufficient rewards
If your customers don’t find value in your rewards, they won’t participate in your loyalty program.
The key here is customer intelligence. Find out what your consumers will react to by conducting surveys or using the data analysis tools in loyalty software. After that, provide appropriate incentives.
4. Absence of data use
Loyalty program data is extremely important. It is frequently underutilized. Without using this data, you lose out on chances for segmentation, customization, & improved decision-making.
5. Mismanagement of costs
Costs can exceed advantages if loyalty programs are not properly managed.
It’s something you can avoid. All you have to do is watch your ROI. Make frequent calculations. Add in all of the expenses, both direct and indirect. Software with built-in analytics for loyalty programs can offer information on how cost-effective the program is and assist in modifying the plan of action as necessary.
The program’s flexibility and data-drivenness are ultimately important. Businesses may guarantee that their loyalty scheme is an effective tool that promotes client loyalty and growth by doing so.
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