Customer Loyalty Programs: Why Retailers Need Them (and How to Create One)

Customer Loyalty Programs: Why Retailers Need Them (and How to Create One)

Loyalty programs | Shopify Retail blogYou know that coffee shop where you get your caffeine fix every morning? You earn a stamp for every cup o’ joe, and then get a free one when your card is all filled up.

You’re technically a member of that café’s customer loyalty program — and you’re probably going to keep going back so you can earn your free coffee more quickly.

Customer loyalty programs are becoming increasingly popular and are especially important to retail business success. In fact, Nielsen found that 84% of consumers are more likely to choose retailers that offer such a program, and 59% report that they’re available where they already shop.

While membership rates continue to rise, the number of active users has been on the decline. According to COLLOQUY’s Customer Loyalty in 2015 & Beyond report, only 42% of loyalty program members are active — and that’s a big miss for retailers.

How can retailers capitalize on this interest in loyalty programs and create an active customer base and, more importantly, keep members engaged?

What Is a Customer Loyalty Program?

Before diving into the logistics of these programs, it’s helpful to define the concept of a customer loyalty program. Nielsen describes them as “marketing programs that reward members with purchase incentives.”

These programs track and incentivize purchasing behavior, rewarding customers for their loyalty to a particular brand. The premise is simple: The more you shop and spend, the more you receive in return.

Many retailers use these programs to attract new customers. But they’re also powerful customer retention tools, as they motivate existing customers to remain engaged and spend more.

Nielsen brand loyalty | Shopify Retail blog

Image Credit: Nielsen

Types of Customer Loyalty Programs

Customer loyalty programs take a number of forms. Some retailers use only one model, while others may combine two or more.

Points

A tactic frequently used by grocery stores, the points-based customer loyalty program gives customers points for making purchases or completing other actions.

Tiers

Tier-based customer loyalty programs track customers’ purchases. Once they’ve made enough qualifying purchases, they are placed in a tier. Each level receives different incentives and rewards, which increase in value as the customer progresses through each tier. Airlines commonly use this model.

Social Media

Not all rewards programs are based on actual purchasing. Some companies take a social approach, awarding points to their customers for engagement, which could include likes, shares, and comments. Many brands have run contests and giveaways that reward loyal fans who like specific posts or share them with their networks.

Paid Programs

Not everything is free. Some customer loyalty programs require that members pay a fee — be it a one-time or a recurring payment — in order to enroll. Examples of this model include Amazon Prime and Sam’s Club memberships.

While the four mentioned above aren’t the only types of customer loyalty programs, they are some of the most common. Some retailers use non-monetary models (such as Patagonia’s Common Threads Initiative), partnerships with other companies (common for credit card companies who offer merchandise from partners in exchange for reward points) or games (like McDonald’s Monopoly).

Much like the way customers earn rewards can vary, so can the rewards they receive. Here are some examples:

  • Discounts
  • Rebates
  • Cash back
  • Points
  • Free shipping
  • Free gifts
  • Flexible return policies
  • Access to exclusive shopping events or hours
  • Free services
  • Upgrades

Benefits of Customer Loyalty Programs

For the Retailer

Retailers spend five to 10 times more to capture a new customer than to retain a current one, according to Data Candy’s 5-Step Guide to Customer Loyalty Programs. That means that engaging your existing customers could cost less and reap more benefits in the long run.

Ankit Runwal, marketing specialist at Social Annex, puts it this way: “The success of a brand doesn’t merely depend on the value of a customer’s single purchase; rather, it’s about the value the customer offers over his lifetime.”

Effective programs can increase customer lifetime value and ROI 66% of consumers report that they modify spending amounts in order to maximize points. Thus, program members are likely to spend more during each visit.

These programs can also activate word-of-mouth marketing. According to the 2016 Bond Loyalty Report, 73% of members are more likely to recommend brands with good loyalty programs.

Happy customers who feel valued are more likely to transition into brand advocates, who will ultimately promote your business for free to their network,” says Ian Naylor, CEO of AppInstitute, a DIY app builder for small businesses.

Retailers can also use these programs to shape purchasing behavior by incentivizing the actions they want customers to take.

These programs don’t just affect the bottom line. They also provide data to help retailers understand their customers more deeply. With this kind of data on purchasing behavior, it’s easier to segment, create personas, and gain insights to help guide new initiatives.

For a more in-depth look at how customer loyalty programs can help your business, check out 5 Reasons Loyalty Programs Will Increase Your Ecommerce Sales.

For the Customer

Customer loyalty programs | Shopify Retail blogBond reports that 43% of retail loyalty program members are very satisfied with their experience. That number has climbed year over year, which means that programs are improving.

Customers also have the opportunity to save money on things they’d already purchase anyway.

“The customer gets more bang for their buck by receiving rewards for purchases they were already likely to make,” says Brian Phillipy, president of Afligo, a marketing solutions and rebate-processing company. Customers “know they are receiving preferential treatment and earning rewards.”

But the benefits go beyond the measurable and materialistic. It reaches consumers on an emotional level.

About a third (34%) of consumers feel that loyalty programs are trustworthy, and when retailers offer meaningful incentives that demonstrate they understand their customers, that trust will only grow.

Naylor says that customers benefit “as they feel valued by the business they are loyal to.”

It also fosters a feeling of loyalty and reciprocity, as [customers] want to support the company that offers free gifts generously,” says Stacy Caprio, founder of Accelerated Growth Marketing.

Emotionally, customers also have the potential to enjoy themselves. “Many loyalty programs have an element of gamification to them, too. From this angle, loyalty programs can actually be quite fun,” says Naylor.

How to Create a Customer Loyalty Program

Research

The first step any retailer should take when developing a loyalty program is to do some research.

“Once the initial groundwork is done, a loyalty program can start to pay for itself,” Naylor says, recognizing the level of effort.

Find out what your customers want, how much they’re willing to spend to get it, what motivates them, and which brands they love. “Find the sweet spot between benefit to the customer and benefit to your business,” Naylor says.

Segment your existing customers as well as your target market to find demographics, purchase patterns, and other information to help guide your strategy. The more you know, the more effective you can be.

Make a Plan

Once you’ve understood your audience, develop a strategic plan around those insights. Create specific, measurable goals and KPIs. Decide which program model and types of rewards will motivate your customers and offer them the most value. Then factor in the benefit to your business.

Build Your Program

Figure out the structure of your program using the information you’ve already put together. Determine what the rewards are (recall the ideas mentioned before) and how customers can earn them. Here are some ideas for reward-worthy actions:

  • Account registration
  • Birthday
  • Purchases
  • Money spent
  • Social engagement
  • Referrals
  • Email subscription sign-up
  • Shopping on specific dates
  • Buying specific products

Give each of these actions point values, and determine how many points are needed to earn specific rewards.

Market the Program

Just because a customer loyalty program exists doesn’t mean people use it or even know about it. Give the program an identity, create a landing page on your website, develop in-store tactics (educate sales associates, develop an awareness campaign, etc.) — in other words, get the word out.

Keep your program simple and user-friendly, and give rewards generously — especially at first. Your early adopters are the most important ones, as they’ll have the power to spread the word.

Charlie Casey, CEO and co-founder at LoyaltyLion, says retailers should give customers points just for joining. “This encourages the second purchase and gets the shopper engaged in the loyalty program.” It’s up to the retailer to maintain momentum from there.

For more ideas on getting started, check out How to Start a Loyalty Program That Keeps Customers Coming Back.

How to Measure Success of Customer Loyalty Programs

Perhaps the most important component to these programs is tracking success. But that’s actually one of the most difficult aspects for retailers. In fact, a Forrester report found that 30% of companies cited “measuring the results of a loyalty program” as one of the greatest challenges they face.

So how do retailers overcome this challenge?

As stated before, make sure you’ve identified your specific KPIs. It’s important to track the most essential metrics that indicate success.

And when you build your program, make sure you can track it. Use apps like LoyaltyLionKlaviyo and S Loyalty, as well as social insights, CRM tools and customer surveys.

Here are some ideas on what you can track in order to gauge success:

  • Membership base
  • Repeat usage
  • Member spending vs. non-member spending (include amount of sales, total transactions, basket size, frequency, etc.)
  • Pre-membership vs. post-membership spending
  • Member referrals
  • Engagement
  • Cost of member enrollment and activation
  • Program cost vs. profitability
  • Customer retention rate
  • Negative churn
  • Net promoter score
  • Customer effort score
  • Customer lifetime value
  • Sales per customer (monthly, quarterly, yearly)
  • Activation rate

Your work isn’t complete after you’ve tracked those metrics. Analyze them over time to find trends, and then use that information. Identify what’s working, and expand upon that. Then figure out what’s not working, and look for ways to modify or alleviate those shortcomings.

Mistakes to Avoid

One of the biggest and most-overlooked opportunities is personalization. It’s important to 50% of program members, but only 22% are satisfied with the level of personalization they receive.

Think about it this way: A customer who is allergic to dogs probably has no interest in a free bag of dog treats. Instead of enforcing the relationship, this becomes more of an annoyance to the customer and you run the risk of pushing them to your competitors. Instead, learn a little about each customer and give them relevant offers. This is where segmentation can also come into play.

Other common mistakes include inconsistency, not tracking member and customer behavior, putting your needs before the customers’, difficult to earn and redeem, over-communication and lack of program promotion. But if you followed the steps outlined above, you’re more likely to avoid these pitfalls and find success in your program.

To create a customer loyalty program that elevates your business and empowers customers, Phillipy couldn’t have said it better: “[A successful customer loyalty program] is a combination of value, customer service, redemption options and experiential feeling to the end user.” An effective program is always a win-win for both the retailer and the customer.

Photo of Alexandra Sheehan

About the Author

Alexandra Sheehan is a freelance writer/editor and content specialist. She’s worked with retailers ranging from Fortune 100 companies to Etsy shop owners, and is always looking for innovative ways to help her clients.

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