How do loyalty programs impact customer retention? Learn why customer retention trumps customer acquisition and how loyalty programs play a role in creating your biggest fans.
Have you ever heard the saying “a bird in the hand is worth two in the bush”? This proverb generally means that something in one’s immediate possession is worth double what you may be able to have, or acquire. Your brand’s audience may not be birds, but the ones that you already “have” are certainly worth more than the customers you may acquire.
Put into marketing speak, you want to retain the customers that are already dealing business from your company. This is because 80% of your future profits will come from just 20% of your existing customers. Furthermore, it’s actually getting harder to acquire new customers. According to a HubSpot article, social media marketing is getting more expensive, evolving search engine algorithms make it harder to optimize content to rank in SERPs, and customer data grows increasingly restricted.
These challenges raise questions: How do you retain the precious customers you already have? How do you keep people interested in your brand? What can you offer them beyond the goods or services you already provide? This is where loyalty programs come into play.
Loyalty programs: A brief history
A loyalty program is set up by a company to offer various rewards, discounts, and other incentives that keep customers buying from you.
You may be surprised to hear that loyalty programs have been employed by businesses for hundreds of years. In the US, loyalty programs go all the way back to 1793 when a New Hampshire merchant began rewarding customers with copper tokens that were redeemable for merchandise upon returning for more business. The prevalence of rewards programs grew significantly in the 20th century.
Betty Crocker’s box-tops were one of the first widely popular loyalty programs. These coupons were included with their products and could be redeemed for other household goods and ingredients. The principle of giving a customer some value in return for repeated business hasn’t changed very much over the centuries.
What has changed, however, is what customers expect in recognition of their business. A Deloitte study on customer loyalty has shown that customers want, and even expect, personalized rewards for their business. Personalized rewards relevant to an individual customer’s interests are absolutely essential to secure 18- to 24-year-old customers in particular. So how can your brand be agile enough to meet these dynamic customer needs?
What have loyalty programs got to do with it?
Remember: the goal of every loyalty program is to keep customers coming back. The details and structure (how you reward your customers) of the loyalty program will always tie back to this goal.
There are four main loyalty program structures that have emerged over the years:
- Tiered loyalty program - A program with different tiers that offers improved benefits as a customer “ascends” the ranks. Ascending is generally tied to repeat business.
See: American Airlines Advantage membership tiers.
- Membership/Subscription program - Customers pay a (sometimes recurring) fee to receive exclusive benefits over an extended time period with a brand. Value/convenience must be apparent.
See: Amazon Prime.
- Points-based program - This program involves rewarding customers with a certain amount of points for each purchase they make at your business. When customers have earned enough points, they can redeem them for additional benefits like a free product or a discount.
See: Starbucks Rewards Stars.
- Perks program - This involves giving a customer a benefit for purchasing something from your brand. This benefit can be free shipping, or an additional small item. This program is simple but can be very effective as it extends to all your currently acquired customers, not just the most loyal ones.
See: Hallmark Free Shipping for orders over $50.
A lot of research and monitoring is required to assure that the program is successful and valuable to your company. Measuring the success of a loyalty program means being aware of a few KPIs:
- Member acquisition - How many customers are joining your program? When did they join?
- Participation rate - What segments of your audience are engaging with your loyalty program? What percentage of your total transactions are “loyal”?
- Redemption rate - How often are customers engaged with a loyalty program taking advantage of their rewards?
- Customer churn - How many total customers are you losing? How many of these customers are exiting loyalty programs?
You may have a lot of ideas about how these different rewards programs will fit into your brand. But remember: The existence of a rewards program won’t necessarily guarantee success. A lot of research into your audience, the customer journey, and your support systems is required.
For example, according to a Harvard Business Review article on a Wharton School study, customers that are part of loyalty programs are likely to get more upset over service failures that occur when they do business with you. Furthermore, HBR states that the loyalty programs your business creates should integrate well with the strategy that your business already employs. If your business employs a free shipping perk, for example, your shipping department should be equipped with the tools necessary to handle higher volumes and respond to issues that may arrive from lost packages.
- Lame rewards - Benefits that don’t resonate with the membership or audience.
- Inadequate communications - Not being in-tune with audience interests and lifestyles.
- Proving performance - A focus on cost over program ROI.
- C-suite support - Leadership must be committed to the program.
- Too much friction - Joining the membership or redeeming benefits is too difficult.
- Inadequate funding - The program may be cheaply designed.
Loyalty program trends
The strategies being employed by other businesses are designed to address these rapidly changing preferences and expectations. These 21st-century trends address the importance of retaining customers that you’ve acquired. After all, CAC has risen by more than 60% in the last five years. Customer preferences have changed as user privacy concerns and our cost of living have increased. The web also tends to saturate many industries as it increases the access that customers have to alternate brands and businesses. Our previous article covers this topic more in-depth, but some of these trends are:
- AI and frictionless shopping
- Experiential and meaningful rewards
- Higher value rewards
Want to start a customer loyalty program?
Before jumping into creating a program, you need to collect and interpret the data relevant to your business. The first step is: listen. Ask your audience about the expectations they have for a loyalty program. What purchases and interactions do you want to reward? What infrastructure is already in place to handle reward redemptions? Gathering this data may come in the form of an email survey. You can even prototype a small reward (like a discount code) to be distributed to the customers that submit responses to your survey.
Gathering information and listening to your audience also relates to community-building, which is a rising trend in boosting customer loyalty. A Forrester report stated that “the desire to form a bond with fellow shoppers around a certain brand is one of the strongest drivers of consumer interest in direct-to-consumer brands.” These groups and communities related to your brand may form regardless of your intervention. Stay ahead of the curve and provide a space for your audience to talk.
Personalized experiences for audience members will make them feel recognized, validated, and involved in your brand. It incentivizes them to stay in business with you with a reward relevant to their specific interests. Successful experiences suited to individual interests can be hard to create, however.
Ultimately, another perspective on how to build and implement a rewards program can be the next best step for your brand. If you’re interested in increasing your customer retention and building a rewards program, schedule a call with Step3 to see how we can help.