XM Knowledge Base
What is a customer loyalty program?
A customer loyalty program encourages customers to keep coming back to you, offering them reward incentives for their repeat business.
Whether it involves collecting points or just spending more money, customer loyalty programs are an up-front deal with repeat customers: buy from us again, and we’ll give you something extra. Customer incentives could include vouchers and discount codes, exclusive products and member-only prices, free delivery or even free merchandise.
It’s a well-established way to retain customers and build loyalty. That said, it’s not always easy to get it right. Here are some tips for making your efforts a success, as well as customer loyalty program examples to inspire you.
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What is the ROI of a customer loyalty program?
Brands might wonder why they should invest in a customer loyalty program. Before are just a few benefits to consider:
Keeping existing customers costs less
In times of economic uncertainty, there’s less money to go around and higher levels of competition, meaning brands need to prove why customers should choose their business over others.
A customer loyalty program can provide that extra incentive to customers who might be debating whether to choose your brand. A rewards program for repeat purchases – perhaps with a discount or free product offered – can help you to ensure customers keep spending more. This costs you less in the long run than trying to win new business.
Existing customers are a safe bet – the likelihood of selling to an existing customer is 60-70%, whereas it’s only 5-20% for a new prospect.
Offering added value attracts new business
It’s not only existing customers that can be swayed by a successful loyalty program. New audiences might also be interested in how customers earn rewards, particularly if the customer incentives are offered straight away. This added value can be a great selling point, particularly when potential customers are comparing rival brands.
Loyalty data is a powerful tool
Customer loyalty programs can be a rich source of useful data. From customer preferences, motivations, buying habits and more, you can gather a wealth of information to help you predict future customer behavior and tailor your customer experiences and product offerings.
Over 60% of consumers told us that brands should demonstrate that they care more about them, and that they would purchase more as a result. Offering personalized customer incentives for loyalty is a great way to increase your customer retention and show that you care about customers as individuals with specific preferences and needs.
Customers are keen to join loyalty programs
No matter their generation, most consumers are either already a member of their favorite brand’s customer loyalty program or would join if there were one. Millennials in particular are keen to join (72%). Customers are already looking for loyalty programs to join – why not give them the customer incentives they’re looking for?
The best types of customer loyalty programs, with examples
There are a few types of customer loyalty programs to choose from. Depending on the type of customer relationships you have, you can choose how to reward customers for their business with one of four program types:
1. A paid loyalty program
A paid loyalty program exchanges benefits for an ongoing or one-time fee, paid for by the customer. Amazon’s Prime system is probably one of the most recognizable paid loyalty programs. For a recurring monthly membership fee, Amazon Prime users are able to access video, music and shipping benefits at any time. Of all the types of loyalty programs, this is appealing because it’s paid for by the customers themselves.
Image source: aboutamazon.com
2. A tiered loyalty program
In this type of loyalty program, customers get different benefits depending on their rank in the system. A customer who makes repeat purchases or engages more will rank higher, and the rewards they can access will improve.
The Virgin Atlantic Flying Club is a great example. Rather than offering “miles” or points for flights for customers to use on future journeys, Virgin Atlantic now offers a Flying Club membership that provides tier points. The tiers offer different benefits to customers. This gives Virgin Atlantic an edge against competitors that don’t offer loyalty rewards, because it gives customers a reason to choose Virgin over another airline in a regulated industry where there’s typically very little room for differentiation. The more a customer chooses Virgin, the more they’re rewarded. Win-win.
Image source: virgin.com
3. A rewards program (or points program)
Customer loyalty programs of this type give customers loyalty points, allowing customers to choose how they’d like to use these points for discounts or full purchases. This is the most common type of customer loyalty program, because it is easy to implement and simple to understand. There’s no hurdle to joining up, except for providing details a customer might already provide during a checkout process. It’s one of the best customer loyalty programs you can offer as a result.
The Starbucks Rewards customer loyalty program allows you to collect ‘stars’ or points to use towards free items. Starbucks outdid competitors by introducing the program, and has now introduced an app to help customers collect, check and spend their rewards. A digital component of a loyalty program can be a key differentiator.
Image source: stories.starbucks.com
4. A value-based loyalty program
A value-based loyalty program doesn’t directly benefit the customer, but it can convince them to make repeat purchases. Rather than giving customers financial discounts or free goodies, the brand donates a percentage of sales or pledges to take action on a social, environmental or economic issue.
Cosmetics company Lush offers a ‘Charity Pot’ customer loyalty program, donating all of the proceeds from specific body cream sales to charitable organizations. This encourages customers to buy specific items repeatedly and gives the brand a credible air of corporate social responsibility.
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How (and when) to start your customer loyalty program
First, determine if you need a loyalty program
It might seem unnecessary, but determining if a loyalty program will be a good addition to your business strategy is important before you start. You can figure out your customers’ lifetime values and also how much acquiring a new customer actually costs your business. This can give you a framework for how much to invest in creating a loyalty program and whether it makes sense to start one at the present time.
Understand your current customers
The key to effective customer loyalty programs is understanding your current customer base’s motivations. You should be able to answer the following questions about each of your customers:
- What kind of products/services does each customer buy, and how often?
- How long have they been a customer, and how quickly do they make a payment?
- What other products do they show interest in, or might show interest in?
- What competitors or alternative suppliers might they go to?
- What profit is generated by their business?
- How satisfied is this customer with our service and customer experience?
- What would incentivize this customer to return for another purchase?
Your ideal target audience for customer loyalty programs is an individual who buys from you frequently, but could increase the profit they generate for your brand. They’ll ideally pay quickly and be interested in further products or services from your brand.
Ways to gather this information include:
- Customer data collected during purchase
- Operational data
- Financial data
- Feedback surveys
- Customer interviews
- Listening to customers across multiple channels
- Market research
Set your KPIs and budget
Create KPIs for your customer loyalty program. For example, what sales increase would you like to see, and for which products and regions? Setting these goals for your loyalty program will help you to determine the right approach, progress and ROI at a later stage.
You’ll also have to create a budget, which should be separate from your budget for developing new customer pipelines. Market research might help you to determine the average cost for your industry.
Choose your customer incentives with their behaviors in mind
Choosing the right type of customer incentive for your business is important. You’ll need to understand what motivates your customers. Is it giving back to the community, ongoing benefits, or an ad-hoc reward that generates freebies?
You’ll also need to work out what makes most sense for the business – for example will it be a point per dollar, or a stamp per transaction? How will you reward their loyalty?
Spread the word
Once you’ve decided to implement your program, ensure that your internal teams are aware of their roles. Additionally, you’ll need to spread the word through your marketing, social media output and more to make your customers aware. Make incentives clear to new customers with quick benefits highlighted. You may offer initial incentives to join as well as ongoing rewards.
What makes a good customer loyalty program?
Ease of use
If you want customers to keep coming back, keep things simple. Once they’ve committed to your customer loyalty program, you need to reinforce that loyalty by making transactions effortless – especially when collecting and redeeming rewards. That way, purchases from you become a habit. A clunky and unreliable system or too many caveats and conditions may drive them away.
A Customer Effort Score (CES) survey can be helpful for judging your existing customer loyalty program and customer experience, as well as functionality to analyze unstructured feedback (such as survey verbatims or social media posts) to automatically assess effort, sentiment, and emotional intensity.
High value incentives
Traditional customer loyalty programs have evolved into more of a subscription, requesting monthly fees in return for a VIP experience. An example might be unlimited free priority shipping, or additional perks and features.
It might seem counter-intuitive, but charging a fee isn’t a deal-breaker, provided the value of the reward is higher than the payment. It can actually be viewed as a way to save, particularly if the customer shops regularly with you.
Flexibility
Offering a choice of incentives can be useful for broadening the appeal of your customer loyalty program, but understanding your customer segments, preferences and priorities is instrumental. For example, if you know that your customers are global and shop online, you’ll want to include rewards that appeal to them specifically, such as free international shipping.
Reward tiers
Make loyalty rewards a progressive achievement by including tiers. This gamification encourages customers to get to the next level and unlock more benefits, adding a competitive element with higher-tier customers feeling proud of their status and lower-tier ones being motivated to achieve the same level of prestige. Make sure the path to higher tiers is clear, and encourage higher-tier customers to spread the word about incentives.
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