Loyalty Programs are a great way for online businesses to attract repeat customers. Not only are they beneficial for the company, but also for the customer because they give people reasons to come back again and again, which is helpful in today's digital economy. So, what is a Loyalty Program and what are the benefits of having one?

How Loyalty Programs Work

Loyalty programs are quickly shaping what is becoming known as the "loyalty economy." Loyalty programs are based on the premise that if customers can earn something of value for each purchase or action they take within a store, then loyalty will develop. Loyalty programs also have another function: to identify customers' changing needs and values so that they are able to adapt to new trends.

As businesses work harder on reflecting the personal values of their potential customers, loyalty programs can go hand-in-hand with helping businesses build their brand through customer recommendations to friends, family, and neighbors.

How Are Loyalty Programs Helpful For Businesses?

There are many advantages to having a loyalty program, especially if your customer base is on pace with technology or used to online shopping. Businesses that offer rewards for repeat customers often see their annual revenue increase, and they can stay competitive in their industry due to their rewarding programs. Offering rewards to loyal customers is also a good way to build the reputation of your company by encouraging customers to make quality purchases not only once, but twice or more.

Research from the Harvard Business Review found that of the 400 surveyed businesses that use loyalty programs, the majority of them view these programs as a way to connect with customers on a deeper level. There are many ways loyalty programs are beneficial for businesses, which include:

1) Customer Retention: Customers are more likely to make repeat purchases on your website or in your retail store if they feel appreciated. They will come back because of the benefits they earn from purchasing certain products, signing up for e-mail lists, etc. Also, it makes them feel important when you contact them about new offers and discounts.

2) Increased Revenue Streams: Loyalty programs can help you sell more products and increase your revenue through customer retention. Investing in new customers is quite expensive. According to HBR, by increasing customer retention by 5%, businesses can increase profits by 25% to 95%. It also helps attract new customers because they're looking for reward points and the latest discounts. If a business is having trouble getting traffic to their website, offering loyalty programs and coupons on your website and social media channels will help them gain new visitors.

3) Gain Insights Into Customer Behavior: Businesses can gain insights into their customers' behaviors, which helps in the long run. Based on their purchase history and how often they shop with you, businesses are able to know what products or services their customers want or need in order to help them make better business decisions.

4) Increased Trust: Your loyal customers will trust your brand more when they see that you're rewarding them for making purchases on your website or in your retail store. This helps create a positive relationship between the business and the customer.

5) Competitive Advantage: Those businesses that offer loyalty programs will gain an advantage over their rivals because they are able to retain customers longer. When customers become repeat buyers, they bring in new traffic through recommendations and by creating a community around your brand. They also help protect the brand when it comes to negative word-of-mouth or bad online reviews, because a proven loyal base will usually dominate any dissatisfaction from a few bad customers.

How Are Loyalty Programs Helpful For Customers?

Because loyalty programs are based on retaining your customer base, the main objective is keeping customers loyal to your business. If you offer a program that's beneficial to them, they will continue purchasing from you and recommend you to their friends for other purchases. Other customer benefits include:  

1) Improved Customer Experience: Loyalty programs help you improve your customer experience by offering something in return for their loyalty. The rewards system encourages customers to spend more because it makes them feel like they're getting a deal. This will make them want to come back again and again.

2) Improved Convenience: Loyalty programs also make shopping easier for customers because they don't have to worry about paying full price. They can purchase when there are promos or discounts available that are time-sensitive, making it easy to save money on the products they really want.

3) Increased Personalization: Loyalty programs allow you to offer a personal touch for your customers that others can't provide. Other personalized rewards might include loyalty cardholder discounts or access to exclusive product releases, VIP discounts on the business's social media channels, and invites to private shopping events.

What Types of Loyalty Programs Are There and How Do I Choose One?

There are many different types of loyalty programs, each with its own benefits and drawbacks. Businesses may choose one type or combine several types for a more customized approach.

Points

One type of loyalty program is a points system. Users earn points for every purchase and they can be redeemed later to buy merchandise, gift cards, or even a reduction in their next order. The points themselves are usually collected on a rewards card that customers carry with them throughout the day.

Benefits:

• Anyone can join for free. This will help increase the number of members and it doesn't require any type of commitment.
• Excellent source for collecting data on new customers.
• There's really no sales involved to get them to "buy-in" to the program. It sells itself.
• Little to no risk.

Drawbacks:

• Some top-tier customers may not see value in this system.
• Consumers these days desire instant gratification. Accumulating points (especially if it takes a while) can leave them feeling like it is not worth the investment of their time.
• It's the most common type of program, but if everyone's doing it, how can you expect to set your business apart from the rest?
• There is no emotional "buy-in" behind it as it is based purely on transactions. True loyalty has an undeniable emotional component.
• It can be difficult to predict the revenue generated by the program or how much funding should be set aside to support it.
• Points expire after a certain amount of time and customers may forget (or not care) to use their points before they expire.
• Little room for customization in terms of reward strengths, redemption options, or creative designs.

Cash-Back

Another option is cash-back. This means that for every purchase, the cash value that's spent by each customer can be returned to them as a percentage of their order. Customers enjoy this type of program because it encourages them to come back and keep purchasing from your store (and they receive a discount on future purchases).

Benefits:

• It's a simple program, very similar to the points system.
• Businesses can enjoy more exclusivity.
• There's no concern over how to redeem rewards because the program is already set up.
• Changes in percentages do not negatively affect customer spending habits.
• The money saved can be used for promotions or special projects. This helps engage customers in your brand story by making them feel like they are part of something more than just transactions with a business.

Drawbacks:

• Customers may not see any additional value beyond the discount itself.
• Rewards must be given to unprofitable customers. There needs to be a plan in place to ensure that the loyalty program doesn't hurt your business's bottom line.
• It still doesn't provide instant gratification, as customers must wait until the next purchase to enjoy the benefits.
• Again, it still doesn't set you apart from other competitors with the same types of reward systems.

Tiered Rewards

If you want the benefits of both the cash-back model and a points system, tiered rewards can be a great fit. This system gives customers more to work toward than just earning discounts on future purchases.

Instead of getting cash back based on their order's value, each tier has its own rewards and redemption options. The program may have three different tiered levels. The first level, for example, might offer a discount of 5% on the order's total value. The second level could have a 10% discount while the third tier gives you 15%.

Benefits:

• Businesses can introduce multiple tiers to help them attract more customers.
• Customers are encouraged to spend more to reach the next tier.
• There's room for customer customization because you can offer different rewards (and redemption options) based on each tier level.
• You're able to set yourself apart from other competitors with similar reward programs because there are unique features that they do not offer or you've added benefits that might be particularly compelling to customers.
• It can be used to satisfy instant gratification as well as give them something to look forward to with their future purchases.

Drawbacks:

• Tiered reward systems may require a higher level of commitment from the business. Businesses must set aside enough in their budget to meet rewards in each tier, even for customers who do not reach the highest level.
• Customers who spend less with your business may not be enticed by this offer, since they will never reach the highest level of rewards.
• Requires complex, strategic planning to implement and maintain.
• If the bar for the next tier is set too high, it can discourage customers from trying to reach the next level.

Affiliated Rewards Programs

This type of program refers to separate businesses that partner together to offer a reward system. They can be a great way for your business to strengthen your relationship with customers by offering more things that they'll enjoy from their favorite brands and businesses.

In order to make this work, each related business must have a similar customer base, so you know the types of people who are interested in working toward rewards through each business. For example, a pet supply store might partner with a grooming or training facility and offer their customers access to discounts or promotions for this related business.

Benefits:

• You can provide your customers with more opportunities to earn rewards from their favorite brands and businesses.
• There's an opportunity for you to work with other businesses that have a similar customer base.
• Reduced investment costs since the companies help share the burden of creating and maintaining a rewards program.
• You can develop loyalty to your business by promoting other businesses that are affiliated with you. The more customers visit these places, the more likely they are to become loyal to your business as well.

Drawbacks:

• You might have to partner with businesses that aren't quite as relevant to your brand or target market.
• There can be more confusion for customers since they'll have to follow the rules of multiple rewards programs.
• If a business offers a promotion that's appealing, it might make your offer look less attractive by comparison, even if they are not very similar.
• Customer data may be siloed between different related businesses. It can be more difficult to cross-reference this information in order to create a deeper understanding of your customers.

Fee-Based Rewards Programs

If you want to attract top-tier, seriously loyal customers, you may want to consider a fee-based program. Customers will enroll to receive a reward but you'll charge them a fee to join the program. This fee may be one-time or ongoing. It can also be based on how much they spend with your business. For example, if a customer spends at least $1,000 in a year with your company, they can enroll in the rewards program for free. If they spend less than that, you may have a tiered fee structure.

Benefits:

• Attracts high-value customers from whom you can extract valuable data on consumption patterns.
• These customers are willing to pay a fee in order to receive rewards for their purchases. This means that although the initial upfront cost may be higher, you'll have fewer costs overall since these customers are better at engaging with your business.
• It allows customers to earn rewards faster if they spend more money within a certain time frame.
• It allows you to offer the most attractive rewards since you have now established a new revenue stream.
• It can increase customer retention, lower the cost per acquisition, and increase customer lifetime value.

Drawbacks:

• You'll need to establish additional infrastructure for this type of rewards program.
• Customers who spend less may not be as enticed by this offer, since they may assume rewards are unattainable.
• Requires complex, strategic planning to implement and maintain.
• Customers may not be willing to pay an ongoing fee for the convenience of earning rewards through your business.

Summary

There are more factors to consider when forming a loyalty program than just whether or not it will bring in additional income. What is the goal of your program? How effective is it in attracting customers? Will you be able to meet customer demands in order to deliver the best possible experience with your rewards system?

Regardless of how you choose to structure your program, ensure that it's flexible enough to grow and scale with your business. There may be situations in which you want to adjust the program or alter rules based on customer feedback or other factors. If you find that the way things are organized isn't working, look for ways to make small changes rather than overhaul everything at once.

For more tips on creating an effective customer retention strategy with a loyalty program, contact us. We have the knowledge and expertise to help you build a successful loyalty program of your own!