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  • Writer's pictureDoozy Digital Solutions

Why are Customer Loyalty Programs and Rewards so important?

Did you know it costs five times more to acquire new customers than it does to retain current customers? And are you aware that existing customers are 50% more likely to try a new product of yours as well as spend 31% more than new customers?

Whether or not you currently have a loyalty program that encourages your customers to return and conduct more business with you, the statistics (above) clearly show the importance and impact of a successful customer loyalty program.

What is customer loyalty?

Customer loyalty is a customer's willingness to repeatedly return to a company to conduct business. This is typically due to the delightful and remarkable experiences they have with that brand. When a customer is loyal to one company, they aren’t easily swayed by price or availability. They would rather pay more and ensure the same quality service and product they know and love.

Loyalty and Rewards

It’s no secret anymore that loyalty programs are effective marketing tools. They increase growth, help retain customers, and improve your brand’s reputation. And if you haven’t yet weaved a loyalty program into your marketing strategy, you may be missing out on one of the best and easiest tools available for the success of your business.

Why is customer loyalty important?

Customer loyalty is something all companies should aspire to simply by virtue of their existence: The point of starting a for-profit company is to attract and keep happy customers who buy your products to drive revenue. Customers convert and spend more time and money with the brands to which they're loyal. These customers also tell their friends and colleagues about those brands, too which drives referral traffic and word-of-mouth marketing.

Customer loyalty also fosters a strong sense of trust between your brand and customers — when customers choose to frequently return to your company, the value they're getting out of the relationship outweighs the potential benefits they'd get from one of your competitors.

Since we know it costs more to acquire a new customer than to retain an existing customer, the prospect of mobilizing and activating your loyal customers to recruit new ones — simply by evangelizing a brand — should excite marketers, salespeople, and customer success managers alike.

But how do you do it? How do you turn happy, satisfied customers into loyal brand evangelists? How do you use positive Google reviews, glowing tweets, and Instagram mentions to propel your brand's growth?

How to Keep Customers Loyal

  • Be as generous as your customers.

  • Show your gratitude.

  • Scratch the program completely.

  • Build a useful community for your customers

Be as generous as your customers.

From the outside looking in, customer loyalty programs can appear to be nothing more than a scheme to get customers to spend even more money. (Let's face it; we can all be cynics sometimes.)

That's why loyalty programs that are truly generous stand out among the rest.

If your loyalty program requires customers to spend a lot of money only to be rewarded with meager discounts and samples, you're doing it wrong. Instead, walk the walk and show customers how much you value them by offering perks that are so good, it would be foolish not to become a member.

Show your gratitude.

You might think that, by offering a loyalty program, you're expressing your gratitude for their business and loyalty. Think again. Your customers are routinely bombarded by businesses — your competitors included. Your competitors likely offer a loyalty program, too.

What sets you apart in a way that keeps customers loyal? Expressing your gratitude through handwritten notes or direct, one-to-one messages. Include thank you notes in your product deliveries or purchase confirmation emails, or send special cards around the holidays.

Scratch the program completely.

What is a customer loyalty program? Companies provide customer loyalty programs to their most frequent customers to encourage loyalty and long-term business by offering free merchandise, rewards, coupons, or even advance released products.

Considering how many businesses offer loyalty programs, one innovative idea to make yourself stand out is to nix the idea of employing a "program" altogether. Instead, build loyalty by providing customers with awesome benefits related to your business and product or service with every purchase.

This minimalist approach works best for companies that sell unique products or services. That doesn't necessarily mean that you offer the lowest price, or the best quality, or the most convenience; instead, I'm talking about redefining a category.

If your company is pioneering a new product or service, a loyalty program may not be necessary. Customers will be loyal because there are few other options as spectacular as you, and you've communicated that value from your first interaction.

Build a useful community for your customers.

Customers will always trust their peers more than they trust your business. Between social media, customer review sites, forums and more, the slightest slip can be recorded and uploaded for the world to see. But, you can turn this into a positive by managing a community that encourages customer-to-customer interactions.

One way to do this is with self-service support resources. If you have a knowledge base, you can add a community forum. A community forum encourages customers to communicate with one another on various topics, like troubleshooting the product or retelling service experiences. Even if they leave negative feedback, at least it's left on your domain where you can respond to it and deal with it accordingly.

As online communities progress, you may formalize them to keep things organized. Having a consistent system in place ensures fairness and keeps customers satisfied over time.

This is where customer loyalty programs come in handy.

So, how do you ensure your customer loyalty program is beneficial for your business and your customers? Check out these types of loyalty programs.

Types of Customer Loyalty Programs

  1. Point-based loyalty program

  2. Tiered loyalty program

  3. Paid loyalty program

  4. Value-based loyalty program

  5. Alliance loyalty program

  6. Game-based loyalty program (i.e. gamification)

1. Point-Based Loyalty Program

This is arguably the most common loyalty program methodology in existence. Frequent customers earn points which translates into some type of reward such as a discount code, freebie, or other type of special offer. Where many companies falter in this method, however, is making the relationship between points and tangible rewards complex and confusing.

"Fourteen points equals one dollar, and twenty dollars earn 50% off your next purchase in April!"

That's not rewarding. That's a headache.

If you opt for a points-based loyalty program, keep the conversions simple and intuitive. Although a points system is perhaps the most common form of loyalty programs, it isn't necessarily applicable to every type of business. It works best for businesses that encourage frequent, short-term purchases.

2. Tiered Loyalty Program

Finding a balance between attainable and desirable rewards is a challenge for most companies designing loyalty programs. One way to combat this is to implement a tiered system which rewards initial loyalty and encourages more purchases.

Present small rewards as a base offering for being a part of the program, and then encourage repeat customers by increasing the value of the rewards as they move up the loyalty ladder. This solves for the potential issue of members forgetting about their points (and never redeeming them) because the time between purchase and gratification is too long.

The biggest difference between the points system and the tiered system is that customers extract short-term versus long-term value from the loyalty program. You may find tiered programs work better for high commitment, higher price-point businesses like airlines, hospitality businesses, or insurance companies.

3. Paid (or VIP) Loyalty Program

Loyalty programs are meant to break down barriers between customers and your business ... so are we seriously telling you to charge them a fee?

In some circumstances, a one-time (or annual) fee that lets customers bypass common purchase barriers is actually quite beneficial for both business and customer.

If you identify factors that may cause your customers to leave, you can customize a fee-based loyalty program to address those specific obstacles.

For example, have you ever abandoned your online shopping cart after tax and shipping were calculated? This is a frequent issue for online businesses. To combat it, you might offer a loyalty program like Amazon Prime — by signing up and paying an upfront fee, customers automatically get free two-day shipping on orders (plus other awesome benefits like free books and movies).

4. Value-Based Loyalty Program

Truly understanding your customer requires you to identify the values and desires of your target audience — in doing so, you can encourage customer loyalty by targeting those characteristics.

While any company can offer promotional coupons and discount codes, some businesses may find greater success in resonating with their target audience by offering value in ways unrelated to money — this can build a unique connection with customers, fostering trust and loyalty.

5. Alliance (Partnership) Loyalty Program

Strategic partnerships for customer loyalty (also known as coalition programs) can be an effective way to retain customers and grow your company. Which company would a good fit for a partnership? The answer depends on your customers' everyday lives, needs, and purchase processes. For example, if you're a dog food company, you might partner with a veterinary office or pet grooming facility to offer co-branded deals that are mutually beneficial for your company and your customer.

When you provide your customers with relevant value that goes beyond what your company alone can offer them, you're showing them that you understand and care about their challenges and goals (even those you can't solve alone). Plus, it helps you grow your network to reach your partners' customers, too.

6. Game-Based Loyalty Program

Who doesn't love a good game? Turn your loyalty program into a game to encourage repeat customers and — depending on the type of game you choose — solidify your brand's image.

With any contest or sweepstakes, though, you run the risk of having customers feel like your company is jerking them around to win business. To mitigate this risk, ensure your customers don't feel like you're duping them out of their rewards.

The odds should be no lower than 25%, and the purchase requirements to play should be attainable. Also, make sure your company's legal department is fully informed and on-board before you make your contest public.

When executed properly, this type of program could work for almost any type of company and makes the process of making a purchase engaging and exciting.

How to Measure the Effectiveness of Your Customer Loyalty Program

As with any initiative you implement, you should have some way to measure success. Customer loyalty programs should increase customer delight, happiness, and retention — and there are ways to measure these things (aside from rainbows, sunshine, and smiles).

Different companies and programs call for unique analytics, but here are a few of the most common metrics companies watch when rolling out loyalty programs.

Customer Retention Rate

Customer retention is an indication of how long customers stay with you. With a successful loyalty program, this number should increase over time, as the number of loyalty program members grows. According to The Loyalty Effect, a 5% increase in customer retention can lead to a 25% to 100% increase in profit for your company.

Run an A/B test against program members and non-program customers to determine the overall effectiveness of your loyalty initiative.

Negative Churn

Customer churn is the rate at which customers leave your company. Negative churn, therefore, is a measurement of customers who do the opposite: either they upgrade or purchase additional services.

These help to offset the natural churn that goes on in most businesses. Depending on the nature of your business and loyalty program, especially if you opt for a tiered loyalty program, this is an important metric to track.

Net Promoter Score®

NPS® is a customer satisfaction metric that measures, on a scale of 1-10, the degree to which people would recommend your company to others.

NPS is calculated by subtracting the percentage of detractors (customers who would not recommend your product) from the percentage of promoters (customers who would recommend you).

The fewer detractors, the better. Improving your net promoter score is one way to establish benchmarks, measure customer loyalty over time, and calculate the effects of your loyalty program.

Customer Effort Score

Customer Effort Score (CES) asks customers, "How much effort did you personally have to put forth to solve a problem with the company?"

Some companies prefer this metric over NPS because it measures actual experience rather than the emotional delight of the customer.

In this way, customer service impacts both customer acquisition and customer retention. If your loyalty program addresses customer service issues, like expedited requests, personal contacts, or free shipping, this may be one way to measure success.

Begin (or Enhance) Your Customer Loyalty Program Today

Customer loyalty is directly tied to your business's bottom line, retention, and your ability to grow better. So, get started today by determining which customer loyalty tactics you're going to tap into and use the examples we reviewed above for inspiration. Or schedule a complimentary consultation with Doozy Digital Solutions and let us help you maximize your brand's true potential.


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