A few years ago, Forbes contributor Ken Krogue -noticed a lady returning rotten, moldy fruit at a Costco store. The clerk attending to the woman kindly offered her money back, even though she bought the fruit days ago, when they were still fresh.
Costco is willing to go to great lengths to keep their customers satisfied. This is why Costco has the best overall customer loyalty score in the United States.
The math is simple behind Costco’s business: loyal customers who buy repeatedly are more profitable than those who buy once. Repeat customers have a higher lifetime value, generate more profits and often have a lower servicing cost. Many loyal customer often bring new customers to your business.
While pretty much every one focuses on acquiring new customers, most retailers often don’t have a system in place to convert new buyers into repeat customers.
Most retailers mistakenly assume that providing great service alone is sufficient to keep customers returning for the next order. However, the intensely competitive nature of e-commerce combined with the impersonal aspect of shopping online, means that as soon as a customer is acquired, that customer is being lost to the competition.
This article will show you how to systematically build customer loyalty and increase your customer lifetime value using a rewards or loyalty program.
Who Needs A Customer Loyalty Program
Anyone who has customers can benefit from a loyalty program. However, certain types of internet retailers will see greater value from a loyalty program. These retailers have the following characteristics:
- Online retailers who receive a steady stream of at least ten or more orders a month will see greater benefit from a loyalty program. Repeat orders are more likely when a retailer is generating a steady stream of new customers. If you are struggling to generate a steady stream of new business, launch an ad program to raise brand awareness and drive traffic to your site. Google Shopping is a tried and true favorite for most mid-market brands, but Facebook and Instagram are equally attractive and allow you to narrow down your audiences with Power Editor.
- Online retailers operating in a niche where customers are price sensitive are ideal candidates for a loyalty program. Price sensitive customers respond better to rewards than customers in big ticket or luxury markets where price is not an important factor. A loyalty program in a fashion or beauty niche can also be successful. Sephora, for instance, has a hugely successful loyalty program. In general almost all businesses that have an e-commerce component, will benefit from a loyalty program.
- Online retailers operating in markets with several competitors are also ideal candidates for a loyalty program. These retailers see the greatest benefit from loyalty programs since they are at the greatest risk of losing customers to competitors. A loyalty program may also help you to stand out among your competition, giving you the upper hand and making you appear more customer-centric than other brands.
Why You Need a Loyalty Marketing Program
The biggest advantage of a loyalty program is that it has the potential to align your entire business toward the most profitable segment of your customer base. This means that your business will begin catering more to customers who have high repeat purchases or average order value –– depending on what type of loyalty program you implement. Over time, you’ll also be able to use the data collected from a loyalty program to figure out ways to make the least profitable customers more profitable.
Below are other benefits of a loyalty program:
- Retain existing customers: Loyalty programs help you to keep your existing customers buying from you longer and more frequently. Customer retention is top-of-mind for businesses owners because it can drastically decrease the cost of customer acquisition.
- Acquire new customers: Although the main purpose of a loyalty program is to retain existing customers and increase repeat orders, it can also be used as a benefit to attract new customers.
- Move customers up: A loyalty program will systematically move your customers up the buying ladder – converting first time buyers into repeat buyers and keeping your repeat buyers spending more often with you.
- Win back lost customers: While it may seem inevitable that a certain percentage of customers will be lost over time, a loyalty program will allow you to identify, target and bring back these lost customers.
- Increase the lifetime value: When you increase the frequency of customers shopping with you, you will automatically increase the lifetime value of your customer.
- Best customer behaviors: A loyalty program will identify your best customers. Once identified, you can then start observing patterns in their behavior. These patterns can be used for better merchandising, advertising and customer service.
- Create brand champions: Your best customers are buying repeatedly from you because they love what you are doing. These customers are prime candidates to be your brand champions. A loyalty program helps you to take the first step, which is to identify your potential brand champions.
- Respond to competition: The best part of a loyalty program is that it can inoculate you from the competition. With a loyalty program in place, your competitors will have a harder time peeling away your customers.
- Reduce advertising costs: As you learn who your best customers are, you can target your advertising to bring in more new customers who fit the profile of a best customer. These new customers are more likely to convert into repeat customers. This data can help you to cut down advertising costs by eliminating advertising in mediums that attract one-time buyers or deal-seekers.
Components of a Loyalty Program
All loyalty programs boil down to a simple concept – customers are rewarded for taking certain actions. Businesses customize on the above principle to create their individual loyalty programs. These customizations consist of making changes to the following components:
1. What actions will customers be rewarded for?
Successful loyalty programs focus on a single customer action: getting customers to buy again. However, you can also reward your customer for other types of actions such as store registrations, referrals, social shares, etc. The most successful loyalty programs focus on repeat orders and ignore ancillary actions such as social sharing, reviews, etc.
2. How will customers redeem and use their rewards?
Once your customer has earned a reward, you will need to decide how the customer will access and use their rewards. This is where most online stores make the mistake of complicating the program. Some common mistakes include:
- Making the customers manually redeem points.
- Offering rewards that are difficult to use such as coupons or gift certificates.
Avoid these mistakes by making it easy for your customers to earn, redeem and use their rewards.
3. What kinds of rewards will you offer?
You can offer your customers several kinds of rewards from free shipping to percentage off to store credit. It is tempting to assume that big rewards will lead to a successful loyalty program. On the contrary, an easy to use loyalty program will always outperform ones that offer larger rewards. It is best to start a loyalty program with one reward.
4. What are the rules of your customer loyalty program?
The rules of your loyalty program allow you to protect yourself from abuse. However, it’s best to have a few, sensible rules and not make it overly complicated. Below are some simple rules to get started with:
- Rewards are available to registered customers only.
- Points earned or redeemed do not apply to tax or shipping.
- Points are earned and redeemable by the e-mail address on account only.
- Points are non-transferable.
- Points may only be redeemed for purchases and have no cash value.
- Points are accumulated by current purchases only.
- We hold the right to cancel an account at any time.
Keys to Designing a Great Loyalty Program That Will Keep Customers Coming Back
A great loyalty program will convert your new customers into repeat customers and it will also keep your best customers staying with you. To accomplish these goals, it is vital to design a customer-friendly loyalty program. Here are two principles to design an effective loyalty program:
- Easy to understand: The best loyalty programs are easy to understand. Keep things as simple as possible. Instead of giving out 3 points for each dollar spent, hand out 1 point for each dollar spent. It is easier for customers to grasp.
- Easy to use: Make it easy for your customers to earn and use their rewards. Try not to make your customers jump through hoops. Eliminate steps like requiring separate enrollment into the loyalty program, offering difficult to use rewards such as coupon codes. Customers become more loyal only when they use their rewards. So make it easy for them to earn and use their rewards.
How To Create & Implement a DIY Customer Loyalty Program
As described earlier a loyalty program has two goals:
- Convert new customers to repeat customers
- Keep your repeat customers shopping with you
It takes significant time and effort to accomplish both the above goals using a DIY loyalty program. A more manageable approach is to start a DIY loyalty program that focuses on your best customers and keeps them shopping with you (goal # 2). Below are the steps to implementing a DIY loyalty program.
- Step 1: Create a quarterly or monthly report of your top customers by amount spent.
- Step 2: Send a reward to the top 10% of customers in the monthly/quarterly list of your best customers.
- Step 3: Rinse and repeat each month. As you get into the rhythm of doing this month-in and month-out, you’ll notice patterns and can take the following additional actions:
- You may notice that some best customers have stopped shopping. Follow up with these customers by offering them a discount or store credit.
- You may also notice that some customers consistently return each month. You can reward them with a simple thank you note.
The above steps will set you on a path to increased customer retention and higher AOV.
How to Select a Loyalty App for Your BigCommerce Store
While a DIY loyalty program can help you to keep your best customers shopping with you, it also takes a significant time and effort.
The better alternative is to implement your loyalty program using one of the many loyalty apps on the BigCommerce app store. The most successful loyalty programs make it easy for your customers to earn, redeem and use their rewards. A good app will walk you through all the decisions involved in setting up the loyalty program.
But most importantly, a good app will do the following:
- Keeps things simple
- Makes it easy to redeem rewards
- Makes it easy to use the rewards
- Provides monthly performance metrics
Below are case studies of two BigCommerce retailers who are increasing their customer retention and loyalty.
Case Study: Nancy’s Floral –– 173% increase in customer loyalty
Rob Cook has been involved in the family floral business since the late 1990s. They began selling online in 1995 and moved over to theBigCommerce platform in 2015.
The online floral business is extremely competitive. Having to compete with large floral websites is a challenging game for local florists.
One change they made after moving to BigCommerce was to launch a loyalty program. It has enabled Nancy’s Floral to increase repeat orders from $3,560/year to $6,184 during the first 8 months after implementing the loyalty program, an increase of 173%.
Note: Nancy’s Floral is using the RewardCamp integration.
Case Study: Using Rewards and Facebook Groups to Get 1000 Orders in First Year
It took Bruce Dally a mere two months to get his first 100 orders, selling drone parts online. Less than six months later, he had received his first 1000 orders. The world of drones consists of several niches, some of the more well-known ones include defense, surveillance, movie production, etc.
Bruce was able to hit his first 1000 orders in the first 6 months because he is highly engaged with his customers.
Within a year of starting his online store, 80% of revenues came from repeat orders from current customers. He does no online advertising except spending some money sponsoring local drone races.
Bruce’s fast growth was powered by using following tactics:
- Providing a high quality product
- Providing great customer service
- Offer rewards to keep customers returning
- Using Facebook to stay engaged with customers
Implemented a customer-friendly loyalty program to keep customers coming back
Bruce tweaked his loyalty program in the following ways to convert new customers into repeat customers:
- Bruce knew that by making it easy for customers to earn rewards, they were more likely to return. So Bruce chose the most customer friendly rewards app on the BigCommerce app store. He configured it so that every customer who placed an order, earned a cashback reward for their next order. This gave customers a reason to come back and they did.
- He configured the rewards app, so that customers would not have to redeem their rewards. It would be automatically added to their checkout cart. This surprised and delighted customers at the most important conversion point – during checkout.
- Used rewards to brand his store. He called the rewards Bruce bucks and even created a humorous image of Bruce bucks.
- He setup the rewards app to send monthly reminders to those who did not spend their cashback rewards. This lead to customers who forgot, to return and order.
Summary: Don’t Forget These Takeaways with Your Loyalty Program
The competitive nature of ecommerce is great for consumers. Unfortunately, this makes it very difficult to hold on to each new customer. The time to setup a loyalty program is as soon as a new customer lands on your online doorstep. Your loyalty program can then go to work to convert these new customers into repeat customers.
To summarize, here are some of the best ways to launch a loyalty program:
Use a simple point system
This is the easiest type of program to implement and one many consumers will already be familiar with. Loyal customers earn points for purchases or actions (i.e. social sharing, etc), and those points then translate into some of reward –– typically discounts. Be clear upfront about the number of points needed to receive different levels of rewards, and stick to those buckets. Customers will work toward reaching a particular point level.
Where companies can get tripped up here is by making the point system complex and confusing. Eliminate confusion altogether by making things simple: 1 action results in 1 point, and 10 points results in 10% off a purchase, or a freebie in their next order. Be clear. Don’t change the rules. And be sure to market the program on site and in your emails so customers know where they stand. Note that this type of loyalty program often works best for brands that encourage frequent, low-cost purchases.
Use a tier system to reward initial loyalty and encourage additional purchases
A tiered loyalty program offers more rewards for customers who spend more. A tired program ensures that your best customers stay motivated and keep shopping with you. Finally it encourages new customers to spend more so that they can earn the greater rewards in the higher tiers.
Charge an upfront fee for VIP benefits
According to a 2015 study of 500 leading global brands, cart abandonment rates can reach 76% across retail, travel and fashion. Sticker shock is often the reason why –– as consumers put everything they like into a cart, then head to the cart, see the total and then back out. This is even more true for those that begin to checkout. Many consumers will leave once they see the full price with taxes and shipping.
Amazon has successfully tackled this problem by offering a paid loyalty program that charges customers a yearly fee of $79. In return customers get free 2 day shipping in all their orders.
However, these kinds of tactics are best implemented once a loyalty program has been running for a few years.