Everything You Need to Know About Customer Loyalty Programs
There is an old notion that it costs 5x more to acquire a new customer than to keep an existing one. That’s why investing in customer loyalty programs and platforms that support them is a growing priority.
A customer loyalty program is a fundamental endeavor for any eCommerce business. And if it created with care and precision using the right strategies, it can be a quantum leap to motivate purchase decisions, increase conversion rate, and drive revenue.
If you are in the midst of building a loyalty program, read on to find out:
- What is a customer loyalty program?
- The origins of customer loyalty programs and how they have changed over time
- Why it is imperative for businesses to invest in a loyalty program.
- A sneak peek at the customer journey
- How to build loyalty in every phase of the customer journey
- The main types of customer loyalty programs
- Some tips to create a good customer loyalty program?
- How to measure your customer loyalty program success?
What Is a Customer Loyalty Program?
At first, “Loyalty” in its simplest sense is the tendency to prefer a specific product, service, or brand to another.
I bet you already knew that…
According to HubSpot, Customer loyalty is “A customer’s willingness to repeatedly return to a company to conduct some type of business due to the delightful and remarkable experiences they have with that brand.”
What is a customer loyalty program?
A loyalty program is an exemplary instrument of relationship marketing that takes the form of an incentive or a reward to encourage shoppers to return back and make frequent purchases. Some of the incentives may include additional discounts, free merchandise, advanced access to new products, etc.
The History of Customer Loyalty Programs and How They’ve Changed
Customer loyalty programs are said to hail back to the 18th century. Over the years, customer loyalty programs have steadily evolved from being a passive marketing strategy to becoming a major component of the customer journey and engagement cycle.
Let’s start to see how loyalty programs have changed over time, taking shapes that we know today.
The 1700s — Copper Tokens
Some believe that the origin of customer loyalty programs started in the late 18th-century, specifically in 1793. At this time, American gas stations and supermarkets started offering their customers “Copper Tokens” that could be later redeemed for merchandise.
The 1800s — Tickets, Certificates, and Stamps
Copper Tokens was a costly way, so in the late 19th century stores shifted to tickets. In 1872, the American ‘Grand Union Tea Company’ started selling products directly to their customers offering tickets that could be collected and exchanged for merchandise from their store catalogs.
In 1886, the New York-based hybrid soap manufacturer “Larkin Company”, used another customer loyalty tactics. The company started distributing certificates with its soap sets, encouraging its customers to redeem these certificates for items from the company’s catalog.
In 1896, marketers turned to stamps to reward loyal customers. The Sperry & Hutchinson Company came to dominate this type of rewards program with their S&H Green Stamps. The company sold the stamps to retailers, who used them to reward customers when making a purchase.
Customers start saving stamps by pasting them into the S&H stamp books to redeem them for something the household needed, such as a new toaster or coffeemaker. This type of loyalty program still exists today with the name of “S&H Greenpoints”.
The 1900s — Points and Cards
In the latter years of the 1900s, retailers adopted other incentives programs similar to S&H Green Stamps. It encourages customers to collect points and then they can use these accumulated points to purchase items through a separate retailer.
There were also card-based retail loyalty programs implemented in-store to be easily monitored than the collection of stamps or branded currency. These types of programs are still popular today as well!
The UK-based retailer, “Tesco” was one of the pioneers to leverage loyalty cards to enhance the retail industry performance. Unlike other traditional loyalty programs, the company introduced a loyalty card in 1995 allowed the company to connect and respond to customers through data, rather than through more traditional methods.
The 2000s — A New Era of Loyalty Programs
2002 was a starting year of mobile loyalty programs. The tech company “Capillary”, was the pioneer in introducing mobile-based loyalty programs for retailers.
Such programs had many advantages that resulted in their wider adoption as retailers could now combine real-time communication and point of purchase analytics to transform loyalty program into a powerful marketing channel.
Developments in customer loyalty programs continued until we got to where we are. The other big trend in customer loyalty programs is the advent of “Omnichannel Loyalty Programs”.
The Starbucks Rewards program is one of the best loyalty program examples of a loyalty program optimized for mobile. The mobile app is used as a payment method and as a dynamic rewards program as well. It allows Starbucks to keep their customers engaged and to keep the loyalty program feeling fresh all through the mobile app.
The Importance of Loyalty Program Investment for eCommerce Businesses
The loyalty landscape is more powerful now than ever. Online retailers are able to give more personalized and meaningful options to customers, which creates customer retention along the purchasing journey.
Let’s review the key benefits of customer loyalty programs and why it is imperative for businesses to invest in a loyalty system.
- Customer Retention Brings More Revenue Than Customer Acquisition: According to the Gartner Group, 80% of your company’s future profits will come from just 20% of your existing customers. That means that customer retention plays a vital role in helping companies grow a healthy bottom line.
- More Repeat Purchases and More Customer Referrals: A loyalty program offers incentives for your best customers to visit and buy from you more often. It’s the perfect tool for rewarding customers who invite their friends/families to become new shoppers.
- Building Healthy Relationships with Customers: Over the years, loyalty programs have transformed from a mere marketing approach to an emotional and personal relationship between a brand and its customers. This is obvious in the way more brands are implementing higher personalization and experiential rewards into their loyalty program.
- Enhancing Customer Experience: Implementing innovative customer loyalty programs is a subtle message to your current and potential customers that your business is concerned about not only about earning money but also bringing benefits to customers as well.
It plays a great role to maintain a good relationship and build customer trust. The act of goodwill will improve the overall outlook of customers towards your online store and bring them a more satisfying experience during shopping.
What Is a Customer Journey? A Quick Glance
The eCommerce customer journey, aka the purchase journey, is a term that describes the key stages of customer experience from the moment they first become aware of a business’s products/services to the moment they make a purchase.
The Key Stages of the Customer Journey Are:
- Discovery/Awareness: Customers first learn about your products/your brand.
- Consideration/Interest: Customers see something they like and begin browsing your online store. They add items to a shopping cart or a wishlist, but they’re still only ‘considering’ the purchasing.
- Purchase: Also known as the ‘conversion’ stage, this is when the customer makes the decision and purchases your product.
- Retention: The customer comes back to purchase again and get more benefits from you.
- Advocacy: The customer engages with your brand on social media, subscribes to your newsletter, recommends your brand to a friend, etc.
Building loyalty needs to go beyond mere customer satisfaction to personalization. Today’s consumers want personalized purchasing experiences, and eCommerce brands that use data-driven marketing to deliver this along all stages of the purchasing journey are seeing awesome results.
How to Build Loyalty in Every Stage of Customer Journey?
“Buy a product and get points toward your next purchase” may be the most common form of loyalty programs. But, a truly effective customer loyalty strategy should involve a series of micro-conversions and customer rewards accordingly.
To create and optimize a successful loyalty program, you need a precise understanding of your customer journey.
You need to ask yourself these questions:
- What are your customer touchpoints?
- What interactions do your customers have with your brand that can improve promoting loyalty?
- How can you improve each of these interactions to inspire loyalty?
- Which actions do you want your customers to take to add value to your brand?
- Can customers share your products on social media or refer to a friend?
- Do you want to encourage customers to visit your physical locations?
- How do you reward and incentivize those actions?
- How can your customers earn points?
Once you’ve answered these questions, you’ll be able to build a loyalty plan that goes beyond incentivizing purchases and guides your customers’ behavior all throughout their purchasing journey.
Let’s return back to the customer journey stages and figure out how understanding your customers and building loyalty in each stage relates to your eCommerce business.
This stage gives you insights into where your customers are coming from, what brought them to your online store, which pages they’re landing on and/or navigating to, and the path that took them from one page to another. At this stage, you can learn what new customers need and what they’re looking for in your online store.
At this stage, you can learn how to help customers find what they’re looking for. Try to lower bounce rates to get prospects to browse more products. Try to identify which page features are working to your advantage and what is getting your customers to add products to their shopping carts.
At this stage, you can start using a new marketing channel. Email marketing would be great using the email lists of people who are interested but are not ready to commit.
This stage is the best opportunity for building a long-term relationship with your customers and identifying opportunities to better serve them in the future.
This phase of the customer journey is also a great time to run a post-purchase survey and get some quick insights into what worked (and/or what didn’t) for customers who have just finished purchasing from you.
This stage is where your customer rewards should be customized according to your business goals, customer data, demographics, and behaviors. Actions taken at this stage are massive potentials to kill two birds with one stone: retaining existing customers and acquiring new ones.
This is a good time for customer engagement to encourage them to participate on social media to mention your brands, review it positively, and refer it to their friends. This stage presents an opportunity to get the customer to become an advocate for your brand.
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Grow your business with ExpanCart and create a fully responsive online store today and start receiving visitors, processing orders, and retaining customers with your very own loyalty program and reward system.
The Main Types of Customer Loyalty Programs
1. Point-Based Loyalty Program / Earn & Burn
This is the simplest and most common loyalty program methodology in existence where customers earn a specific amount of points for every transaction or specific action. These collected points can then be redeemed for discounts, products, services, and rewards.
Although a Point-Based Loyalty Program is perhaps the most common form of loyalty programs, it isn’t necessarily applicable to every type of business. It may be complex and confusing for some businesses but it works well for frequent and short-term purchases, like Dunkin’ Donuts.
- Ease of use
- All kinds of purchases are rewarded
- Very quick and easy implementation
- Easy-to-budget and easy-to-manage system
- Offering highly perceived customer values
- It builds transactional loyalty only, which reinforces a discount culture
- It’s difficult to add relevant personalization
- It lacks a unique selling point so competitors can easily copy the formula with better discounts
2. Tier-Based Loyalty Program – Progress & Benefit
This model works to provide short-term rewards and long-term benefits once a customer reaches a specific level. This is a very effective loyalty program model especially for high commitment, higher price-point businesses like insurance companies, hospitality businesses, airlines, and luxury fashion brands (like what ‘MATCHESFASHION’ brand is doing).
- A great way to encourage repeat purchases as well as increase the average order value
- Allows you to focus on high-value customers
- Leads to higher revenue
- Ability to customize rewards to each customer’s preferences
- The time between purchase and gratification is too long so members may forget about their points and never redeem them
- Not very attractive for casual and low-engaged customers
- Complex and requires clear communication to be effective
3. Cashback Loyalty Program
Cashback loyalty programs are simple and straightforward. “Just spend X amount and get Y amount as cashback.” This model is effective in reducing customer churn rates in a variety of industries like banking, insurance, and retail.
- The ability to be customized to a multi-tiered program offers more value to loyal customers
- Often perceived as being of a higher value compared to discounts
- Drives incremental visits and sales
- No instant gratification
- Rewards loyal and casual customers alike
- Complicated for micro to medium businesses
- Easy for competitors to replicate
4. Game-Based Loyalty Program – Play & Unlock
The gamified loyalty program is based on completing a specific challenge or collecting badges to engage customers in a gamified way. The purpose is to encourage customers to interact regularly with touchpoints and repeat their behaviors so that they don’t lose their privileges. 401 Games’ loyalty program is a good example to explain this model.
- Encouraging repetitive behaviors to keep customers’ progress
- An engagement-based strategy which goes beyond transactions
- Achieving interesting customer experience just like playing a game
- Incentivizing specific interactions and encouraging customers to follow your instructions in a fun way, without feeling restricted
- If challenges become too complex, participants may lose interest in it
- The game system requires regular updates or customers would abandon the program
5. Perks Loyalty Program – Join & Enjoy
The perks loyalty programs grant benefits and offer rewards to all members, regardless of how long a member has been enrolled in the program. The main purpose is to generate emotional attachment and customer relationship with the brand, which could lead to recurring purchases.
The Perks Loyalty Program takes many forms, for example giving loyalty members precedence to try new items or get informed about new features before anyone else. Also, perks could take the form of “member-only discounts.” The below example shows that the ‘Shop Gap’ for Casual Apparel offers additional “Perk Discounts” to give members extra incentive to shop.
- Driving additional customer acquisition and boosting brand awareness
- Generating a sense of gratitude as consumer benefits are granted unconditionally. It makes members feel indebted, rather than entitled to the privileges
- Ease of management with no commitments
- Although this represents a relatively low cost for companies in most cases, it’s seen as valuable
- Highlighting the unique services of your brand
- The lack of segmentation could lead to low personalization
- Perks loyalty programs suffer from a lack of customer investment
- Customers’ shopping behavior is slower to change as they have no clear goal to work towards
5 Tips to Create a Good Customer Loyalty Program
Launching a loyalty program is an important step in growing your business, and one you don’t want to mess up. There are some tips to help you build your own exclusive loyalty programs that match well with your online store to achieve inspiring customer loyalty.
Let’s take a glance…
1. Create a Simple Points System
The fundamental step of building a loyalty program is allowing frequent customers to earn points that convert into rewards. If you’re a small business or you offer inexpensive purchases, start using the point-based loyalty program. It’s important to make the relationship between both earned points and tangible rewards as intuitive and simple as possible.
2. Start with Your Existing Email List
Think about it a little bit…
You already have loyal customers who like you enough to type their email addresses and join your email list. Your email list is a good start on your relation-building journey. Use it to your advantage and make your customers feel special at the same time by offering them a chance to be the first members of your customer loyalty program.
3. Make Joining Easy and Earning Rules Simple
It’s very important to ask your customers only for the information you really need. All you really need at this stage is your customer’s name and email address. Customer loyalty programs can be excellent lead capture incentives, but no one wants to share their life story or personal data with an eCommerce store.
Keep your program easy to join and digital rewards system easy to understand because if customers don’t understand how to earn in your loyalty program, they may ignore it. The below example from Azazie Store for Bridesmaid Dresses & Wedding Dresses is a good one to inspire you.
This pop-up appears once you visit the website. All you have to do is type your email address. Once you do so, the spin will start and your reward will appear. I’ve tried my luck and I’ve won a coupon. 😍
4. Partner with Another Brand
Partnering with other related brands could be great for your loyalty program. Think of other companies that would be a good fit. For example, if you sell formal suits for women, consider forming a loyalty program with a maker of work purses. When customers receive a value that’s relevant to them and goes beyond what your company alone can offer, it shows that your business is customer-centric and really cares and understands its customers’ needs.
Businesses can also grow their network to reach their customers and partner with multiple brand names. For example, Vodafone, the largest mobile network operator in Egypt, has a loyalty program “Vodafone Red Points,” which enables customers to collect points and redeem them from 70+ brands ranging from electronics & home appliances to restaurants & cafes.
5. Offer Distinctive Rewards
Being distinctive is something that not many businesses are good at. Company offers may take many other forms apart from the usual traditional form of discounts. For example, you can reward customers, who spend at a certain threshold, free tickets to events or subscriptions to other products and services.
So many customers are also willing to invest in brands that take stances on social issues they care about. So you can get the benefit from this sense of altruism in creating your loyalty program — for example, telling your customers that a percentage of every purchase goes to charity.
The Key Metrics to Measure Your Customer Loyalty Program Success
eCommerce businesses become more focused on tying marketing efforts to their revenue; it has become critical to show effective and better ROI on customer loyalty programs.
Let’s take a quick glance at the key metrics needed to measure the success of your loyalty program.
1. Customer Lifetime Value (CLV)
CLV represents the overall revenue contribution or the total amount of money you can expect from a customer during his/her engagement with your brand. It’s a great way to measure the long term impact of your loyalty program. To calculate CLV, you need first to calculate the “Customer Value.”
Here is how to calculate Customer Value and Customer Lifetime Value for Loyalty Programs:
- Customer Value = Average Order Value (AOV) × Purchase Frequency
- Customer Lifetime Value (CLV) = Customer Value × Customer Lifespan
Image of formula 1
2. Repeat Purchase Rate (RPR)
The Repeat Purchase Rate (RPR) is a percentage that gives you an overview of the short-midterm impact of your loyalty program.
Here is how to calculate the Repeat Purchase Rate (RPR) for Loyalty Programs:
- Repeat Purchase Rate (RPR) = Repeat Customers (Yearly) / Total Customers (Yearly)
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3. Redemption Rate
Redemption Rate is a percentage that represents to what extent your customers are redeeming their loyalty points. A high redemption rate means that your customers are highly engaged with your loyalty program. The healthy benchmark of redemption rate is 25%; anything less than that rate indicates an issue with the redemption process.
Here is how to calculate Redemption Rates for Loyalty Programs:
- Redemption Rate = Points Spent / Points Issued
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4. Customer Retention Rate
Customer retention rate is the percentage of customers the company has retained over a given time period.
Here is how to calculate Customer Retention Rates for Loyalty Programs:
- Customer Retention Rate = (Total No. of Customers at End of Period – Total No. of Customers Acquired During Period) / (Total No. of Customers at Start of Period) × 100
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5. Churn Rate
Unlike the retention rate, the churn rate shows the percentage of customers a company has lost over a specific period.
Here is how to calculate Churn Rates for Loyalty Programs:
- Churn Rate = (Total No. of Customers Lost During Period) / (Total No. of Customers of Company at Beginning of Period) × 100
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How to Use ExpandCart’s “Advanced Reward Points” Application?
ExpandCart offers you “Advanced Reward Points,” a great customer loyalty program within your reach once registering for the “Professional and Ultimate Bundles.” The below steps explain in detail how to use ExpandCart’s Advanced Reward Points to create a loyalty system to obtain customer retention by using reward points.
No software work is needed, all you have to do is to create an online store on ExpandCart platform and you’ll find our loyalty system located inside the control panel of your store.
Let’s delve right in…
- From your store’s control panel, click on Apps & Services
- Browse apps and install the “Advanced Reward Points” application
- Once installed, click on “Edit”
- Hit the “Configuration” option and enable your reward points app.
- You can also enable your customers to earn points on other actions, not just purchasing a product, for example, registering for your newsletters.
- Name your reward points system.
- Format how much money your customers will earn when gaining a specific amount of points.
- Enable “Show points on the product listing page” and “Show points on the product detail page” to enable customers to know how much points they’ll gain for each product.
- Hit “Save Rules”
- Go to “Settings” >> “Advanced Settings” >> “Order Totals”
- Enable both “Earn Points” and “Redeem Points” options.
- Go back again to “Settings” >> Click “Save”
- There are also a bundle of variety rules you can set to customize your own loyalty program
To Sum Up…
By now you know almost all the basics to start building your loyalty program. Remember, consumer preferences are constantly changing. They expect personalized rewards, easy membership process, and reward points that don’t expire.
Remember also that a great loyalty program should:
- Strengthen and align with your business goals.
- Be relevant to most of your customers.
- Be visible and accessible onsite and offered via text messaging, email, push notifications, or a card.
- Not ask for too much information.
- Encourage customers to repeat purchasing.
- Encourage customer referrals by offering valuable rewards to the sender and receiver.
Build your online store with ExpandCart and get benefit from all features of our loyalty programs platform “Advanced Reward Points” located inside the control panel of your store.