Running A Business

How to Design a Loyalty Program for Your Retail Business

Jun 24, 2020 • 10+ min read
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      Pop quiz: would you rather retain a current customer or attract a new one? Any entrepreneur worth their salt will probably reply, “Both!” But if you were forced to choose only one option, you should stick with the current customer. It takes more time and effort to bring new customers into the fold, and the costs can be 5 times higher than retaining one you already have.

      “It is well-understood that acquiring a new customer can be significantly more expensive than keeping an existing one,” says digital marketing guru Greg Kihlstrom. “For instance, recent research by Monetate found that an e-commerce customer who has had one previous shopping experience with a company is over 3 times more likely to convert again versus a brand new visitor, and customers who have bought multiple times are over 5 times as likely to convert again. It stands to reason then that customer loyalty programs can be incredibly valuable to any organization with repeat customers.”

      When customer loyalty is so crucial to your bottom line, it certainly makes sense that you’d want to implement a business program that literally begins with the words “customer loyalty.” Customer loyalty programs have exploded in popularity in recent years, with about 90% of businesses using them. All told, American consumers hold more than 3 billion memberships to these programs. That’s almost 30 memberships per household!

      The Heart of Customer Loyalty

      While customers are enrolled in countless loyalty programs, that doesn’t mean they participate in them. Research shows that Americans engage with fewer than half of the programs they’ve signed up for. This number is unsurprising because consumer satisfaction with such programs is on the decline. Only 44% of consumers say they’re “very satisfied” with their programs and rewards.

      In order to make your program rise above the dust created by the 3 billion other programs stomping around the nation, you’ll need to focus on the concept of loyalty. You probably have customers who have made purchases from your small business but still couldn’t technically be considered loyal. Perhaps they like the availability or price of a certain product or service. Or it might be your convenient location that draws them back.

      The problem with factors such as availability, price, and location is that they’re fragile. When a competitor offers better availability, a lower price, or a more convenient location, your repeat customers could vanish.

      This is why loyalty is king. You must connect with your customers and give them a distinct experience with your brand. A great example of this type of loyalty is seen in the hyper-competitive world of smartphone sales. Samsung makes great phones that compete with (or surpass) the iPhone on nearly every level. But let’s say that Samsung released a new phone with revolutionary features that actually made that latest iPhone look like a 2005 BlackBerry. Even if this holy grail of a phone cost less than the cheapest iPhone, millions of Apple loyalists would refuse to cross over.

      Your business might aspire to Apple-type loyalty but should be content with more realistic levels amongst customers. It all starts by creating a distinct experience that simply won’t be available from your competitors. This is how you create emotional connections that bond customers to you with weather-resistant glue.

      “Today’s definition of customer loyalty has evolved to encompass all engagement a customer has with a brand, whether it be via social media, in-store, or online visits,” explains a customer analysis from Forbes. “These engagements go beyond driving the customer simply from one purchase to the next. Today’s consumers demand more from brands. They don’t want to be judged solely by what they buy or how much they spend. Consumers want personalized experiences. They’re willing to hand over their information to brands when they know they’ll get something in return: a value exchange.”

      Providing a value exchange should never be limited to just your loyalty program. You obviously need to connect with your customers on multiple levels and prove to them that they mean more to you than just “one free cookie on your next visit” or “collect 50 more loyalty points and get half off your next swimsuit purchase.”

      What Makes a Great Rewards/Incentive Program

      The benefit of a loyalty program is that it allows you to delight your customers. Whether it’s a humorous promotion for National Burrito Day or a legitimately generous offer available exclusively on their birthday, these unexpected incentives help build emotional equity.

      Here are some ways for your program to shine:

      Make it accessible: We’re not even going to use the term “user-friendly” here to describe your program, as the term sounds cold and we’re talking about meaningful relationships. So let’s go with “friend-friendly” instead.

      In addition to any formal incentives, your loyalty program should reward customers with a surprisingly smooth experience. Each member’s credit card information should be connected to the program (more on this later) so they can make purchases from any device and collect their rewards.

      “We live in a world dominated by smartphones and discovering ways to interact and engage with customers has become a vital point,” according to Data Driven Investor. “Although UI is a crucial part of user experience, it is the usability that should always be a priority. If your mobile app is difficult to use, no matter its modern and appealing design, the overall perception will be negative. And let’s get real—a mobile app’s success depends only on one thing: how the users perceive it.”

      You can ensure a warm welcome for your loyalty app by making it as easy to use as your personal favorite loyalty app. If your business still requires customers to carry around a special loyalty card or remember a 9-digit loyalty account number to participate in your program, you need to repent immediately. Throwing in these types of extra requirements seems almost like you’re punishing them for joining your club.

      Make it personalized: Nearly all loyalty programs aspire to be personalized. But it takes much more than just having the words “Hello, Peter” appear when a customer named Peter logs into the app.

      You need to take it to the next level by showing you remember the little things and that those personal details will actually make customers’ lives easier. For example, a local Mexican restaurant has an excellent loyalty program. When customers make an order from their smartphones, it displays the last order and asks if they want to get that again. This feature might seem small, but when you’re ordering for a family of 4 and everyone prefers different items, the process of plugging in an order can take 7–8 minutes. So if everyone was happy with the last order, who wouldn’t love to save 7–8 minutes and get that same delicious meal again?

      Research shows that only 22% of customers are very satisfied with the level of personalization provided in their loyalty programs. You have an excellent opportunity to stand out in a sea of mediocrity by tailoring your program to each customer and helping him or her feel valued.

      Make it rewarding: Your program can have every bell and whistle ever invented, but it won’t delight your customers unless the incentives are worthwhile. While discounts and freebies are common in many small businesses’ loyalty programs, they shouldn’t be viewed as the standard. The risk you’ll run by leaning on these types of rewards is making customers loyal to your prices, rather than your business. If competitors beat your prices, you might see some of your precious customer base migrate elsewhere.

      “It’s more than just points, even more than marketing,” says Forbes. “It’s creating a convenient experience for the customer […] For example, members of the reward program can download a mobile app to their phones and then use it to check the status of their hotel room, check in when the room is ready, and even use the phone as a key to get into the room. All of this without ever having to visit the front desk. Once you learn how to use it, which is a simple process, you find it more convenient to do business with Hilton. And, the company that is most convenient and easy to do business with wins.”

      Target’s loyalty program perfectly embodies this idea of going beyond savings and adding convenience. The REDcard starts by giving customers a 5% discount on all purchases, then adds free shipping to all their online orders and a more generous return policy.

      One way to add more to your program is by including incentives that are unique to your business. For example, if a restaurant has a signature dessert that isn’t found anywhere else, that could be a great option to include in the program. Another possible option would be to allow customers to earn loyalty points that could be redeemed at other businesses. You’d need to establish business partnerships to make this approach possible, but as hotels and airlines have discovered, it can be a major lure for customers.

      How Much Does a Great Rewards/Incentive Program Cost?

      American businesses devote billions of dollars annually to their loyalty programs’ non-cash incentives. Given the arms race taking place in the loyalty space, it’s important to consider the costs and what kind of returns you could anticipate on your investment.

      “The truth is that traditional loyalty programs are costing significantly more, and delivering significantly less, than many executives realize,” explains a business loyalty analysis from Accenture. “To reclaim the loyalty value that is slipping through their fingers, business leaders are starting to rethink what loyalty means for their customers—and for their business.”

      This means that if you want to make your loyalty program work for your business and your customers, you can’t offer more than you’ll get back from your customers, which is typically about 12–18% more revenue. But the rewards must still be tantalizing enough to engender positive emotions, as nearly a quarter of consumers are either apathetic or disappointed by the programs they belong to.

      Take time to carefully consider the rewards you’d like to include in your program. They might be tangible, such as free samples, gifts, or a product from a partner brand. Or you could offer a service like free expedited shipping or easier returns on purchases. Put yourself in the customers’ shoes and think about what you most appreciate from loyalty programs. If a certain incentive would make your heart sing, there’s a good chance it’ll have a profound impact on your customers as well.

      When it comes time to crunch the numbers, you’ll find that the formula is harder to nail down than clear business costs such as utilities, rent, or professional fees. The best you can do is anticipate how your customers will react (remember, the average loyalty program member brings in 12–18% more revenue) and contrast that with the program’s associated costs.

      Here’s the formula in its purest form:

      Incremental revenues – incremental costs = loyalty program cost

      The incremental revenues you might see from your program include a higher number of sales, larger volume within sales, less turnover among your customer base, and more new customers referred to your business.

      On the other hand, you’ve got to think about incremental costs such as vendor contracts, program advertising, IT support, business overhead, and the actual redemption of rewards.

      If you feel the benefits of your program will outweigh the costs, then there’s rarely been a better time to launch it. You may need to tweak aspects of the program over time, but that should be fine as long as the evolution is smooth and fair to customers.

      Making Your Program Easier for Everyone

      Many of the incremental costs for loyalty programs in the past were tied to their cumbersome nature. For example, restaurants often handed out punch cards to patrons. This solution was perfectly fine at the time, but it slowed operations and created extra hassles for staff. When customers were ready to pay for their food, they’d often have to dig through their purses or wallets to find the elusive punch cards. This process could double the time it would normally take to receive payment.

      To prevent the issue of customers losing their cards and becoming frustrated with the loyalty program, some restaurants stored the cards onsite. When a customer was ready to pay for the meal, an employee had to manually sift through a file system to find the correct card. This method undoubtedly slows operations and burdens your staff with unnecessary tasks.

      The best way to eliminate hassles for your employees and customers is to use a point of sale systems that syncs with your loyalty program. When a customer makes a purchase, there’s no need for anyone to track down a punch card or recite a loyalty number—the point of sale system automatically matches the credit card with the corresponding account and adds it to the purchase history. Any qualifying rewards would then be granted.

      This synchronization is a crucial way to simultaneously keep your customer base happy and help it grow. New customers will have their contact information saved within the point of sale system, enabling you to reach out to them with targeted offers. You can invite them to join your loyalty program, perhaps offering a sign-up bonus like extra points or an exclusive discount.

      Although automation should be the name of the game at this point, many businesses still haven’t embraced such systems.

      “The point of sale system serves as the central component for your business; it’s the hub where everything—like sales, inventory and customer management—merges,” says software guru Agnes Teh Stubbs. “As evident as the benefits of a POS system are, we found that 56% of single-store retailers are still not using one. Instead, we found, many are still using a combination of manual methods, cash registers, QuickBooks, and Excel for bookkeeping.”

      For small business owners who can’t be swayed by benefits like convenience, efficiency, and accuracy, think about data security. When your customers provide their personal data during a transaction, they’re placing an incredible amount of trust in you. Data breaches and other calamities will shatter that trust.

      The best point of sale systems offer advanced security that keeps customer’s loyalty program information and, more importantly, their credit card or bank information safe.

      “Few things are as ominous in today’s digital landscape as a data breach. Not only do data breaches come with an immense cost, estimated at close to $4 million, but shifting consumer sentiment and increased regulatory scrutiny help ensure that companies will be dealing with the consequences long after the initial expense is paid,” says Forbes.

      By linking your loyalty program to a reliable point of sale system, you’ll maintain your customers’ trust, make their lives easier, and establish emotional connections that can last through the years. Loyalty is a two-way street, after all, so do everything in your power to show your customers how much you value them. Then sit back and watch as they return the favor.

      About the author
      Grant Olsen

      Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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