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How to Launch an Irresistible Customer Loyalty Program

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Tips for keeping your customers thrilled to do repeat business with you.

2.1 billion.

That’s how many loyalty program memberships are held in the U.S. alone.

With a population of 319 million, that’s more than 6.5 memberships per person.

Over the years, brick-and-mortar retailers and online businesses alike have figured out that when it comes to increasing customer lifetime value, loyalty programs, simply put, work.

But how do you make them work for you?

Surely whatever works for Macy’s or CVS or Jamba Juice won’t apply, apples-to-apples, to small online businesses, right?

Digging into the research—and the sheer volume of loyalty programs out there means that there’s plenty of research to dig into—I learned that the answer isn’t a simple yes or no.

There are things that small businesses can do to ensure that your loyalty program makes your customers happy to keep coming back… and there are mistakes you can make to ensure that your program never gets off the ground.

Today, I’m digging into both.

The Psychology of Loyalty Programs

Loyalty programs work not because of marketing voodoo, but because of the way our brains are wired.

There’s a psychological effect called the Endowed Progress Effect, and it’s pretty simple but incredibly powerful:

The Endowed Progress Effect

  • When people feel they have made some progress towards a goal then they will become more committed towards continued effort towards achieving the goal.
  • Perception is critically important with this and the appearance of progress can have a strong effect whilst actual progress that is not recognized can be demotivating.
  • The corollary is that people who feel they are making little or no progress will be more likely to abandon efforts.
  • As people get closer to the goal, their commitment is likely to deepen as they strive increasingly harder to achieve success.

Rewards programs harness the Endowed Progress Effect to help you grow your business.

Today, I’ll show you some different ways you can implement your own loyalty program. But first, I’ll explain why customer loyalty is so ridiculously important to focus on.

The Incredible ROI of Customer Loyalty

In 2012, ClickFox asked customers about their loyalty to brands, and how it affects their buying decisions. Here’s what they found:

As it turns out, loyalty can mean a lot to your bottom line.

A Lee Resource Inc. statistic showed that acquiring a new customer costs five times more than retaining an existing customer.

From Bain & Company report, businesses that grew their customer retention rates by as little as 5% saw profit increases ranging from 25% to 95%!

A different research finding, this one from the book Marketing Metrics, compares a business’ chances of selling to new vs. existing customers:

The probability of selling to a new prospect is 5–20%. The probability of selling to an existing customer is 60–70%.

Bottom line: building customer loyalty pays. It gives you a big selling advantage, and makes growing your business cheaper and more efficient.

But while your loyalty program memberships might consist mostly of department stores and grocery chains, you don’t have to be a giant retailer to have a loyalty program.

In fact, the psychology and strategy that make loyalty programs so effective can be used by any business of any size, whether you’re an online SaaS or eCommerce site, or a local brick-and-mortar shop.

The Three Main Types of Loyalty Programs

Below are the three main “structures” for loyalty programs that you can find at many businesses:

1) Reward for Number of Purchases

You’ve probably seen this at some point at a sandwich shop or video rental store (remember those?).

The idea is this: the customer gets a “point” for each purchase they make. Once they make a certain number of purchases, they get a reward on the next purchase; usually a free product or discount.

Remember that Endowed Progress Effect I mentioned in the beginning of this post?

This type of program leverages that phenomenon in a huge way.

In one study at USC, researchers handed out loyalty cards to customers at a local car wash. The cards offered a stamp for every wash purchased.

But there was a twist: Half of the cards had spots for eight stamps, with a free car wash offered for collecting all eight. The other half had spots for ten stamps, but two of the spots came pre-stamped.

What they found was amazing: the pre-stamped cards resulted in 178% more repeat business than the unstamped ones.

This structure isn’t just for retail or eCommerce; it can be used in SaaS, too. If your business has a subscription model and pricing and transactions are fixed, then this program rewards customers for their continued long-term business.

2) Reward for Total Spending

Another option for retail and eCommerce businesses, rewards for spending leverage the Endowed Progress Effect to encourage customers to spend more, whether it’s in a single purchase or over time.

The main advantage of this program is that incentivizes purchase size and purchase frequency, versus a reward-per-transaction model which only encourages the latter.

3) Paid Upfront Rewards Program

The third rewards model offers customers instant gratification and rewards — for a cost.

The classic example of a paid rewards program is Amazon Prime: pay $99, and get unlimited two-day shipping (plus other goodies like free streamed movies) for a year.

The power of a paid-upfront rewards program lies in the psychology of maximization: customers spend money on the program, so they want to make sure that they get the maximum value possible from it, which keeps them coming back.

In fact, it’s been reported that Amazon Prime members spend twice as much as non-members.

The Two Things You MUST Do in Your Loyalty Program

Regardless of which model you test, there are two very important things to keep in mind:

1) Progress Must Be Easy to Track.

In order to leverage the psychological power of a loyalty program, customers must be able to see their progress so that they’re motivated to reach the next milestone.

2) The Rewards Must Be Valuable and Relevant.

In an MIT study on loyalty rewards, researchers found that just about the worst thing you can do with a rewards program is offer freebies that aren’t related to your business.

Probably the least useful rewards for customer loyalty are free gifts such as lottery tickets; these are nice to receive but tend to be only short-term tactical froth that can devalue the brand. — Dowling and Uncles, 1997

Give your customers rewards that are valuable to your customers and relevant to your business.

If your business delivers great value without a rewards program, then it’s in your — and your customers’ — best interest to build customer loyalty and generate more sales.

A rewards program, if done right, can be a powerful way to do that.

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About the Author

Len Markidan heads up marketing at Groove. He’s focused on helping startups and small businesses build better relationships with their customers.

Read his latest posts or follow him on Twitter

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