We've all heard of them, and they're everywhere! The wide world of loyalty programs stares us in the face every day. Credit card issuers, hotel chains and airlines use them extensively, and travel and airline points are about as familiar to Canadians as hockey and maple syrup.
What is a customer loyalty program and does it work?
Giving something back to customers in exchange for their loyalty or repeat business, when done properly, drives good customer relationships and referrals from existing customers who feel valued and satisfied. In turn, this builds the business's brand and reputation. These ingredients are the secret sauce that leads to customer satisfaction, retention, repeat buyers and positive word-of-mouth and reviews. A small business customer loyalty program should aim for all of these goals. We all know about customer loyalty programs from major companies, but what about programs for your small business? Can you afford to offer a loyalty program, or can you afford not to? Unequivocally, its importance cannot be ignored. It works as a component of your overall online presence. There are scores of tools and apps that make it easier than ever to connect with customers and provide incentives. Here is a comprehensive list of online loyalty apps that manage your program for you, but definitely talk to your webmaster first if you have an online presence.
Old school vs the digital age
Decades ago, consumer product manufacturers used loyalty tactics to drive customers to buy more products. Over the years, it became clear that repeat buyers were more interested in the lure of a big prize than a product, brand or business. In the sixties and seventies, kids would beg their parents to buy more cereal, candy, comic books, gum or soda so that they could collect points. The only catch was that winning a big prize could take years to get and require consuming thousands of products. Not exactly a win for the consumer! The essential point here is that a loyalty program isn't just a sales or marketing gimmick that benefits the business at the expense of the customer. The key is delivering value in exchange for loyalty, and rewards as perks for customers who support your business. Do customer loyalty programs work for small businesses? Yes, but a company that doesn't have repeat customers may have other internal issues that a loyalty program cannot solve. If your customers aren't thrilled about the menu at your restaurant, a loyalty program probably won't fix any problems in the kitchen.
The takeaway: you should start a loyalty program when you're doing everything in your power to ensure its success, not when you have internal problems to fix that are directly impacting customer satisfaction and repeat business.
How to create a loyalty program for customers
Before you decide to create a customer loyalty program, there are a few basics to cover. First, the business must serve its customers' needs well and provide value, even if it's just starting up. If your customers aren't getting what they need, their loyalty may tough to secure, at least until you ask why and figure out how to solve any problems. For the best results, your loyalty program should aim to make evangelists out of your most satisfied customers. What is an evangelist? In marketing, an evangelist is someone who actively tells others about their positive experiences with your business. Any customer who has a positive experience with your business or your products is a potential evangelist. People post positive (and negative) experiences online. Harness this opportunity by inviting customers to review your business, products and services on your website when they purchase. The following example illustrates the inner workings of a great customer loyalty program.
Small Business Customer Loyalty Program Success Story: XYZ Coffee Roasters
XYZ is a popular online retailer of well-reviewed premium roasted coffees and a range of enthusiast and semi-commercial espresso equipment. The company offers very competitive prices on espresso machines and has become one of the largest premium coffee retailers in North America. XYZ has a generous loyalty program. They award points to customers when they join the program and every time they make a purchase or submit a review on a purchased product. Management of the program takes place in real time on their website. New customers come to the site because of XYZ's tremendous selection of competitively priced equipment and excellent service (including free shipping both ways for warranty repairs). If they submit reviews when they buy or join the program, they could easily accumulate $50-100 or more in points. Points can be used immediately online to order fresh coffee beans or accessories.
And if all that wasn't enough, XYZ offers free shipping on orders above a reasonable amount, even for purchases made with reward points! They also have regular promotions for newsletter subscribers, offer free coffee beans with any purchase occasionally and sell open-box and used equipment at a good discount. Also, XYZ sends a detailed thank you message for every purchase, not just a generic "your order is confirmed".
How can XYZ do all this and still make money?
You might think that XYZ can't possibly generate any profit when they offer such competitive services, low prices on equipment and generous rewards. But there is a silver lining, and it plays out over time:
New customers who buy expensive equipment are well rewarded, but what likely matters most to XYZ is that they buy freshly roasted coffee beans on a regular basis for years to come. As it happens, the margins on roasted coffee are very tasty and help subsidize the loyalty program and lower margins on equipment.
Also, since customers spend less on coffee than on machines, the cost of giving out points will be lower for XYZ over time.
XYZ is in an industrial area on the outskirts of Canada's largest city, where rents are low. They have a large showroom for walk-in sales, which are more profitable since they don't require shipping or prep.
Customers need to buy at least 2-3 bags of coffee to get free shipping, but the shelf life of freshly roasted beans is short. XYZ sells freshly roasted beans to enthusiasts, who discard coffee as soon as it loses freshness and then orders more.
Build a strong foundation before enacting customer loyalty programs
Clearly, XYZ has built enormous customer loyalty and a generous small business loyalty program, but their business has a strong foundation built on value, quality, selection and service excellence. XYZ seems to be making all the right moves to exceed customer expectations. If XYZ keeps focusing on providing outstanding products at a great price and exceptional service, they should continue to attract new customers as more and more satisfied customers recommend them to friends. This practice saves the business time and money on marketing and advertising since referrals from happy shoppers on social media and reviews are very effective at recruiting new customers. As far as the technology required, XYZ runs their loyalty program through their website and other tools that tie-in data mining and stats, email campaigns and social media management.
How to develop a sustainable customer loyalty program
Is there a rule of thumb when it comes to deciding what to give out and what you get in return? It's a case-by-case. If you're thinking about starting a loyalty program, play around with the numbers to see how long you could support a program even if you get no extra business out of it. If you can't, then you're either too generous with your rewards, or your business isn't generating enough revenue and repeat business, or maybe you are in a lower margin or commoditized industry. Trial and error is the only way to figure out what will work for your company.
Some important things to consider
Other questions that a successful customer loyalty plan for small business should address:
Is your plan designed to reward top customers at the expense of occasional customers according to the 80/20 rule?
How effective is your loyalty program at increasing sales for occasional customers? How do you convert them to top customers? A successful small business loyalty program uses proven methods such as points and rewards, useful content and alerts about sales and promotions.
Should you design a loyalty program to keep customers away from your competition? Yes! Competition is not something you can control. If your competitors are your equals, keep your customers away from them with incentives. On the other hand, when loyalty programs are too generous, a price war can erupt, that causes a race to the bottom. Focus on quality and personal connections to build a strong foundation for loyalty. If the price is the only factor, your product becomes a commodity.
How should you reward customers who refer new customers? The standard today is to give them cash rewards.
Do you operate a B2B business? If so, design your customer loyalty program accordingly. Your customers may be more interested in excellent service, innovative ideas, on-time delivery and customized solutions than pricing alone. You are your customer's partner. Suggest best practices to help them succeed based on your expertise. These actions can go a long way to secure their trust and loyalty.
Successful customer loyalty programs have one thing in common: they keep customers coming back to your business because they reward good customers and say thank you for being a customer. Satisfied customers help your small business, but grateful customers actively promote it!
