E-Class #37: How to Create a Customer Loyalty Program that Runs Itself

Checkpoint:

You understand how repeat business impacts your customer acquisition cost and revenue stream
You have surveyed your customers for their ideas and feedback on their shopping experience in your store.
You have chosen and begun to implement a few strategies that will boost your repeat business.

Customer loyalty programs go beyond incenting your clients to return – they tap into your customer’s psychology.

You and probably everyone else you know are part of a customer loyalty program. Just look at your key ring, or in your wallet, and you’ll probably find a bunch of cards for a variety of businesses. If you have an Airmiles or Aeroplan credit card, this is also a loyalty program.

It is estimated that at least 75% of consumers have at least a single loyalty card, and that those with more than two comprise a third of the population. Loyalty programs have been around for decades, and many businesses have some form of simple strategy, if not a more elaborate one.

These businesses know that when they give their customers a loyalty card, that they are creating a sense of belonging for the customer. A sense of being part of something. If you’re at Bob’s Pet Food, and open your wallet to discover a half-stamped discount card for Purdy’s Pet Supplies, you’re reminded not only of your “investment account” at that business, but that you are part of the Purdy’s “club” or clientele.

At the very least, working towards the reward or incentive will be enough to make the customer choose your business over another. They want to get one sandwich or coffee closer to their free item. They want to get to the next category or level of bonus points. They want to have enough funny money to buy something!

In this E-Class we will cover:

The purpose of customer loyalty programs in your business
The psychology behind customer loyalty programs
How to create a low-cost, low-maintenance program for your business
Types of customer loyalty programs

Your customer loyalty program is designed with a single purpose: to keep customers coming back to your business.

As I briefly discussed in the last E-Class, a customer loyalty program can have a strong impact on your repeat business volumes, lowering your customer acquisition costs and putting more money in your jeans.

While you may fear that a loyalty program is too expensive or complicated, there are a host of really simply strategies that can have just as much impact for a fraction of the financial investment.

With this in mind, you need to make sure that your program is structured around your customer and what they believe is valuable. Otherwise, the reward or incentive won’t be enough to motivate your client to return.

Keep in mind that customer loyalty programs also allow you to track and monitor your customer’s purchasing habits, and even gain further demographic information through a detailed sign-up form. Your loyalty program could serve as a vital component of your ongoing marketing research.

I want to note that customer loyalty programs don’t work for every business – to imply so would be misleading. If you sell high priced items, chances are that customer isn’t going to be coming back to buy from you every month. In that case, you may be better served by an incentive-based referral strategy to gain more business from your customer’s friends and family network. This will still maximize your customer acquisition investment.

You want to create a program that works for your business, costs very little, and is nearly effortless to maintain. Here’s how you do it.

1. Find out what your customers value.

An effective loyalty program must motivate your customers with something they feel is of value. You can use your knowledge of your target market to make assumptions about the types of rewards they would value.

You may wish to include a few questions on a customer survey about what kind of rewards your client base would appreciate. Or you can simply ask some of your top customers in casual conversation. Do they like points-based programs? Cash back? Free products or services? What other loyalty programs are they a part of, and how are those program structured?

Keep your research focused on your top customers – your “a” list. The last thing you want to do is cater to your “c” list and make an unprofitable or difficult customer loyal.

2. Figure out what is a reasonable number of transactions per year you can expect from your target market.

Like I mentioned above, a customer loyalty program won’t work for every business. Additionally, certain types of loyalty programs will work better than others depending on how often customers make purchases – their spending frequency.

So, you will need to figure out what your customers’ average yearly spending frequency is. This will clearly depend on the product or service you sell, and the financial status of your clients. In this case, it doesn’t matter how much they spend, just tally up how often your customers return to your business.

For example, if you run a grocery store, you’ll see your clients on average of once a week. Alternatively, if you sell oil changes, you’ll see your clients a few times a year. If you don’t know, estimate based on your specific product or service and its usage.

This information will affect how you choose to structure your loyalty program. If a customer has to buy ten oil changes from you before they get a free one, and they only see you twice a year, there is little to no motivation to stay loyal to your business. It would take five years to save $50.

3. Next, choose a loyalty program that fits within your budget and maintenance ability, and rewards your customers with something of value.

The loyalty program you establish has to work for everyone involved. It needs to provide your customers with a reward that is valuable enough to motivate them to earn it. It also needs to be profitable for your company, and relatively easy for your staff maintain.

The level of maintenance you should build into the program will depend on the resources you have available to you. With a sophisticated point of sale system, you may have an ability to track what and when customers purchase, and manage rewards through the same system. This will allow you to offer a points or dollar-based program, since records are maintained in individual customer accounts.

If your records are paper based, you’ll need to establish a very simple program that is simple for you and your staff to monitor and execute. Your customers will expect to be able to track and monitor their progress as well.

The time it takes for you and your staff to maintain the program will cost your business money. So will potential hard costs, like key fobs and frequent buyer cards. Calculate the cost of the program on a per-client basis, and establish how long it will take you to break even. Of course initial start-up costs will be greater than the cost of maintaining the program, but overall you should see a net increase in sales.

Here are some examples of simple loyalty programs that you can implement:

Free product or service.

Give them every 10th (or 6th) product or service free. Produce stamp cards with your logo and contact information on it.

Rewards dollars.

Give them a certain percentage of their purchase back in money that can only be spent in-store. Produce “funny money” with your logo and brand. Rewards programs provide gifts and perks that are “earned” according to the amount of business your customers do with you.

Rewards points.

Give them a certain number of points for every dollar they spend. These points can be spent in-store, or on special items you bring in for points only.

Membership amenities.

Give members access to VIP amenities that are not available to other customers. Produce member cards or give out member numbers.

Special discount card.

I see a lot of grocery stores do this, like Safeway, for example. Their Club Card allows you collect points that can be used towards a catalogue of items, but the real incentive to join is for the discounts that members receive. These discounts are advertised throughout the store, next to the regular price, and you need to have an account to receive the discounts.

4. Always check to be sure your business can afford the time and money required to set-up and maintain the program you’ve chosen.

Once you’ve decided on a program that you’re happy with and that suits your business, run the numbers. The last thing you want to do is implement an unprofitable program that you have to discontinue. Your customers will be disappointed, and you may even lose them.

Consider the following costs when evaluating the overall investment:

Start-up Costs

Staff training and customer education/marketing
Hard costs, like card or key fob production
Other printing costs

Maintenance Costs

How often will you need to order cards or key fobs?
What extra VIP amenities will you have to add to your office supply orders?
Will you have to pay for additional staff time?
How much will it cost you each time a customer signs up?

Maintenance Time

How many additional hours per week will it take you and your staff to maintain the program? Consider things like extra steps at the point of sale, tabulating purchases, tracking progress, creating membership accounts, and giving out rewards.
Think about whether you can implement the program into existing systems.

Profit

Have you built enough profit into the rewards or discount structure? If you offer a free product after ten purchases, you’ve essentially discounted each of those purchases by 10% – is there enough room in your margin for this?
Do the VIP amenities cost you more than the increase in business?

I’m not trying to scare you away here, I just want you to make sure that your efforts will be profitable. A simple, straightforward loyalty program can be just as effective as a complex one.

5. Implement the system by training your staff and educating your customers.

Train your staff on how the program is structured, and what their additional responsibilities will be in executing and maintaining it. They are your front line, so their understanding is essential to the customer’s education about the news.

Announce the customer loyalty program to your existing customers, and make sure to tell each new customer about it. Send out a newsletter, and post in-store signage describing the details of the program.

Remember that for this strategy to work, you and your team have to understand and promote it. The program in itself becomes a product that you sell.

Be prepared to commit to your loyalty program for the long-term, but allow yourself to make changes after a few months if you need to.

An effective customer loyalty program requires a longer-term commitment than other strategies because it takes time for customers to earn their rewards. This is why you need to be comfortable with the cost and time investment associated with each particular program.

Remember that the impact on your income over the long-term can be substantial. You want to be recovering the cost of maintaining the program with the increase in sales volume. Pay attention to your numbers over the course of a few months, and make small changes to the program if you need to.

The next few E-Classes are going to look at some powerful marketing tools that you can create to generate better results for your company.

Stay tuned!