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How to Effectively Use Loyalty Programs to Increase Customer Retention

Harvard business review logo incorporating loyalty programs for customer retention.

Loyalty Program Rewards

As an e-commerce brand, do you seek out repeat customers? If not, it might be time for you to consider adding customer retention into your business strategy.

Have you ever considered why you continue shopping at your favorite stores? Whether it’s the look of the brand, the service it offers, the community it provides, or if it offers a great product that perfectly matches what you’re looking for, there’s a reason that you go back to your favorite brand for more. 

As an e-commerce business owner, considering the things that make you a repeat shopper is the first step in figuring out how to offer the same experience to your consumers. One way you can do this is by creating a loyalty program to reward your customers. To explain, let’s define customer retention and run through the most effective way to use loyalty programs to increase your customer retention rate. 

Defining why customer retention should be important to you

Customer retention is a strategy used to increase the amount of repeat shoppers your store has. When you implement tactics to try and keep your current customers coming back for their lifetime, you’re investing in a customer retention strategy. It’s about focusing on keeping your current customers loyal to your brand rather than only trying to recruit new ones. 

As traditional acquisition strategies like paid ads and deep discounting become more expensive, it’s important to focus your time and resources on retention methods as well. In fact, customer retention is a great way to minimize your customer acquisition cost because loyal customers are an acquisition tool in themselves. Although it’s great to drive new customers to visit your store and make a purchase, finding out how you can retain those customers for future purchases is a key component to driving your e-commerce store toward success.

Increasing customer retention rates by 5% increases profits by 25% to 95%.

You may be wondering: “How does retention fit in to my strategy?” Well, retention is part of a three-step process. The first step, as you know, is to acquire customers. Afterwards, the pathway to retention is continued by getting those customers to engage with your brand. There’s a few ways you can get newly-acquired customers to engage with your brand, and one of the best solutions is by offering a great loyalty program to get them excited to shop at your store.

Why loyalty programs are part of this process

There are new e-commerce stores being launched every day—all of them selling similar or identical products. Having something distinct about your brand can help set you apart from the competition, and this is where loyalty comes into play. By offering a rewards program for customers, you’re showing them that you appreciate their business. In return, this appreciation will be invested back into your store when they become loyal brand advocates. 

Loyalty begins in the engagement stage, and it helps guide your customers back down the funnel to make repeated purchases and become brand advocates! When you offer points, tiers, and valuable rewards just for shopping at your store, customers will be interested in being a part of your community.

Outlining your strategy, tactics, and tools

To help you kick-start your customer retention process, it’s important to outline your strategy, tactics, and tools. Using this three-tiered model will help you plan how you’ll achieve your goal. We’ve broken it down below using loyalty programs as the main retention tactic:

  • Strategy: Your plan to achieve the overall goal (retaining customers).
  • Tactic: The actions you’ll take to achieve this goal (offering a loyalty program).
  • Tools: the system you’ll use to carry out your tactic (downloading a loyalty app, like Smile.io). 

By planning your customer retention process this way, you’ll have a clear understanding of the steps you need to take as a merchant to turn customers into brand advocates! It’s important to note that customer retention is a long-term benefit. This is something Shopify has explored before: it pays off more when you spend a longer period of time using a strong retention strategy.

Source: Shopify

Tips for designing an effective program

If you’re interested in improving customer retention levels, you should be interested in offering the right kind of loyalty program to your customers. There’s a lot to consider when you build a loyalty program, so we’ve provided you with a few tips and best practices. These will help you start creating the right kind of customer loyalty that leads to retention.

1. Customize your program to your target audience and brand

To start engaging customers with your rewards program, it should be personalized to your brand and your audience. 79% of shoppers only consider brands that show they care about them, and this can be done by giving your rewards program a unique name and offering a great loyalty experience. Match your name and points to whatever it is you’re selling, and run tests on your customers’ habits to find the kind of rewards that will speak to them. These actions will make your loyalty program more personalized and show customers you care. 

2. Gamify your rewards to get people excited

Adding a VIP or tier feature to your program can be a massive benefit, and it’s a different way to reward your customers. Using gamification techniques will get new customers excited to engage with your brand because they’ll be motivated to make it to the top tier. Plus, making it to a new tier makes members feel like they’re part of an exclusive club, which is another reason for them to engage!

3. Offer rewards for referrals

A great thing about referral programs is they increase acquisition and retention rates simultaneously. As your loyal customers send referrals to their friends and family online, your store is more likely to get an increase in shoppers. Part of this is because 92% of shoppers will trust a recommendation from a peer. Ultimately, you’ll keep your customers satisfied by rewarding them with perks for referring you, plus, you’ll increase your chances of acquiring and retaining customers that trust their peer’s referral. It’s a win-win for both you and the customer!

4. Make your rewards attainable

One of the most important things you can offer is rewards that your customers can actually achieve. If points are too difficult to earn, it will deter members from continuing to engage with your program. Offer points for every dollar spent, celebrating a birthday, social shares and page likes, and writing product reviews. These are easy to earn, so customers will choose to engage just as easily. 

Also, don’t make redeeming too high of a cost. If the points cost is out of sync with the amount being earned, then you may lose customers who feel that the next reward is too far out of reach. Make your customers feel special by providing an easy way to earn and a fair cost to redeem points.

5. Creating a simple program is key for success

You may not have thought about it before, but how often have you stopped using a tool or program because it was too difficult? This is the same with a loyalty program—if it’s too difficult to understand, customers won’t use it. Make it easy for your shoppers to navigate through your program and ensure they understand exactly how they can earn and redeem points. Complexity creates confusion. Besides, you’ll be able to launch your program more quickly if it’s simple (meaning you start increasing retention right away)!

How to effectively use these five tips

These five tips can be combined into one program easily! To give you an idea of how, check out the loyalty program for Barney Cools.

Barney Cools Rewards customer retention 2020

Barney Cools personalized their program by calling their points system “Cools Coins.” When customers open the panel, they get told it’s their “all access pass to exclusive Cools rewards.” Right away, this feels personal to each person visiting the rewards panel. Aside from matching their rewards to their brand, they’ve also incorporated many ways to earn and redeem points, offering the right kind of rewards to each type of customer. 

By offering a referral and VIP program, Barney Cools has gamified their loyalty and offered a second way to earn. This will keep shoppers invested in their brand because they’ll want the exclusive top-tier treatment while offering referrals for even more points. Bonus!

Finally, the rewards are attainable and the program is simple. The store offers a variety of ways to earn points, and the lowest redemption cost is 250 Cools Points for a $25 voucher. Since you get 50 points just for signing up, the 200 points until the first reward isn’t too far off. Plus, the panel is easy to navigate and understand. Overall, Barney Cools nails their strategic approach and offers a great loyalty experience for customers.

Combine your rewards tactic with others to achieve your goal

Like we said above, loyalty programs are one tactic and tool you can use to achieve your goal of increased customer retention. Using customer loyalty with other tactics, like value-add marketing, re-engagement marketing, an effective brand community, or emotional marketing, to boost retention numbers and provide an enhanced brand experience.

These tactics are beneficial to use together. When you have an effective brand community where your customers feel engaged and find value, along with a great loyalty program to offer fun rewards, you’ll be on the right path toward a successful e-commerce store that your audience can’t help but fall in love with.

  • Customer retention is about keeping customers loyal to your brand so they continue shopping with you over their lifetime.
  • Offering a loyalty program is an effective method for increasing customer retention.
  • Outlining your strategy, tactics, and tools will help you get started working toward your goal of increased customer retention. 
  • Ensure your program is personalized, offers great (attainable) rewards, is easy to use all while being fun and engaging.

Christina Donati

Christina Donati

Christina is a Content Marketing Specialist at Smile.io: an easy-to-build loyalty app built for ecommerce brands who want to offer rewards and increase repeat purchases.

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