How do loyalty programs work and why are they effective?

Loyalty programs have come a long way since Betty Crocker first introduced its box top coupons in 1929, ushering in a new era of modern customer loyalty. Today, brands no longer have to be retail icons or superpowers to be able to launch loyalty programs. Neither do they need to have a brick and mortar store so that their customers could redeem their box clippings in person. Ecommerce and the rise of digital payment services made it possible for all businesses, big and small alike, to increase their customer retention and nurture their returning customers with loyalty programs. 

For growing brands, the biggest appeal of loyalty programs is that they can help generate revenue faster than a marketing strategy that focuses on recruiting brand new customers. Repeat and loyal customers make up 8% of a typical ecommerce site’s traffic but drive 41% of its revenue, and loyal customers spend 5x more than first-time buyers. So, while it might sound scary to turn marketing attention away from new customers and toward existing ones, tapping into your returning customers and converting them into loyalty members is worth the investment. 

What’s even better is that customers are more than willing to join loyalty programs across multiple industries: 72% of adults in the U.S. belong to at least one loyalty program, and a typical U.S. household actively uses five to 12 of them. 

The numbers are convincing enough. But what makes a good loyalty program that actually succeeds in keeping customers faithful to a brand? 

Simply put, it’s engagement. At the heart of a successful loyalty program is customer engagement, where your shopper continuously and repeatedly gains value out of having a relationship with your brand. In other words, your end-goal is not to simply convert your shoppers into loyal customers but to keep them coming back to your brand, incentivize their return, and deepen your relationship with every interaction. 

For that, you’ll need to offer your customers more than a percentage off of their next order. To build a lasting relationship, you will have to develop personalized, relevant incentives and foster an emotional connection with your shoppers.

By segmenting your customers based on their shopping and post-purchase behaviors (e.g. Do they use discounts to shop? Do they leave reviews?) and analyzing what type of messaging gets them to buy (e.g. Buy-one-get-one-free, early access deals, or contributions to a charity), you can personalize your customers’ journey in your loyalty program and increase their likelihood of taking advantage of your offers. You can create a virtuous cycle of personalization and loyalty if you incentivize returning shoppers with rewards that appeal to them. Knowing that you’ll reward them with things they value, whether that be free samples hand-picked for them or donations to their preferred causes, your shoppers will keep choosing your brand over your competition. 

In addition to useful perks, like free shipping, your loyalty incentives should include emotion-evoking rewards. Get your customers excited with sneak peeks, delight them with birthday surprises, make them feel like VIPs with exclusive offers, and speak to their hearts with the opportunity to support a cause or charity. Take REI, for instance: All REI customers know of the company’s dedication to outdoor conservation and they actively participate in the co-op’s sustainability efforts that also reward them with discounts and exclusive sales. Shoppers return to this retailer because they support what they stand for and benefit from doing so. 

But if this example feels too daunting, think simpler. You could easily gamify your loyalty program and award badges and redeemable points to top reviewers or shoppers who follow you on social media. Trust that this will appeal to your customers’ competitive nature. 

Well-executed loyalty programs work. And they work the same way as human relationships: You have to continuously nurture them and keep the positive emotions alive. So don’t hesitate to shift your focus to your existing customers and reward them for returning to your brand with relevant, personalized rewards.  

Special thanks to our friends at Zaius for their insights on this topic.
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