How to Set Up an Ecommerce Customer Loyalty Program (And Improve Retention)

A few years ago, Forbes contributor Ken Krogue noticed a lady returning rotten, moldy fruit at a Costco store. The clerk attending to the woman kindly offered her money back, even though she bought the fruit days ago, when they were still fresh.

Costco is willing to go to great lengths to keep their customers satisfied. This is why Costco has the best overall customer loyalty score in the United States.

The math is simple behind Costco’s business: loyal customers who buy repeatedly are more profitable than ones that buy once. Why? Because repeat customers have a higher lifetime value, meaning that over the course of a customer’s projected buying time with your brand, you can predict a high return on investment. For instance, if you spent $5 to earn a customer and you know that over the course of that customer’s lifetime with your brand, they will likely spend about $100, that’s a great lifetime value to churn (or cost to acquire a customer) ratio (LTV to CAC).

Getting this ratio right is crucial for scaling businesses. It will help you to determine where you advertise, how and why, all based on how expensive it is to buy an ad slot. After all, you want your LTV to CAC ratio is be as high as possible in order to successfully predict long term success.

With ecommerce, due to intense competition, great customer service like that at Costco’s brick-and-mortar isn’t always enough to keep customers coming back. So, how can you increase retention and customer lifetime loyalty? With a good loyalty program that gives customers a reason to return and buy again and again and again.

What is a customer loyalty program?

Loyalty programs reward frequent customers and incentivize one-time buyers to return to your store. Rewards frequently include free merchandise based on points accrued, special coupons and early access to new product lines.

Loyalty programs first originated in the 1950s, when grocers gave customers stamps for making purchases, eventually spawning airline miles during the 1980s.

Who Needs A Customer Loyalty Program

Anyone who has customers can benefit from a loyalty program. However, certain types of internet retailers will see greater value from a loyalty program. These retailers have the following characteristics:

1. Online retailers who receive a steady stream of at least ten or more orders a month will see greater benefit from a reward program. Repeat orders are more likely when online retailers are generating a steady stream of new customers. If you are not generating a steady stream of customers or orders already, launch an ad program to raise brand awareness and drive traffic to your site. Google Shopping is a tried and true favorite for most mid-market brands, but Facebook and Instagram are equally attractive and allow you to narrow down your audiences with Power Editor.
2. Online retailers operating in a niche where customers are price sensitive are ideal candidates for a loyalty program. Price sensitive customers respond better to rewards than customers in big ticket or luxury markets where price is not an important factor. A loyalty program in a fashion or beauty niche can also be successful. Sephora, for instance, has a hugely successful loyalty program. If your various selling channels have different selling propositions –– for instance, on your independent website your unique products are more of a draw than your prices, but on your Amazon channel, your price competitiveness wins out –– then consider running different loyalty programs for those two audiences. Or, test out a loyalty program to help grow a specific channel.
3. Online retailers operating in markets with several competitors are also ideal candidates for a loyalty program. These retailers see the greatest benefit from loyalty programs since they are at the greatest risk of losing customers to competitors. A loyalty program may also help you to stand out amongst your competition, giving you the upper hand and making you appear more customer-centric than other brands.

Why You Need a Loyalty Marketing Program (Spoiler Alert: Retention)

The biggest advantage of a loyalty program is that it has the potential to align your entire business toward the most profitable segment of your customer base. This means that your business will begin catering more to customers who have high repeat purchases or average order value –– depending on what type of loyalty program you implement. Over time, you’ll also be able to use the data collected from a loyalty program to figure out ways to make the least profitable customers more profitable, increasing your customer lifetime value, and thus company revenue and projected profitability overall.

Below are other benefits of a loyalty program:

1. Retain existing customers: Loyalty programs help you to keep your existing customers buying from you longer and more frequently. Customer retention is top-of-mind for businesses owners because it can drastically decrease the cost of customer acquisition.
2. Acquire new customers: Although the main purpose of a loyalty program is to retain existing customers and increase repeat orders, it can also be used as a benefit to attract new customers.
3. Move customers up: A loyalty program will systematically move your customers up the buying ladder – converting first time buyers into repeat buyers and keeping your repeat buyers spending more often with you.
4. Win back lost customers: While it may seem inevitable that a certain percentage of customers will be lost over time, a loyalty program will allow you to identify, target and bring back these lost customers.
5. Increase the lifetime value: When you increase the frequency of customers shopping with you, you will automatically increase the lifetime value of your customer.
6. Best customer behaviors: A loyalty program will identify your best customers. Once identified, you can then start observing patterns in their behavior. These patterns can be used for better merchandising, advertising and customer service.
7. Create brand champions: Your best customers are buying repeatedly from you because they love what you are doing. These customers are prime candidates to be your brand champions. A loyalty program helps you to take the first step, which is to identify your potential brand champions.
8. Respond to competition: The best part of a loyalty program is that it can inoculate you from the competition. With a loyalty program in place, your competitors will have a harder time peeling away your customers.
9. Reduce advertising costs: As you learn who your best customers are, you can target your advertising to bring in more new customers who fit the profile of a best customer. These new customers are more likely to convert into repeat customers. This data can help you to cut down advertising costs by eliminating advertising in mediums that attract one-time buyers or deal-seekers.

Components of a Loyalty Program

All loyalty programs boil down to a simple concept – customers are rewarded for taking certain actions. Businesses customize on the above principle to create their individual loyalty programs. These customizations consist of making changes to the following components:

1.  What actions will customers be rewarded for?

Successful loyalty programs focus on a single customer action: getting customers to buy again. However, you can also reward your customer for other types of actions such as store registrations, referrals, social shares, etc. The most successful loyalty programs focus on repeat orders and ignore ancillary actions such as social sharing, reviews, etc.

2.  How will customers redeem and use their rewards?

Once your customer has earned a reward, you will need to decide how the customer will access and use their rewards. This is where most online stores make the mistake of complicating the program. Some common mistakes include:

1. Making the customers manually redeem points.
2. Offering rewards that are difficult to use such as coupons or gift certificates.

Avoid these mistakes by making it easy for your customers to earn, redeem and use their rewards.

3.  What kinds of rewards will you offer?

You can offer your customers several kinds of rewards from free shipping to percentage off to store credit. It is tempting to assume that strong rewards will lead to a successful loyalty program. On the contrary, an easy to use loyalty program will always outperform ones that offer greater rewards. It is best to start a loyalty program with one reward.

4.  What are the rules of your customer loyalty program?

The rules of your loyalty program allow you to protect yourself from abuse. However, it’s best to have a few, sensible rules and not make it overly complicated. Below are some simple rules to get started with:

1. Rewards are available to registered customers only.
2. Points earned or redeemed do not apply to tax or shipping.
3. Points are earned and redeemable by the e-mail address on account only.
4. Points are non-transferable.
5. Points may only be redeemed for purchases and have no cash value.
6. Points are accumulated by current purchases only.
7. We hold the right to cancel an account at any time.

Keys to Designing a Great Loyalty Program That Will Keep Customers Coming Back

A great customer rewards program will convert your new customers into repeat customers and it will also keep your best customers staying with you — no loyalty card required. To accomplish these goals, it is vital to design a customer-friendly loyalty program. Here are two principles to design an effective loyalty program:

1. Easy to understand: The best loyalty programs are easy to understand. Keep things as simple as possible. Instead of giving out 3 points for each dollar spent, hand out 1 point for each dollar spent. It is easier for customers to grasp.
2. Easy to use: Make it easy for your customers to earn and use their rewards. Try not to make your customers jump through hoops. Eliminate steps like requiring separate enrollment into the loyalty program, offering difficult to use rewards such as coupon codes. Customers become more loyal only when they use their rewards. So make it easy for them to earn and use their rewards.

Follow these, and you can design a thriving rewards program. The same principles apply whether you’re a small business or up-and-coming retail giant — followed by immediate customer satisfaction.

How To Create & Implement a DIY Customer Loyalty Program

As described earlier a loyalty and retention program has two goals:

1. Convert new customers to repeat customers
2. Keep your repeat customers shopping with you

It takes significant time and effort to accomplish both the above goals using a DIY loyalty program. A more manageable approach is to start a DIY loyalty program that focuses on your best customers and keeps them shopping with you (goal # 2). Below are the steps to build brand loyalty and drive LTV with a home-brewed loyalty program.

• Step 1: Create a quarterly or monthly report of your top customers by amount spent.
• Step 2: Send a reward to the top 10% of customers in the monthly/quarterly list of your best customers.
• Step 3: Rinse and repeat each month. As you get into the rhythm of doing this month-in and month-out, you’ll notice patterns and can take the following additional actions:
  • You may notice that some best customers have stopped shopping. Follow up with these customers by offering them a discount or store credit.
  • You may also notice that some customers consistently return each month. You can reward them with a simple thank you note.

Follow those steps and you’re on the path to increased customer retention and higher AOV.

How to Select a Loyalty App for Your BigCommerce Store

While a DIY loyalty program can help you to keep your best customers shopping with you, it also takes a significant time and effort.

The better alternative is to implement your loyalty program using one of the many loyalty apps on the BigCommerce app store. The most successful loyalty programs make it easy for your customers to earn, redeem and use their rewards. A good app will walk you through all the decisions involved in setting up the loyalty program.

But most importantly, a good app will do the following:

1. Keeps things simple
2. Makes it easy to redeem rewards
3. Makes it easy to use the rewards
4. Provides monthly performance metrics

Below are case studies of how two BigCommerce merchants are increasing their customer retention and loyalty – all while bolstering the overall customer experience and keeping shoppers happy.

Case Study: Shop4Vitamins –– A 265% increase in repeat business

Former police officer, work from home and stay at home dad of four kids Robert Smutek was experiencing painful joint aches after his workout sessions. He tried physical therapy with little improvement and then stumbled across natural calcium tablets. After taking the natural calcium, his joint pain had completely disappeared.

He was so impressed that he began selling those calcium supplements online. Robert has been selling online since then, more than 20 years later.

A few years ago, he noticed new competitors were selling at cost to grab market share. By 2014, he was fed up and implemented a loyalty program to keep drive customer engagement and build a loyal following.

He opted for a loyalty program that was easy to use for his customers. In addition, he offered generous rewards in the form of cashback ranging from 10% to 15%.

The decision paid off. Since implementing the loyalty program, Shop4Vitamins has increased repeat orders from $21,441/year to $56,936/year, a 265% increase.

Note: Shop4Vitamins is using the RewardCamp integration as their loyalty solution.

Case Study: Nancy’s Floral –– 173% increase in customer loyalty

Rob Cook has been involved in the family floral business since the late 1990s. They began selling online in 1995 and moved over to theBigCommerce platform in 2015.

The online floral business is extremely competitive. Having to compete with large floral websites is a challenging game for local florists — earning repeat business is key for success.

One change they made after moving to BigCommerce was to launch a loyalty program. It has enabled Nancy’s Floral to increase repeat orders from $3,560/year to $6,184 during the first 8 months after implementing the loyalty program, an increase of 173%.

Note: Nancy’s Floral is using the RewardCamp integration for their customer loyalty software.

Summary: Don’t Forget These Takeaways with Your Loyalty Program

The competitive nature of ecommerce is great for consumers. Unfortunately, this makes it very difficult to hold on to each new customer. The time to setup a loyalty program is as soon as a new customer lands on your online doorstep. Your loyalty program can then go to work to convert these new customers into repeat customers.

To summarize, here are some of the best ways to launch a loyalty program:

Use a simple point system

This is the easiest type of program to implement and one many consumers will already be familiar with. Loyal customers earn points for purchases or actions (i.e. social sharing, etc), and those points then translate into some of reward –– typically discounts. Be clear upfront about the number of points needed to receive different levels of rewards, and stick to those buckets. Customers will work toward reaching a particular point level.

Where companies can get tripped up here is by making the point system complex and confusing. Eliminate confusion altogether by making things simple: 1 action results in 1 point, and 10 points results in 10% off a purchase, or a freebie in their next order. Be clear. Don’t change the rules. And be sure to market the program on site and in your emails so customers know where they stand. Note that this type of loyalty program often works best for brands that encourage frequent, low-cost purchases.

Use a tier system to reward initial loyalty and encourage additional purchases

Getting participation in an online customer loyalty program can be difficult, especially if you aren’t a brand selling products customers purchase frequently (i.e. if you are selling bigger ticket items). Striking the right balance between what your brand can offer and the desirability of that offer for your audience is hard –– for every single brand out there. So, know you aren’t alone!

Lindsay Kolowich writes for Hubspot’s blog and recommends, presenting small rewards as a base offering for being a part of the program, and then encouraging repeat customers by increasing the value of the rewards as the customer moves up the loyalty ladder. This helps solve the problem of members forgetting about their points and never redeeming them because the time between purchase and gratification is too long. The main difference between a tier system and a points system is short-term versus long-term value. If you sell higher priced items that consumers purchase less frequently, a tiered system will likely work better for you and encourage customers to continue shopping with you again and again.

Charge an upfront fee for VIP benefits

According to a 2015 study of 500 leading global brands, cart abandonment rates can reach 76% across retail, travel and fashion. Sticker shock is often the reason why –– as consumers put everything they like into a cart, then head to the cart, see the total and then back out. This is even more true for those that begin to checkout. Many consumers will leave once they see the full price with taxes and shipping.

Not to worry, though, because one commerce behemoth has effectively solved for this issue: Amazon Prime. By charging an upfront fee for VIP services like free or expedited shipping, Amazon is able to offset cart abandonment by making customers feel as though they are getting a much better deal. According to Kolowich: “This system is most applicable to businesses that thrive on frequent, repeat purchases. For an upfront fee, your customers are relieved of inconveniences that could impede future purchases.”

Structure non-monetary programs around your customers’ values

So, what if you just can’t make sense of offering a monetary reward right now within your business strategy? Fair enough. Monetary rewards like discounts and coupon codes work well for online shoppers, but that doesn’t have to be your only option.

Cater to your customers’ values by figuring out what it is that drives them to purchase from you. Do you offer Peruvian-made shoes that give back to those communities like Fortress of Inca? Use purchase confirmation emails to introduce a customer to the person who made their item, allowing them to give back to the employee or community, or even just spread awareness, through goodwill.

This is also a great way to use cause commerce to further encourage loyalty. Does your brand give back a percent of every purchase to a cause? Josie Maran’s brand utilizes Moroccan women co-ops to produce sustainable products and packaging, and helping to preserve Argan forests. Keep tabs on how much your customers are buying and let them know with every purchase exactly how many trees they have saved. This is a cost-benefit analysis that proves to your customers that loyalty to your brand helps the world at large.

Partner with another company to provide more attractive (all-inclusive) offers

Partnering with companies that share your consumer group demographic and values is always a smart idea. This helps to increase your brand awareness within your niche and provides goodwill to your customers. It can also help to offset the cost of high-value reward programs.

Think about which non-competing brands in your space also cater to your consumer group demographic. For instance, if you sell to millennial and Gen Z women, think about reaching out to a local meet-up group. In Austin, BigCommerce’s HQ hometown, there is a very popular meet up group called Boss Babes. This group partners with brands and local hotels, spas, etc. to offer retreats and other discounted options to their members. Find something similar in your area to help boost awareness and align yourself with brands and ideas that are on the rise.

Do you have any advice or ideas for online customer loyalty programs that have worked well for your brand? Share them in the comments section below!