Definition: Loyalty programs reward frequent customers and encourage 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.

Why have a loyalty program?

When executed effectively, loyalty program's can be a significant driver of revenue. When considering marketing expenses, it costs at least five times more to attract a new customer than to keep an existing one, and returning shoppers spend 67 percent more than new customers. Relationships with online customers are built over time, considering the lack of personal contact and physical storefront to assure them during the purchasing process. Customers may not be willing to buy multiple items the first time they shop from a particular online store because of shipping concerns. After a retailer earns their trust, they are more likely to return and make a larger purchase. In addition, 95 percent of customers who enroll in a loyalty program continue to use it.

Customers are even more likely to buy frequently if they are close to reaching the threshold for their next reward or to gain points for a free items. Consumers want a personalized experience and to be rewarded for their purchases. Loyalty programs are a way to say thank you to customers and show that you value them, while simultaneously giving them an incentive to keep returning.

How to establish an effective loyalty program

Loyalty programs are not one-size-fits-all. The right benefits depend on business model, products, and industry — to name a few determining factors. Common rewards and structures for loyalty programs include:

  • Loyalty programs with different reward levels: In this type of program, people increase their rewards potential or become eligible for new benefits as they continue to shop from a store. They can qualify for free gifts, free shipping, birthday coupons and other benefits that increase in value as the customer makes more purchases. This type of loyalty program encourages people to spend more to reach the next level.
  • Offer some benefits for other actions: If your loyalty program is based on points, consider giving points to users for non-purchase actions, such as interacting with the brand on social media, visiting the website or watching product videos. This increases website traffic, which improves search engine optimization. Customers will also feel appreciated when they earn points at no personal cost.
  • Make sure the program is multichannel: Many online shoppers engage with brands in multiple ways, especially millennials and other consumers who rely on their mobile devices. Retailers with an offline presence need to make sure customers can participate in the loyalty program in this way.
  • Collect data to refine the program: Many customers are willing to share their personal data in exchange for benefits. The more you know about your customers, the more personalized benefits you can offer. In addition, retailers gain more access to data as consumers make repeat purchases. Measurement also paints a more complete portrait of customer sentiment. How do shoppers feel about your brand? What benefits do loyal customers want?
  • Be sure to promote the program: Just having a loyalty program isn't enough. Expecting customers to find out how to enroll on their own won't increase the number of participants. Loyalty programs can be advertised around your website, on social media and through email.
  • Offer distinct rewards: If you offer coupons to your email subscribers, sending your loyalty program members an offer for 15 percent off their next purchase isn't going to be effective. Rewards need to be something customers want. Tiered programs need to add value at every level. Not only do personal benefits keep customers happy, but it also makes your program more difficult for competitors to imitate.

Is a loyalty program right for you?

Loyalty programs are an excellent source of recurring revenue that every online business should consider. However, extensive offerings and free items are often out of reach for smaller online stores with lower profit margins. Loyalty programs also have the potential to undermine the perceived value of a product when executed ineffectively; if customers see that some people can get the same products for much less, they may think it's not worth the sticker price.

Regardless of whether you use a formal program, there are many ways to show appreciation for customers and engage in loyalty marketing. Contact customers about promotions and holiday sales and make sure to thank them for choosing your business.

Learn more about building an effective loyalty program: How to Set Up a Loyalty Program and Increase Customer Lifetime Value More Than 150%

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