Are you planning to launch a loyalty rewards program? Are you unsure how to justify the cost vs. benefit of a loyalty program?
This blog describes the top 10 benefits that you can derive from your loyalty program. It also outlines strategies on how to achieve these benefits and how to measure success. This blog can help you in justifying a loyalty program for your business. It will also assist you in setting objectives for a robust loyalty rewards program.
TOP 10 BENEFITS FROM A LOYALTY PROGRAM
1.DRIVE REPEAT SALES
This is the most important benefit of any loyalty program. The success of a loyalty program is measured by its ability to increase the frequency of purchases.
1.1 SUGGESTED STRATEGIES
Here are some strategies to drive higher repeat sales.
1.1.1 360-degree Engagement with Users
Keep users engaged continuously even when they are not making a purchase. The more they engage, the higher the brand retention and the higher the repeat sales. You can achieve this by rewarding users for not just purchases, but a variety of different activities.
In the example below, Anna Scott engaged in 5 additional activities after the initial purchase which led to a second purchase within 20 days. These activities lead to frequent visits to the site and a reduction in time between purchases.
1.1.2 Customer Winback Strategies
Identify customers who have gone dormant for more than your average repeat purchase duration. Give them a personalized offer.
For example, if your average repeat purchase frequency is 4 months and the customer has not bought for 4 months, send an email offering them double the number of points on their next purchase if they buy within 15 days. This is a great way to reactivate dormant customers.
1.1.3 Habit Forming Strategies
Getting a new customer to become a 3-peat customer is crucial to building customer loyalty. Research shows that buying 3 times from a business is a habit forming event.
Failing to get them to 3-peat will create attrition. Give new customers a bonus reward after their third purchase within 3-6 months depending on your business vertical.
1.2 MEASURING RESULTS
To measure the success of your repeat sales strategy, look at the number of customers and number of transactions for the 12 month period before launching your loyalty program.
Compute Purchase Frequency using the following formula:
Now monitor this number 6 months after you launch your loyalty program. A good loyalty program should give you an uplift in the repeat sales frequency.
2. INCREASE AVERAGE ORDER VALUE (AOV)
Loyal customers not only buy more frequently, they also spend more money per transaction. Increasing the number of loyalty customers will therefore automatically increase your AOV as well. However, you can deploy additional strategies to improve AOV even further.
2.1 SUGGESTED STRATEGIES
Configure your reward program so the users earn a cash discount for their next purchase if they spend a little more than AOV.
Say your AOV is $45 and you are rewarding 10 points for every dollar spent. You can configure the reward program so users get $5 off their next purchase once they accrue 500 points. Now a user spending $45 will be tempted to spend $50 instead because they will feel that they will get the incremental $5 they are spending back in rewards! Of course, to use the rewards they will have to make another purchase.
This information should be shown clearly on product pages and also on the shopping cart page. Otherwise, this strategy is not likely to be very effective. This is similar to the free shipping messaging used by many retailers – “You are only $20.80 away from earning free shipping on this order”.
2.2 MEASURING RESULTS
Best way to measure the impact of this strategy is to run an A/B test. Show the loyalty points information on the product and shopping cart pages for half your traffic and do not show it to the other half. Make sure that everything else including page load time etc. are constant for both options. Measure the AOV. You should see an increase in AOV.
3. LOWER CUSTOMER ACQUISITION COST
Customer acquisition costs account for a large part of any marketing budget. While loyalty programs are focused on retaining existing customers, they can also enable you to acquire new customers at a low cost.
3.1 SUGGESTED STRATEGIES
3.1.1 Integrated Referral Program
Word of mouth is the most effective customer acquisition channel. By creating an integrated referral program that allows customers to earn a lot of loyalty points for referring new customers is a great way to acquire new customers and to lower your customer acquisition cost. Creating loyal customers is crucial to the success of a referral program.
Loyal customers are 2.5 times more likely to refer their friends and be social advocates for your brand or business.
3.1.2 Reward Loyalty Points for Marketplace Purchases
Many retailers sell their products via marketplaces such as Amazon and eBay. These marketplaces are a great but expensive channel. Furthermore, currently there is no way for retailers to ‘acquire’ these users.
Rewarding loyalty points to users for their marketplace purchases is a great way to create a direct connection with them. Users can be notified about your loyalty program via product insertions, email notification etc. It is important to make sure that you remain compliant with the policies of the marketplace.
3.2 MEASURING RESULTS
A good referral program should have built-in reporting to help you measure the results. You should be able to see the number of users participating in the referral program, number of clicks, sales, incremental revenue etc.
For the marketplace strategy, you should have a separate landing page for marketplace shoppers to enroll in the loyalty program. These users should then be tagged as ‘marketplace users’. You can now measure the incremental sales from these users.
4. IMPROVE STICKINESS AGAINST COMPETITION
It is easy to lose customers to the competition. Strategies that improve user stickiness will avoid a loss to competition, leading to higher margins.
4.1 SUGGESTED STRATEGIES
Allow users to earn extra points for a competitive purchase. Survey the competition and offer a better rewards program to keep your customers.
Look for signs that the user may be switching to competition – lack of website visits, no purchases in the last 3 months etc. Create targeted strategies to win them back. Some examples are:
- Points for visiting website
- Points for opening or clicking email promotion
- Double points for next purchase
4.2 MEASURING RESULTS
Track the number of users who participate in competitive switching program to earn points. Tag these users and track subsequent sales. These users are a good measure of how sticky your offering is compared to the competition.
Tag users that are identified as risky or dormant, run win-back strategies and measure the impact.
5. REDUCE DISCOUNTS TO CUSTOMERS
Direct discounts to customers are a drain on your revenues. Additionally, discount-oriented customers often switch if a competitor offers higher discounts. Use the strategies listed below to reduce the discounts to customers and increase your margins.
5.1 SUGGESTED STRATEGIES
5.1.1 More Points for Products you want to Sell
Allow users to earn a higher points multiple for products you want to move. Choose a points multiplier such that the users will earn enough points to hit a reward tier. Rather than discounting the product by $20, you can discount the product by $10 and let them earn enough points to get $5 off their next purchase. It is likely to generate better results.
5.1.2 Add these Products as Redemption Options
Users will see a high perceived value and will use their points to get these products for free rather than using points to get gift cards or store credits. Say the product has a regular price of $30 and you were going to discount the product down to $10. You can give users the option to get a $15 store credit or get a $30 product for free for the same number of points!
5.2 MEASURING RESULTS
Create a baseline conversion rate using the regular discounting method (you may already have this data). Now simply offer a high points multiple for these products with a smaller discount. Compare the conversion rates.
You may need to do a few experiments to find the right combination of discounting + more points. Simply count how many users are using these products as redemption options.
6. INCREASE CONVERSION RATE
A good loyalty program can help increase the conversion rate.
6.1 SUGGESTED STRATEGIES
Show the number of points users will earn on product pages and shopping cart pages. That makes it very clear that you have a rewards program and it will increase the overall conversion rate.
6.2 MEASURING RESULTS
Run an A/B test of product pages, one without the points mentioned and the other with the points mentioned. Figure out the uplift in conversion rate to estimate the overall impact on conversion.
7. INFLUENCE PRODUCT SELECTION
You can influence product selection using the loyalty program.
7.1 SUGGESTED STRATEGIES
If you want to encourage users to buy higher margin products or house-branded products, you can offer a higher points multiplier for these products. Once again, the perceived value of earned points is higher than discounts that you may offer to customers. Discounts are often treated by customers as a birthright. Points are perceived as a value delivered to them.
7.2 MEASURING RESULTS
Measure the percentage of sales that are currently coming from higher margin products. This is your baseline. Then, deploy the strategy to influence product selection and measure it again after a few months.
8. BUILD RICH USERS PROFILES
User data is your biggest asset. Know more about your customers and build rich customer profiles.
8.1 MEASURING STRATEGIES
8.1.1 Points for Profile Completion
Allow users to earn points for profile completion such as uploading birthday, signing up for email newsletter etc. You can also give them points for connecting their social profiles such as Facebook, Twitter, Instagram etc. This will help determine their name, birthday, age, gender, likes, interests, number of friends/followers (therefore social influence) etc.
8.1.2 Receipt Scanning
This is a great strategy for brands that are selling products via retail channels. Allow users to earn loyalty points for purchases from retail channels by scanning their receipts. This will allow you to directly connect with these users and know who they are. Additionally, receipts will contain data about where they are buying your products, what else are they buying, are they buying any competitive products etc. This will give you an incredible insight into your customers.
8.2 MEASURING RESULTS
Roll out this program and measure how many users are participating in profile completion, receipt scanning etc. If the numbers are too low, then you know that you need to promote it better.
9. INCREASE USER GENERATED CONTENT
User-generated content is a critical component of driving organic traffic to your website. The loyalty program can help you increase UGC.
9.1 SUGGESTED STRATEGIES
There are three types of UGC content that are most common on websites – reviews, customer Q&A and customer photos. You can reward customers with loyalty points for all of these actions. Make sure to take steps to prevent fraud – e.g. allow users to earn points only once a day or 3 times a week so they don’t abuse the program by uploading 50 photos in one day!
Of course, you should have a good idea of how much each piece of UGC content is worth on an average. E.g. just three reviews can typically increase your product conversion rate by up to 2%. As a rule of thumb, a good review is worth about 2.5% of your AOV. Once you have a good estimate of how much a UGC is worth, you can then calculate the maximum number of points you can award.
Make sure that you promote it clearly. E.g. say “earn 100 points for writing a review” in the review section of the product page.
9.2 MEASURING RESULTS
Measure the rate of UGC creation for various categories. This is your current baseline. Roll out the program and then measure it again in a few months. You should also experiment with adjusting the number of points to see the cause and effect. E.g. increase the number of points for writing reviews to 150 from 100 for two months and measure the impact. After a few experiments, you should be able to figure out the optimal number of points for each piece of UGC content.
10. INCREASE SOCIAL PARTICIPATION & CONTENT
Any good business has more happy customers than unhappy ones. Yet the voice of the unhappy customers always seems to dominate social media. This is simply due to human nature. A happy customer may talk to 2 or 3 friends. An unhappy customer is likely to talk to 30 or in the world of social media, 300 or even 3,000. Fortunately, a loyalty program can help tilt the balance in your favor.
10.1 SUGGESTED STRATEGIES
Give users loyalty points for social sharing and social advocacy. Note that timing is critical here. You need to engage customers at the points where they are most likely to talk positively about you. For example, users will share immediately after they make a purchase or receive the product.
10.2 MEASURING RESULTS
You can simply measure the number of users participating in social sharing. For a more sophisticated measurement, use a social sentiment analysis tool. Create a baseline of social sentiment and then see how it changes.
This article describes the benefits you can derive from a well-designed loyalty program. Use it to do a cost vs. benefit analysis of a loyalty program. You can also use Zinrelo Value Calculator (www.zinrelo.com/loyalty-value-calculator) to estimate the ROI that you can get from a loyalty program.