Set Up a Loyalty Program to Increase the Value of Your Customers

Homo Numericus had gotten a headache from calculating customer acquisition costs that day, and now he sat down to try and quantify loyalty instead.

“If it costs me $100 in marketing costs to get a new customer, and I generate $25 margin for each product I sell, then I need to either sell 4 products to my new customer, or have them repurchase my product another 3 times in the future.”

The most common version of loyalty is one quantified via repeat purchase. That is where Homo Numericus tends to forget the value of brands -- and the value of word of mouth.

Customer loyalty is not just an act; it's also an emotion, and it can generate more than direct revenue. But let’s stick to the main line of thought of our Homo Numericus for now to explore how you can improve your business with loyalty programs.

The marketing objectives of an e-commerce business can be summarized in two steps: first acquiring new customers, and second, maximizing sales to clients and hence their lifetime value.

For e-commerce, the two basic marketing functions can be summarized as client acquisition and lifetime value maximization. Image source: Author

E-commerce strategies must include a strong element of value maximization in todays' competitive environment.

You have two options for increasing the lifetime value of your clients: Either you focus on increasing order values via short-term upselling and cross-selling, or you work on repeat, or additional purchases via more long-term relationship management and customer loyalty programs.

Overview: What is a customer loyalty program?

Rewards programs are systems you put in place in order to increase the lifetime value of your clients by inciting them to buy more by rewarding them with discounts or benefits. Most loyalty programs aim to stimulate upsells or re-purchases by using a system of points. At a certain number of points, a reward is given.

It can take the form of loyalty cards, which register the points and make users carry your brand around in their pockets. In principle, that is. With the number of store loyalty cards, some people have started to consider this a bit of a nuisance.

But loyalty programs can have other forms. Amazon has turned the concept around somewhat, as members of its loyalty program certainly receive benefits and added value, but also directly pay for it.

Why is customer loyalty important?

Loyalty leaders grow 2.5 times faster and deliver high returns on investment, according to Rob Markey of Bain & Company.

This general view of loyalty gets an even sharper focus for an e-commerce business operating in a highly competitive and globalized market, where it is a better economic deal to work on loyalty than to acquire new customers.

But loyalty programs are also beneficial in other ways. They allow you to listen to feedback and better understand your customers. Sometimes they can even build brand value and generate ambassadors for your brand or products.

How to build a customer loyalty program

Before starting to build a program, you should start by taking a broader view of building customer loyalty. Once you have loyal customers, you can start thinking about a customer rewards program, for which you may need a technical solution.

You will need to gather as much information as possible about your clients and their buying habits, so if you are using a CRM, it will play an important role.

Surprisingly, the leading CRM tools don’t offer the functionality in their standard packages, and you may need to find a specific loyalty rewards program to integrate with your CRM or as an app for your e-commerce platform.

Let’s look at the five steps required to set up a loyalty program below:

Step 1: Explore client behavior

First, segment and analyze your CRM database to understand buying behavior and user types. Can you identify loyal clients and estimate their extra value compared to the average?

What products are bought together? What is the frequency for repeat purchases? This will help you identify possible upsells or cross-sells that both make sense to the client, and increase the customer value for you.

Step 2: Define loyalty

Second, make your own definition of what loyalty is. Define the characteristics of the users you want to retain and make loyal and determine the metrics you will use to measure loyalty. What additional steps can you take to stimulate customer satisfaction, branding, and user experience?

Step 3: Value calculation

Make projections for the value you can create with rewards. Will revenue increase by 20% for loyal clients? Remember, you will be reducing your margins in your program, so you need to make sure a discount or a reward is worth it.

You will also invest resources in setting up and running the program, so you need to calculate how big a reward you can give to loyal customers and within what horizon of time.

Step 4: Make it tangible

Once the concept is established, think about communication. Perhaps you can give your program a name. You also need to communicate the program to the right customers.

And make it tangible so members can feel and touch it, maybe even feel proud about it. A card is one of the preferred ways to make it concrete, but it could also take the form of a pin or a sticker.

Step 5: Measure results

Finally, you need to measure results on an ongoing basis. You started out researching and quantifying loyalty, and now you need to measure your results to see if your projections were correct and whether the program is actually generating value for you and your clients.

Examples of innovative customer loyalty programs

If you launch yet another loyalty program with a plastic card and some standard formula, chances are returns won’t be so good. Let’s look at some innovative loyalty programs to inspire you.

1. Frequent flyer miles

The first loyalty programs that spring to mind are the frequent flyer or “air miles” programs. The first frequent flyer program to use mileage was launched by Texas International Airlines in 1979. Airlines were selling a high-priced item and were facing a challenge in their marketing.

End-users in their most valuable segment -- business customers -- were often excluded from the choice of airline. These valuable users didn’t look at the price because they didn't pay for the tickets themselves. Air miles were an ingenious way of motivating these end-users to influence the buying decision.

Providing tangible benefits to the end-user, when they flew with their favorite airline, would incentivize them to sway the purchasing choice. Air miles still exist in most traditional airlines. Low-cost airlines, for the most part, have replaced these programs with loyalty-to-price bargains.

2. American Express

American Express is not a bank; it is a credit card. It took the miles concept from airlines and brought it into other territories. You earn points by using your American Express card.

In this way, American Express motivates cardholders to use their Amex card rather than their bank card -- and they earn commissions for each usage.

The earned points from American Express could be used with a number of merchants. The points earned were quite significant and provided a real motivation to use your Amex rather than another credit card.

3. Amazon Prime

In recent years, the world has been disrupted by the digital revolution. Not surprisingly, so have loyalty programs. The most outstanding loyalty program today is without doubt Amazon Prime.

It provides real benefits in the form of record-breaking delivery times and adds both perks and functionalities on top: video and music on demand. What is most outstanding, however, is that users gladly pay a monthly subscription to be part of the program.

Loyalty does not come from a program

A loyalty program can increase sales and it can maximize lifetime value as it monetizes the goodwill you have built up with your clients. You shouldn’t mistake the means with the motivation, though.

If you have a sloppy brand image, bad customer service, and low-quality products, trying to activate loyalty will only have the opposite effect of what you are trying to achieve.

Loyalty programs can only unlock value that you have already created. If you delight customers, there is a good chance a loyalty program will work well for your business.