Customer Loyalty: The Ultimate Guide

Customer Loyalty: The Ultimate Guide

Did you know it costs a business about 5-25X more to acquire a new customer than it does to sell to an existing one?

Not only that, but existing customers spend 67% more than new customers. In short, customer loyalty really pays off — and customer loyalty programs end up paying for themselves.

In light of statistics like these, businesses need to think about what they are doing to keep their customers coming back to their business. 82% of U.S. adults say they’re loyal to brands, and if you’re like more than half of the brands surveyed by L2, your company has already implemented a loyalty program.

In this post, we’ll dive into everything you need to know about customer loyalty: what it is and why it’s important, and all about customer loyalty programs and the value they can add for your customers and your business.

What is customer loyalty?
Customer loyalty is a customer’s willingness to buy from or work with a brand again and again, and it’s the result of a positive customer experience, customer satisfaction, and the value of the products or services the customer gets from the transaction.

It might sound obvious — of course, brands want to provide great customer service so customers will continue subscribing or purchasing. But customer loyalty is paramount to brands’ success — because loyal customers can grow business faster than sales and marketing.

Why Customer Loyalty Matters
Customer loyalty is something that all companies should aspire to simply by virtue of their existence: The point of starting a for-profit company is to attract and keep happy customers who buy your products to drive revenue.

But there’s a lot of data to support the value of cultivating customer loyalty, too:

Loyal customers convert and spend with brands they like more often
Loyal customers spend more than others
Loyal customers tell their family and friends about positive experiences. Word-of-mouth marketing is more effective at driving new customers than branded content and advertising, and in turn, these referred customers become loyal customers that are likely to spend more than average.
In the U.S., 40% of online shopping revenue comes from repeat customers, who make up only 8% of site visitors.
And in a world where hundreds of different options for virtually any product or service a customer might purchase, the fact that so many keep coming back to the same brands is really saying something. It indicates that a customer trusts and loves a brand — and that the value they get from being a customer outweighs the potential benefit of a lower price or a different product from another brand.

Since we know that it costs more to acquire a new customer than to retain an existing customer, the prospect of mobilizing and activating your loyal customers to recruit new ones — simply by evangelizing a brand — should excite marketers, salespeople, and customer success managers.

But how do you do it? How do you take happy, satisfied customers into loyal brand evangelists? How do you use positive Yelp reviews, glowing tweets, and Instagram mentions to propel your brand’s growth?

That’s where customer loyalty programs come in handy.

What is a customer loyalty program?
A customer loyalty program is a rewards program offered by a company to customers who frequently make purchases. A loyalty program may give a customer free merchandise, rewards, coupons, or even advance released products.

According to The Loyalty Report 2017, the average consumer is involved in 14 loyalty programs, but have the capacity to engage with only seven. Companies lose money on time and effort, and customers get no more value from the businesses to which they are “loyal.”

So how do you keep your business out of that segment? How do you convey enough additional value in your programs to keep your customers coming back?

It’s time to look beyond convoluted rewards systems and offer actual value to customers using their loyalty program. Here are some ideas for building a customer loyalty program that might work for your business.

Best Customer Loyalty Programs
Sephora Beauty INSIDER & VIB
Virgin Atlantic Flying Club
Amazon Prime
TOMS One for One
American Express Plenti
Swarm Perks
REI Co-op

1. Use a simple point system.
This is the most common loyalty program methodology. Frequent customers earn points, which translate into some type of reward. Whether it’s a discount, a freebie, or special customer treatment, customers work toward a certain amount of points to redeem their reward.

Where many companies falter in this method, however, is making the relationship between points and tangible rewards complex and confusing.

“Fourteen points equals one dollar, and twenty dollars earn 50% off your next purchase in April!”

That’s not rewarding. That’s a headache.

If you opt for a points-based loyalty program, keep the conversions simple and intuitive.

Although a points system is perhaps the most common form of loyalty programs, it isn’t necessarily applicable to every business type. It works best for businesses that encourage frequent, short-term purchases, like Boloco.

Case Study: Sephora’s Beauty Insider & VIB Programs
Sephora, a cosmetics brand, is an example of a company who does the points-based loyalty program well. Customers swipe their stylish Beauty Insider card at every purchase, and the card tracks the amount of money spent. Every dollar spent earns the member one Beauty Insider point, and shoppers can redeem points for beauty supply items at checkout. Sephora speaks the language of its audience by measuring points in dollars, and rewards in cosmetic items.

For its more loyal customers, Sephora also offers VIB and VIB Rouge programs that offer customers even more rewards if they spend enough money at Sephora to reach a certain threshold. It scales up the rewards according to how much the customer spends — which is, of course, a great incentive to keep on shopping.

Source: Sephora

2. Use a tier system to reward initial loyalty and encourage more purchases.
Finding a balance between attainable and desirable rewards is a challenge for most companies designing loyalty programs. One way to combat this is to implement a tiered system which rewards initial loyalty and encourages more purchases.

Present small rewards as a base offering for being a part of the program, and then encourage 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 biggest difference between the points system and the tiered system is that customers extract short-term versus long-term value from the loyalty program. You may find tiered programs work better for high commitment, higher price-point businesses like airlines, hospitality businesses, or insurance companies.

Case Study: Virgin Atlantic Flying Club
In addition to earning miles, Virgin Atlantic’s Flying Club allows members to earn tier points. The club inducts members at the Club Red tier, then bumps them up to Club Silver and then Club Gold.

Club Red members earn miles on flights and get discounts on rental cars, airport parking, hotels, and holiday flights.
Club Silver members earn 50% more points on flights and have access to expedited check-in and priority stand-by seating.
Club Gold members get double miles, priority boarding, and access to exclusive clubhouses where they can grab a drink or get a massage before their flight.
Seem complicated? They created a comprehensive benefits table so customers can easily understand the extra benefits they’ll receive as they move from Red to Silver to Gold. The key is to offer benefits in the early stages to hook the customer into coming back. Once they do, they’ll realize that “gold” status isn’t unattainable and offers really cool benefits.

Source: Virgin Atlantic

3. Charge an upfront fee for VIP benefits.
Loyalty programs are meant to break down barriers between customers and your business … so are we seriously telling you to charge them a fee? In some circumstances, a one-time (or annual) fee that lets customers bypass common purchase barriers is actually quite beneficial for both business and customer. By identifying the factors that may cause customers to leave, you can customize a fee-based loyalty program to address those specific obstacles.

According to a study of 500 leading global brands, cart abandonment rates reached 75.6% across retail, travel, and fashion. This abandonment is often caused by “sticker shock” after tax and shipping prices have been applied. Below, we’ll take a look at Amazon, the ecommerce giant that’s found a way to combat this issue using a loyalty program with an upfront fee.

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. Amazon’s mastered this for ecommerce, but this model also has potential to work forB2B businesses that deliver products to businesses on a regular basis.

Case Study: Amazon Prime
For $119 a year, Amazon Prime users get free, two-day shipping on millions of products with no minimum purchase, among other benefits.

Why is this a great example? Because it provides enough value to frequent shoppers for them to feel like it’s really benefitting them. Actually, analysts estimate Amazon loses $1-2 billion per year on Prime. But the company makes up for it in increased transaction frequency: According to a report from Consumer Intelligence Research Partners, Prime members spend an average of $1,500 per year on, compared with $625 per year spent by Amazon customers who aren’t Prime members.

Source: Amazon Prime

Additionally, after its acquisition of Whole Foods Market, Amazon announced it would also offer free 2-hour grocery delivery to Prime members in certain areas — as well as additional in-store grocery discounts available only to Prime members. Of course, they did announce this news around the time they also announced Prime’s membership cost would increase by $20 a year, but Amazon made sure to provide even more rewards for being loyal — even in spite of a price increase.

4. Structure non-monetary programs around your customers’ values.
Truly understanding your customer means understanding their values and sense of worth, and shared valued have a huge impact on if a customer will be loyal to a brand. In fact, CeB surveyed consumers on customer loyalty and found that customers were loyal “not to companies, but to beliefs.”

Depending on your industry, your customers may find more value in non-monetary or discounted rewards. While any company can offer promotional coupons and discount codes if they want to, businesses that can provide value to the customer in ways other than dollars and cents have a unique opportunity to connect with their audience.

Case Study: TOMS One for One
TOMS Shoes is dedicated to providing resources to communities in need — namely, shoes. The brand is dedicated to “improving lives” and promise that, for every item purchased, TOMS will help a person in need. The initiative started with TOMS donating a pair of shoes to a child in need for every pair purchased, but the initiative has grown to help ensure clean water access, improving maternal health care, and supporting other organizations through themed products — like the elephant-dotted TOMS I once purchased that shared profits with the Wildlife Conservation Society.

Source: TOMS

5. Partner with another company to provide all-inclusive offers.
Strategic partnerships for customer loyalty (also known as coalition programs) can be super effective for retaining customers and growing your company. Which company would a good fit for a partnership? Again, it boils down to fully understanding your customers’ everyday lives and their purchase processes.

For example, if you’re a dog food company, you might partner with a veterinary office or pet grooming facility to offer co-branded deals that are mutually beneficial for your company and your customer. When you provide your customers with value that’s relevant to them but goes beyond what your company alone can offer them, you’re showing them you understand and care about their needs. Plus, it’ll help you grow your network to reach your partners’ customers, too.

Case Study: American Express Plenti Program
American Express has a huge partner base with companies across the country. The company’s Plenti program, launched in May 2015, lets consumers pool their rewards from various retailers like Macy’s, AT&T, Rite Aid, Enterprise Rent-A-Car, Hulu, and more. Plenti members earn points for shopping at these stores and redeem points at these stores by linking their existing store loyalty card to their Plenti account. For example, customers can use Plenti points they’ve earned from something like renting a car from Enterprise in order to pay their AT&T phone bill.

Flexibility is the biggest appeal here for customers, since points can be earned and redeemed at a variety of retailers. According to Fortune Magazine, “For the companies, even ones like Macy’s that already have huge loyalty programs, Plenti is a way to tap into the broader customer base of its partners, save on program costs, and lift sales by offering a more appealing program to customers.”

Source: Interbrand

6. Make a game out of it.
Who doesn’t love a good game? Turn your loyalty program into a game to encourage repeat customers and — depending on the type of game you choose — help solidify your brand’s image.

With any contest or sweepstakes, though, you run the risk of having customers feel like your company is jerking them around to win business. To mitigate this risk, it’s important to make customers feel like you’re not duping them out of rewards.The odds should be no lower than 25%, and the purchase requirements to play should be attainable. Also, be sure your company’s legal department is fully informed and on-board before you make your contest public.

When executed properly, this type of program could work for almost any type of company — even an off-the-beaten-path B2B company. If your audience enjoys having a little fun and purchases frequently, this type of program can make the buying process both fun and engaging.

Case Study: Swarm Perks
Swarm, a check-in app, uses Swarm Perks to gamify and incentivize users to check-in to different locations and share what they’re up to with friends. With Swarm Perks, users can get discounts for locations they check-in to — like a 20% off coupon at Best Buy.

Source: The Verge

Users can also compete in sweepstakes challenges every week, where they are entered into a drawing after check-in at a participating location to win things like dream vacations, spa days, and shopping trips.

Source: The Verge

7. Be as generous as your customers.
From the outside looking in, customer loyalty programs can appear to be nothing more than a scheme to get customers to spend even more money. (Let’s face it, we can all be cynics sometimes.)

That’s why loyalty programs that are truly generous stand out — and why customers who are members rave about them far and wide.

If your customer loyalty program requires that customers spend a ton only to be rewarded with meager discounts and samples, you’re doing it wrong. Instead, walk the walk on showing customers their value to your brand by offering a loyalty program that’s so good, it would be foolish not to become a member.

Case Study: REI Co-op
REI’s Co-op membership program harkens back to the outdoor gear company’s roots as a co-op — a consumer organization that is truly “owned” by the consumers and managed to meet the needs of its members. In fact, REI is the largest consumer co-operative enterprise in the United States.

If you’re not familiar with co-ops, here’s how it works at REI: Customers can become lifetime members by paying a flat fee of $20 — and that’s it.

rei lifetime membership

From there, members are rewarded with 10% of the total amount of money they spent at REI in the previous year, access to deeply-discounted “garage sales,” discounted wilderness and outdoor adventure classes, and members-only offers for discounts and new products.

As a member myself, I can confirm that the $20 I invested has been made up more than a few times over. But more than just the discounts, I feel good about spending my money with REI because of their commitment to this co-operative vision of giving back to outdoor conservation and their prioritization of the members over the profits — as reflected in REI’s widely-publicized vow to close its stores on Black Friday every year. It feels good to be prioritized and rewarded for my support in a tangible way — as I’m sure it does to the other 177,000 members.

8. Scratch the “program” completely.
Considering how many marketers offer loyalty programs, one innovative idea is to nix the idea of employing a program altogether. Instead, build loyalty by providing first-time users with awesome benefits, hooking them in, and offering those benefits with every purchase.

This minimalist approach works best for companies that sell unique products or services. That doesn’t necessarily mean that you offer the lowest price, or the best quality, or the most convenience; instead, I’m talking about redefining a category. If your company is pioneering a new product or service, a loyalty program may not be necessary. Customers will be loyal because there are few other options as spectacular as you, and you’ve communicated that value from your first interaction.

For example, one of the most innovative companies on the planet implements this strategy: Apple.

Case Study: Apple
Even the most loyal Apple customers don’t get special rewards or discounts … because it doesn’t offer them to anybody. Apple “enchants” customers by delighting them with a product or service the very first time.

“The loyalty is voluntary and long-lasting,” explains Apple evangelist Guy Kawasaki.

Apple has plenty of supporters, both online and offline, ready and willing to rave about its product. For them, loyalty happens organically.

How to Measure the Effectiveness of Your Loyalty Program
As with any initiative you implement, there needs to be a way to measure your success. Customer loyalty programs should increase customer happiness and retention, and there are ways to measure these things (other than in rainbows and sunshine).

Different companies and programs call for different analytics, but here are a few of the most common metrics companies watch when rolling out loyalty programs.

Customer Retention Rate
Customer retention is an indication of how long customers stay with you. With a successful loyalty program, this number should increase over time as the number of loyalty program members grows. Run an A/B test against program members and non-program customers to determine the overall effectiveness of the loyalty initiative. According to Fred Reichheld, author of the Loyalty Effect, a 5% increase in customer retention can lead to a 25-100% increase in profit for your company.

Negative Churn
Customer churn is the rate at which customers leave your company. Negative churn, therefore, is a measurement of customers who do the opposite: either they upgrade, or they purchase additional services. These help to offset the natural churn that goes on in most businesses. Depending on the nature of your business and loyalty program, especially if you opt for a tiered loyalty program, this is an important metric to track.

Net Promoter Score®
NPS is a customer satisfaction metric that measures, on a scale of 1-10, the degree to which people would recommend your company to others.

NPS is calculated by subtracting the percentage of detractors (customers who would not recommend your product) from the percentage of promoters (customers who would recommend you).

The fewer detractors, the better. Improving your net promoter score is one way to establish benchmarks, measure customer loyalty over time, and calculate the effects of your loyalty program.

Customer Effort Score
Customer Effort Score (CES) asks customers, “How much effort did you personally have to put forth to solve a problem with the company?”

Some companies prefer this metric over NPS score because it measures actual experience rather than the emotional delight of the customer. A Harvard Business Review study found that 48% of customers who had negative experiences with a company told 10 or more people. In this way, customer service impacts both customer acquisition and customer retention. If your loyalty program addresses customer service issues, like expedited requests, personal contacts, or free shipping, this may be one way to measure its success.

To learn more about customer loyalty, read about how to use customer loyalty analytics next.

Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.

Written by Sophia Bernazzani HubSpot

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