The Benefits of Loyalty Programs in Small Business

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Companies invest millions in advertising, product development and marketing strategies to grow their customer base. Retaining those customers is just as challenging but involves lower costs. In fact, it's five to 25 times less expensive to retain an existing client than to gain a new one. As a small business, you can implement loyalty programs to turn occasional buyers into repeat customers and stay competitive without devaluing your products.

TL;DR (Too Long; Didn't Read)

Repeat customers are cheaper to retain and provide more value than new buyers. A strong loyalty program can increase customer lifetime value, raise brand awareness and boost sales, leading to business growth.

Why Customer Loyalty Matters

Did you know that about 65% of a company's revenue comes from existing customers? However, many companies focus on customer acquisition and overlook the clients they already have. Loyal customers mean an increase in sales, referrals and brand awareness. If you want your small business to succeed, it's crucial to prioritize customer engagement and satisfaction.

According to Harvard Business Review, a 5% increase in customer retention can boost a company's revenue by up to 95%. The customers you already have are your biggest asset. Turn them into loyal buyers, and they will speak about your brand and recommend it to others. Loyal buyers are also more likely to offer honest and constructive feedback so you can take the steps needed to create better products and services.

Repeat customers are the building blocks of business growth. They choose your brand over others and keep coming back. Over 40% of buyers spend more with the brands to which they are loyal, and those who sign up for loyalty programs generate up to 18% more revenue. A well-thought-out loyalty program can make it easier to engage your clients so they stick around and stay true to your business.

Furthermore, loyal buyers can act as a focus group. If, say, you're launching a new product, you can ask them to take surveys or fill out questionnaires. They love your brand and won't mind taking a moment of their time to help you. These people want to see you succeed, and they care about how your business is doing.

What Drives Customer Loyalty?

In this digital era, customers have more power than ever before. They are no longer limited to a handful of products. A quick online search is all it takes to find millions of products, compare prices and research brands. If your small business fails to meet their expectations, they will go to your competitors. Therefore, you need to focus on customers' needs and wants, not your own.

Customer loyalty is often what makes the difference between companies that grow and those that don't. Take Starbucks, for example — does it really have the best coffee? That's a matter of personal preference. One thing is for sure: They do have a great rewards program that keeps customers coming back for more.

A 2018 study revealed that coupons, discounts and rewards have the biggest impact on brand loyalty. Customers also demand good value for the money, consistent quality, transparency and personalized experiences. Corporate social responsibility matters too. Other factors that drive customer loyalty include:

  • Easy payment and return process

  • Outstanding customer service

  • New and innovative products

  • Convenience

  • Responsiveness

  • Ethics

Loyalty and reward programs influence customer retention too. About 74% of shoppers look for a strong loyalty or discount program when choosing a store, and nearly 80% look for deals in reward programs before making a purchase. Just as you'd give away discounts to attract new buyers, you should offer incentives to engage and retain the customers you already have.

How Loyalty Programs Work

Different companies reward their best customers in different ways. Some offer loyalty points that can be redeemed for shopping vouchers, gifts, discounted products or even cash, which encourages buyers to spend more. Others have loyalty programs that reward members for referrals. Cash-back loyalty programs are particularly appealing to frequent buyers, so that's an option to consider if you own a retail store.

As a small business, you may not be able to afford to offer gifts and free products, but you can structure non-monetary programs around your customers' needs. One way to do that is to launch a VIP club for repeat customers who make frequent purchases or subscribe to your membership program. VIP clients may have access to secret deals, time-sensitive offers or new product previews.

The Marriott Bonvoy program, for instance, features six elite levels with special perks like priority late checkout, enhanced room upgrades, discounted rates, lounge access and bonus points. Guests can upgrade their membership status and earn loyalty points by staying at participating Marriott properties. The points can be redeemed for discounts, shared with family and friends or donated to a good cause.

Implementing a rewards program doesn't have to be expensive. For example, you can encourage customers to make repeat purchases by donating a portion of sales to charity. If, say, you own a pet shop, you could donate funds to local animal shelters. You may also reward your best customers with small gifts, such as a free cup of coffee, invitations to exclusive events or access to premium content on your website or blog.

Why Start a Rewards Program?

Starting a loyalty program is not just a great way to reward repeat customers but also an effective means to increase sales. Loyalty program members spend 12% to 18% more per year than new or occasional buyers. A strong rewards program can also make your business more appealing to prospects and turn them into new customers. Buyers who haven't yet tried your products are more likely to do it if you offer a $10 coupon or other perks to those who sign up for a loyalty card.

Furthermore, loyalty programs can help you deliver a more customer-centric experience. According to Epsilon, 90% of consumers find personalization appealing, and 80% would buy from brands that offer personalized experiences.

When buyers sign up for your loyalty program, you can ask them to submit their names, addresses, shopping preferences and other information. Next, use this data to provide coupons or special offers based on their location or recommend products according to their preferences.

The insights provided by loyalty program members may help improve your content marketing efforts and reduce advertising costs. More than 70% of buyers only engage with personalized marketing messages. By starting a loyalty program, you'll get to know your customers better and deliver content that sparks their interest. For example, you can send personalized newsletters, write blog posts that answer their questions and keep them engaged on social media.

Create Repeat Business

According to Adobe, conversion rates are up to nine times higher for repeat buyers. Furthermore, consumers who are loyal to a brand continue to buy its products during times of economic hardship. Repeat customers — those who have bought from you at least two times before — are nine times more likely to make a new purchase compared to new shoppers. These findings indicate that returning and repeat customers are more valuable than new buyers.

As Adobe points out, returning and repeat buyers are more familiar with a particular brand and its products. They trust the company, experience lower levels of transaction friction and know that their orders will arrive on time. Therefore, it's not surprising that a company's overall revenue may increase by about 10% for each 1% of buyers who make a second purchase.

Returning customers are those who buy a product or service and return to your website or store later, even if they don't make another purchase. Loyalty programs can help you turn these buyers into repeat shoppers and increase your revenue. If, say, a returning customer enters your store, you can give him the option to sign up for a loyalty card to get 10% off, or you can set up a tiered loyalty program to reward repeat customers with special offers based on their ranks or loyalty points.

Examples of Successful Loyalty Programs

Retail businesses often use a points system to drive customer loyalty. The key is to keep it simple so that buyers can easily track their loyalty points and use them to the fullest.

A good example is The North Face, which offers 10 Peak Points for every dollar spent at its stores and online and five Peak Points for every dollar spent at its outlets. Customers can join its loyalty program, VIPeak, for free and redeem their points for rewards that can be used toward future purchases. As their number of loyalty points increases, so does their rank. The brand uses a tiered loyalty program — the higher your rank, the greater the reward.

In 2019, Walmart and Capital One launched a credit card rewards program with innovative digital features. Customers who use the Capital One Walmart Rewards MasterCard get 5% back on purchases at Walmart.com and in the store as well as cash back on travel and dining out and any products they buy. The Walmart Rewards Card, a similar product, rewards buyers for using the Walmart app and Walmart Pay.

Starbucks rewards are a big part of the company's branding efforts, so you might want to check them out. Consumers who pay with their Starbucks card in its stores receive stars that can be redeemed for free snacks, free brewed coffee and other goodies. Cardholders can order ahead through the Starbucks app and skip the line.

Build a Winning Loyalty Program

The best loyalty programs are tailored to specific audiences and are easy to implement. Keep your key performance indicators in mind at all times. Create a rewards program that makes it easy to track your KPIs, whether it's the number of sales per square foot of retail space, conversion rates, gross and net profit or average transaction value. Use customer data to develop a personalized strategy.

Set clear goals from day one. For example, if you already have a solid customer base, your primary goal might be to increase their lifetime value. Think about your key customers, assess their needs and find ways to get the most out of those transactions. If, say, you're targeting millennials, you can leverage mobile apps, gamification or digital gift cards to draw their attention and give them one more reason to choose your brand.

A successful customer loyalty program should have clear rules and use a currency with which your audience is familiar. Paper coupons, for instance, may be a better choice than electronic coupons for baby boomers. You also need to figure out how you will track participation. Some companies prefer traditional customer relationship management software, while others use customer loyalty and marketing platforms like TapMango, Kangaroo, Fivestars or RepeatRewards.