With reports showing that acquiring a new customer is 5-25x more expensive than retaining an existing one and loyal customers spending 67% more than new ones, you can immediately see the value of a strategy that can boost your customer retention rate.
Loyalty programs reward those customers who buy from you again and again and again. You don’t have to focus a loyalty program on discounts and cashback – though these are perfectly valid things to include in a program – the main aim though is to add emotional benefits to your customers to make them feel special about dealing with you. Emotion is what really drives purchasing behaviors, and decision making in general.
Bain & Company – “a 5% increase in customer retention produces more than a 25% increase in profit”
Before we dive into examples and benefits of a loyalty program, we must first understand a metric used to measure customers ending their relationships with your business – Churn rate.
Churn rate is a measure of customers who end their relationship within a given timeframe. This is typically measured by month, quarter or year depending on your product or industry. Most companies will default to a yearly rate but businesses with monthly recurring services or a faster churn rate will measure on a monthly basis.
There are many contributing factors to a business’s churn rate (which we will go into in another blog post) and the rate is always a measure of past performance. Only by understanding the reasons for your customers leaving will you be able to influence your future performance.
Calculating churn is simple as it is the percent of customer who end their relationship within the timeframe:
Customers at the beginning of period minus customers at end of the period divided by customers at the beginning of period = churn rate
How does your rate compare to industry averages?
Now we understand the measure of churn lets dive into how a customer loyalty program can influence this metric and drive up profits.
Let’s consider an airline loyalty program – that certainly doesn’t offer discounts and cash-back.
The more you fly with the airline, the further you go through their tiered loyalty system – which might be bronze, silver, and gold levels… though many come up with fancier names – and the further you go through their tiered system, the better your travel experience becomes.
That travel experience is not intrinsically tied to the price of the tickets that you buy or the class that you travel in.
A Gold airline member might get access to a lounge before they board. They might get priority upgrades. They might get priority boarding onto the aircraft and priority luggage delivery after they land. Even though they could be flying Economy.
These are benefits that other Economy travelers who are not airline members just don’t get.
The more that the traveler flies with the airline, the greater the benefits they get even though the product that they’re buying (the seat on the plane) is exactly the same as what non-airline members are buying.
And the more the traveler flies with the airline, the more reason there is for that traveler to fly with them again because they’re getting a better and better experience.
And this works not just for airlines, but it could work for your business too.
- Here are just a few examples of benefits that could be offered to loyal customers:
- free or faster shipping for repeat customers
- priority customer service
- some kind of concierge service that you offer but is exclusive for those people who are part of your loyalty programme
- discounts with other companies – partners with whom you’ve developed a relationship and agreed to introduce your customers to (essentially, you’re marketing for the partner)
- Exclusive products
- Time-limited product discounts
There are several routes that you could try with loyalty programs to create a better experience for your customers.
You don’t want to create a very complex or difficult program, but something simple, very easy for you to implement and very easy for you to offer
Your program could be based on spend or based on a frequency or a combination of them both.
Programs don’t have to be simply “opt in” or “opt out” – you’re in the program or not in the program – there’s masses of potential to create relatively straightforward programs that have tiers of benefits to them.
Irrespective of the benefits that you decide to offer, irrespective of how wonderful you make your customers feel, the measure of success for a loyalty program is the churn rate of the customers who are in that program.
Benefit summary of a loyalty program
- Easy to implement
- Creating an emotional bond with your customers increases retention
- Increased revenue from high order values of your loyal customers
- Increased profit from lower acquisition cost
- Bonus benefit – Brand advocacy, a loyal customer will tell others about your brand.