Tips and tactics to help you build your base of loyal customers — and reap the profits. Plus, how to leverage customer loyalty programs.
- The cost to retain customers is about seven times less than the cost to acquire customers.1
- Increasing spend on customer retention can drive a 200% higher chance of growing your market share.2
- The factors driving customer loyalty vary by retailer.
- Customer loyalty programs are formal efforts to retain and grow existing customer relationships.
- Best-in-class customer loyalty programs offer a mix of hard and soft benefits.
Every retailer wants customers. But you shouldn’t be satisfied with getting just any customers. You want loyal customers — the ones who spend more with you, shop with you more frequently and advocate for your brand. Here’s what you need to know to build and improve customer loyalty — including a discussion on how customer loyalty programs can help.
What is customer loyalty?
At the most basic level, we can define customer loyalty in the retail context as occurring when a customer repeatedly shops with a specific retailer for particular product or service needs.
In simple terms, customer loyalty might be thought of on a spectrum. At one end, a customer shops with a particular retailer because that is the only retailer offering a particular product or service. Obviously, in this situation the customer can barely be called “loyal.” However, the retailer does get 100% of that customer’s share of wallet for that product. (Quick reminder: Share of wallet refers to the amount a customer spends over time with your brand (and not with competitors) for a particular category or sub-category of product, such as clothing, shoes, groceries, etc.)
At the other end of the spectrum, many retailers may offer a particular product or service, yet the customer chooses one specific retailer, based on a number of factors, and is also a strong advocate for that brand.
Why is customer loyalty important?
The value of loyal customers, and the cost efficiency of focusing on retention over acquisition, are time-proven facts. For instance, according to an often-cited statistic from Bain and Company, the cost to retain customers is seven times less than the cost to acquire new ones.1 And, according to Forbes, “Brands that upped their spend on customer retention over the past one to three years drove a 200% higher chance of growing their market share.”2
Repeat customers are also far more likely (and easier) to convert. They already “get” your brand and your product, so it takes less effort to convince them to make a second (and third, fourth, fifth …) purchase than if you’re trying to sell a newbie.
What’s more, loyal customers are likely to refer others to your door. That could happen through a formal “refer a friend” program. Or it can happen more organically as they share positive comments about your brand or products on social media, post a glowing review, or just chat you up with family and friends. Any way you approach it, such advocacy is great for business.
How do you create, build and increase customer loyalty?
Many different variables impact customer loyalty. In general, though, a convenient shopping experience and getting a good value for the money tend to be top factors that can increase customer loyalty, according to customer.com’s annual Retail Customer Brand Loyalty Study.
Other important factors include customer service, ease of making purchases, caring staff, trust, receiving shopping incentives and VIP benefits and experiences.
The factors that influence customer loyalty and retention vary by retailer. For instance, our research shows that customers who described themselves as loyal to Target most often cited the retailer’s convenient shopping experience as the most important factor influencing their loyalty.
On the other hand, customers who described themselves as loyal to Kohl’s most often cited receiving incentives to shop with Kohl’s as their most important loyalty factor. Clearly, it’s important to identify and carefully maintain those factors that drive your own customers’ loyalty.
What is a customer loyalty program?
Customer loyalty programs are formal efforts to retain and grow existing customer relationships while attracting new ones. Customer loyalty programs are particularly geared toward attracting and retaining consumers who are most likely to become best customers.
The primary benefits of a customer loyalty program are building customer loyalty and retention while lowering customer acquisition costs. And, because a loyalty program helps you retain more customers, you don’t have to acquire as many new customers to maintain sales levels. In fact, according to Accenture, members of customer loyalty programs generate 12% to 18% more revenue than non-members.3
Essentially a customer loyalty program provides a way to show customers that their repeat business matters to you. As part of this, it provides structured mechanisms to optimally:
- Increase customer spend and frequency by incenting customers to consolidate their category purchases with you
- Present an opportunity cost to the customer if they shop at a competitor, since those purchases will not count toward earning incentives
- Increase customer loyalty by offering benefits that appeal to and engage customers, such as free shipping, surprise and delight benefits, recognition of best customers, etc.
- Leverage data to better serve customers
Of course, a loyalty program isn’t the only mechanism for showing customer appreciation. Retailers must identify and carefully safeguard all factors that help create and increase customer loyalty.
How do you create a customer loyalty program and choose benefits?
Developing a customer loyalty program is an enterprise-wide endeavor that requires buy-in from the top, a customer-centric corporate mindset and cross-departmental cooperation from planning to implementation to ongoing management and refinement. You’ll need to decide how you’ll evaluate success, which means setting goals and establishing how you’ll measure key performance indicators to see if you’re meeting those targets.
Once you have these underpinnings in place, you can begin developing a specific loyalty program framework. The best customer loyalty programs are based on a foundation of customer knowledge. This can include leveraging data and conducting research, such as surveys and focus groups. It may also mean talking to associates and customer service team members to understand customer concerns, wants and common questions.
Through this process, you can begin to uncover ideas about what incentives and benefits might positively impact how much your customers spend with you and how frequently they shop with you. This information will also help you develop a value proposition, which acts as the underlying instrument driving any loyalty program. It essentially answers the question of how to reward customer loyalty through the program.
As you delve into the value proposition and brainstorm potential loyalty program rewards, keep in mind your margins and return on investment. The best customer loyalty programs balance the needs of the customer with those of the retailer. Customers are rewarded for their loyalty in a way that retains them and grows their share of wallet in a way that’s profitable for the retailer.
Often, this means incentivizing cumulative spending, which most often occurs over multiple shopping trips. For instance, Nordstrom’s Nordy Club members earn points for every dollar they spend with the retailer. After the customer has accumulated 1,000 points, they earn a $10 Nordstrom Note that they can, in turn, spend on their next Nordstrom shopping trip.
Ulta loyalty program members also earn points. However, as the table below shows, the more they spend, the more their points are worth.
A customer loyalty program value proposition doesn’t have to be based on points to be successful. For example, customers who join the REI Co-op can earn rebates or dividends at different spending thresholds. Members earn a varying percentage of their spending (usually about 10%) as a dividend and then receive an annual dividend check in March.
Other programs utilize spending thresholds where customers earn better and better benefits as they ascend the tiers. Good customer loyalty programs also go beyond the transactional to reward loyal and engaged behavior — such as rewarding customers with points or perks for writing a review, watching a product tutorial, participating in a product design panel and so on.
What are other ways to reward loyal customers?
Best-in-class customer loyalty programs include a mix of benefits optimized for their brand and their key audiences. The mix typically includes a combination of financially driven rewards (known as “hard benefits”) and emotionally driven perks (known as “soft benefits”).
Examples of hard benefits include the discounts mentioned earlier, as well as things like members-only sale events, member pricing, surprise savings and other dollars-focused perks.
Examples of soft benefits include such things as advance notice of sales, VIP recognition, unique experiences or insider knowledge. For instance, one convenience and fuel retailer sends price alert text messages to loyalty members three hours before the price is scheduled to increase. Since their margins remain the same regardless of the price, the cost of offering the benefit is minimal (just the cost of sending text messages) but the impact on customer loyalty is great.
Soft benefits can also include enhanced services that make customers’ lives and interacting with the brand easier. Think VIP customers getting to board the plane earlier, which allows them to get themselves and their bags situated when it’s easier to do so.
How do you measure customer loyalty and customer loyalty programs?
Measuring customer loyalty can help you gauge the success of your retention, engagement and customer experience initiatives. Some metrics and factors to study include:
- Customer lifetime value
- Net promoter score
- Type and level of engagement with the brand
- Customer retention rate
- Average transaction size
- Annual average spend and transactions
Measuring loyalty program effectiveness is a related but separate undertaking. In this case, you want to quantify the impact of your customer loyalty program — which not only lets you gauge the program’s performance, but can also provide proof of your program’s value to your C-suite or board.
This review should include the same factors listed above, but narrowed down only to members of your customer loyalty program. You can then compare the general customer metrics to the members-only metrics to see how the program is impacting results.
A loyalty program audit should also include looking at these additional key performance indicators:
- Member net promoter score, which specifically tracks whether members would recommend the program to others
- Active participation quotient, which measures member understanding of and participation in the program
- Motivation to spend, which assesses whether your top benefits are driving desired customer behavior
- Customer data view, which measures your data collection efforts
- Membership growth rates
- Share of transactions and sales by members compared to overall transactions and sales
- Rewards earned and redeemed
- Member social engagement metrics
Customers’ loyalty — and their interest in your loyalty program — may change over time and throughout the customer journey. So it’s important to conduct regular performance reviews. This can also give you advance notice of potential trouble, so you have the chance to correct problems before they get out of hand.
How does collecting customer data affect customer loyalty initiatives?
Collecting data is vital to building customer loyalty for many reasons. Most broadly, it gives you a rich source of information to help understand your customers and drive the business. For instance, data can help you align your business to meet customer (or best customer) preferences, anticipate and cater to their needs, and identify relevant products or services as next-best-sell items.
Data is also essential to create personalized experiences. You can use it to better target promotions to specific customers, making personalized recommendations. It can help you develop more relevant communications that let you better engage with your customers.
You can (and should) also analyze and mine customer data to unearth business opportunities, improve business practice and better serve customers. For instance, it may show you ways to align inventory, store merchandising or processes to better serve customer interests. And, you can use data modeling to build your group of most loyal customers by identifying consumers whose behaviors resemble your top tier.
A formal customer loyalty program is an excellent way to capture customer data. It essentially incentivizes customers to identify themselves when they shop, so their purchase progress can be tracked and rewards tabulated.
Other ways to collect data include tracking:
- Interactions with sales staff, customer service and online chats
- Website activity
- Social media engagement
- Marketing analytics
- Customer surveys and polls
It’s increasingly important to be transparent about your data practices. Make sure customers can easily learn the type of data you’re collecting, how you might use it — and why that can be of value to the customer — how you keep their personal data secure and how they can opt out of data collection.
Understanding Customer Loyalty Is Just the Start
There’s truly nothing more important to a brand than building customer loyalty. After all, without customers, you don’t have a business. Understanding how to build and improve customer loyalty, as well as what part a loyalty program can play, is the first step. Planning and implementing an enterprise-wide customer-centric strategy is harder — but well worth it to enjoy the benefits of longer, stronger, more profitable customer relationships.
Wherever you are on your customer loyalty journey, we can help you move forward to the next stage. Our retail marketing experts are dedicated to helping our clients improve their customer relationships to improve their bottom lines. To learn more about our expertise, services and solutions, schedule a free consultation or call us today at 303.986.3000.
1 “A Customer Saved Is Worth a Customer Earned … Times 5,” Evolve Performance Group, posted Sept. 9, 2016, https://evolvepg.com/About/Whats-Evolving/ArticleID/28/A-Customer-Saved-Is-Worth-a-Customer-Earned%E2%80%A6Times-5, accessed Jan. 28, 2022
2 “Retentionomics: The Path to Profitable Growth,” Forbes Insights, published in 2016, https://i.forbesimg.com/forbesinsights/sailthru/sailthru.pdf, accessed Jan. 28, 2022
3 “Members of Customer Loyalty Programs Generate Significantly More Revenue for Retailers Than Do Non-Members, Accenture Research Finds,” posted June 16, 2016, Accenture, https://newsroom.accenture.com/news/members-of-customer-loyalty-programs-generate-significantly-more-revenue-for-retailers-than-do-non-members-accenture-research-finds.htm, accessed Jan. 28, 2022