A few years and many conversations with merchants later, we at LoyaltyLion have come to realise that there are several misconceptions about loyalty programs floating around. Some people think that a loyalty program is too complicated to set up, others think that it will take too much time to manage. Even more are under the impression that a loyalty program is too costly to positively impact their revenue. We’re here to dispel these myths and rumours, and help merchants to make sense of the ROI that a customer loyalty program can deliver.
The number one question any merchant should be asking when they consider investing in any marketing activity, is will it deliver a positive ROI? So first and foremost, let’s understand the costs involved with implementing and running a loyalty program.
The cost of a loyalty program
Typically, there are four main areas of cost that can be associated with launching a loyalty program: software, design, promotion and of course, the cost of the rewards themselves.
Starting with software, this is the platform required to manage your loyalty program. You might decide to design this in-house, or alternatively invest in an existing ecommerce loyalty platform. Creating your own platform can be extremely costly, while using an existing platform means that you can benefit from the experience and learnings of others.
Secondly, as your loyalty program is an extension of your brand, you will need to invest in creating a style and branding that matches your store’s identity. Investing in a consistent look and feel for your loyalty program will ensure that you appeal to the target customers you’re looking for.
Effective promotion is the key to the success of any customer loyalty program, and needs to be considered not just at the time of launch but as a longer-term strategy. Your program should be incorporated in all communications and marketing materials – this isn’t costly going forwards, but will involve some changes to your existing materials.
Finally, let’s cover rewards. The cost of your rewards will vary depending on how your points system is structured. Rewards could take the form of anything, from discounts and money off the next purchase, to more experiential rewards such as early access to new product ranges. Whilst rewards certainly don’t come for free, there are many ways to limit the cost – for example, use products that you’re struggling to sell in order to clear old inventory, or use points promotions to sell high margin products, reducing the cost to your store.
Now we know the costs involved, let’s look at how a loyalty program can drive a positive ROI.
How a loyalty program can increase store revenue
Over and above everything else it can do for your business, the biggest benefit of any customer loyalty program is increased customer lifetime value (CLV). CLV is the amount a customer spends in their ‘lifetime’ as a customer at your store. It is made up of three key metrics, all three of which are positively impacted by a customer loyalty program:
- Purchase frequency
- Average order value
- Customer lifetime
Increasing purchase frequency
Purchase frequency is defined by how often a customer returns to your store and buys again. The more customers return and repeat purchase, the more your revenue increases. Loyalty programs drive repeat purchase by giving shoppers reasons to come back again and again, whether that’s to earn more points, or to redeem points they’ve already earned.
You can use a loyalty program to increase purchase frequency in a number of ways. We recommend finding additional ways to award points in order to encourage repeat purchase. For example, rather than just awarding points for purchases, reward site visits, signups, facebook likes and shares and other valuable onsite activities. Customers will have more opportunities to earn points, and therefore will return to redeem them more regularly.
You can also consider using tiers to motivate customers to return and shop again. For example, LoyaltyLion client, 100% Pure has three tiers within their Purist Perks program. The more a customer returns and repeat purchases, the closer they get to unlocking the next tier and the additional benefits that go with it, such as free shipping or priority customer service.
Increasing average order value
Average order value (AOV) is the total value of every order placed with a retail business over a defined period of time. Not only does it help you identify your most valuable customers, but it also helps you spot when your customer spend is decreasing. The average basket size of a customer that uses a loyalty reward in a purchase is 39% higher than the basket size of a customer that doesn’t, demonstrating the impact that a customer loyalty program can have on AOV.
Use your loyalty program to drive up AOV by ensuring that your customers know how many points they have at every stage of their customer journey. Rather than only referencing your program on account pages and at the checkout, make it easy for a customer to see their points on every page. If a customer can see on a product page that they have 20,000 points, and they can also see that another product that complements what they’re already looking at is available for 25,000 points, they are far more likely to consider adding to their basket in order to gain enough points to unlock a reward. You might also consider using triple points weeks and other one-off promotional tactics to boost AOV.
Driving customer retention
Finally, a loyalty program can help you retain your existing customers for longer. This is not just due to the fact that they have more reasons to return and shop with you again, but also because your program will give you reasons to engage with your customer in between purchases.
Loyalty emails typically have open rates of 35% – far higher than the average open rate for marketing emails. This is because they are highly personalised, and unique to the individual. From monthly points statements to reward available reminders, a loyalty program gives you multiple opportunities to engage with customers even when they’re not purchasing, helping your brand stay top of mind and ensuring that when they are ready to buy, it’s your store that they choose to come back to.
A loyalty program is also invaluable in re-engaging customers who are ‘at-risk’ – i.e. those customers who haven’t returned to make another purchase within an expected time frame. By segmenting those customers and using rewards to re-engage them, you can significantly lengthen their customer lifetime.
Finally, let’s talk about advocacy and acquisition
Customer acquisition is the top priority for most ecommerce marketers, but in reality it costs five times more to acquire a new customer than it does to retain an existing one. The most successful ecommerce businesses are therefore those who are focusing on customer retention, and encouraging loyal customers to act as advocates.
Consumers are four times more likely to make a purchase when they’ve been referred by a friend of family member, and a referred customer’s CLV is between 16 and 24 per cent greater. Use rewards to incentivise those referrals, awarding points to loyal customers who refer your brand via social media, email or WhatsApp. You can also award points in return for product and store reviews – with 91% of consumers consulting reviews before making a purchase, encouraging social proof has never been more important.
A happy customer tells as many as nine people about positive brand experiences, and your most loyal customers are likely also your happiest ones. Encourage them to act as advocates and you will open up a far more cost-effective acquisition channel, built on trust and more qualified traffic.
Measuring the ROI of your loyalty program
According to Experian, nearly a fifth of companies are failing to track the success of their loyalty programs. There are a number of KPIs you should consider in order to know whether your program is performing effectively. As we’ve already mentioned, your customer lifetime value, repeat purchase rates and average order values are all metrics you should be monitoring.
However, we also recommend that you keep an eye on enrolment and usage, in order to understand whether or not your program is offering an attractive proposition. Ensure you’re tracking not just how many members enrol, but also whether or not they are using the program – a key metric to consider is the percentage of customers who are using or redeeming rewards.
You should also monitor the net promoter scores of your loyal customers in order to understand how likely it is that they will act as advocates for your brand. Changes in NPS should be caught early, in order to avoid customers becoming ‘at-risk’ or churning.
Research from Bain and Co. shows that increasing customer retention by just 2% can have the same impact as reducing costs by 10%. While there will always be some initial costs associated with setting up a loyalty program, they will be far outweighed by the positive impact on your customer retention and lifetime value.
If you want to find out more about the ROI of customer loyalty programs and how to track each of the metrics we’ve talked about, then visit the LoyaltyLion Academy.
LoyaltyLion is a data-driven loyalty and engagement software for fast-growth ecommerce merchants. Thousands of retailers worldwide use LoyaltyLion to add their own fully customizable loyalty programs and increase customer engagement, retention and spend. Stores using LoyaltyLion typically generate at least $15 for every $1 they spend on the platform.