Loyalty Rewards Program - What It Is and How It Works

Amongst the many challenges a business may face; from low traffic to balancing operations costs, being without options is single-handedly the biggest issue. While loyalty programs focus on increasing customer retention, which may be a highly relevant goal in e-commerce, loyalty programs are more about managing loyalty members and enabling a business to exercise retention strategies. 

If we look at the state of e-commerce, we’ll see that there is a concrete benefit for business to find their core audience, as well as market their product or service. Due to the low barriers of entry and platforms like Shopify, virtually any business can reach a global market. However, even the most brilliant product may go unnoticed or may fail due to restrictive competitive forces. Retention involves the capture of high-value customers for the purpose of extracting value from them over longer periods of engagement.

A loyalty rewards program is a modern system intended to attract and incentivize customer engagement meant to highlight products and enhance your services. This guide will lead you through the many intricacies of creating a loyalty rewards program and optimizing its utility.

Definition of Loyalty Rewards Program

A loyalty rewards program is a customer-centric strategy where incentives, experiences, or exclusivity are utilized to nurture customer relationships. If we imagine equality in the market where competitors all have similar products and services, an incentive-based loyalty program can create ideal conditions to retain customers and prevent brand switching. A loyalty rewards program uses a variable form of rewards to attract, capture, and retain interested customers. They aim to sustain a long-term relationship with shoppers, while also attempting to increase their duration of engagement. It is believed that through retention we can extract value from customers, bolstering our reputation in the market, and periodically capturing market share.

Promotions and discounts are a standard practice in retail for garnering the attention of shoppers. If we look at the implications of these types of promotions, we’ll see that their impact cuts out as soon as the sale is complete. In plain words, they are typically short-term strategies that focus on inventory turnover and involve a price compromise. If we compare loyalty rewards programs to standard discounts, we’ll see that loyalty rewards are designed to motivate repeat purchases, leading towards future engagement. For this reason and many more, loyalty rewards programs are considered more advanced promotional campaigns with an emphasis on customer experience.

Definition of Referral Marketing

Referral marketing pairs perfectly with a loyalty rewards program as your members are already familiar with your brand. Your loyalty members can become a steady source of high-value leads through referrals. Referrals are thought to pass trust to their referees and have a high chance of conversion. These leads are also generated organically, which is means that the source is essentially free. They are known to increase operating efficiency as they diminish your costs or acquisition. It’s also common to incorporate double rewards into referral programs to increase their rates of engagement.

While referral marketing can be of great value in certain cases, they have their issues which downgrade their utility. For instance, referrals are contingent on existing customers and are often restricted in how many leads they can generate. Furthermore, they cannot replace your core marketing channels and can only supplement them. Consider also how you will generate engagement without some sort of reward. All things considered, referral marketing builds really well on to loyalty reward programs.

Benefits of Loyalty Programs

Retention is undeniably a crucial e-commerce goal and businesses are constantly looking for a way of keeping customers from switching to competitors. Furthermore, the value we generate from retention is boundless, especially if we successfully extend the duration of the engagement. Through the accumulation of active customers, we can craft a competitive loyalty program and also leverage our loyalty members for scaling our platform. Loyalty members are often considered some of the most willing and positive customers and can help a business bolster its reputation. Both businesses and customers stand to benefit from loyalty programs, consider reading the article below for a more detailed explanation of how that’s possible.

Benefits of Loyalty Programs for Business

• Creating a transcendent experience
• Cutting through the competition
• Cultivating an air of exclusivity
• Simplified relationship
• Nudging customer behaviour
• Customer engagment and advocacy
• Sustainable revenue source
• Customer trust
• Growing member list

Benefits of Loyalty Programs for Customers

• Deeper connections
• Freedom to choose rewards
• Exclusive treatment
• Discounts and incentives
• Trust and familiarity
• Sense of community

Types of Loyalty Programs

Customer loyalty programs can come in a variety of different types each tailored to your particular needs. When selecting the type of loyalty program you intend to use, it's important to consider your goals and how they fit into your particular industry. Consider the options below or check out the article below for more details.

• Point Accrual: These are among the most common types of loyalty programs that utilize in-store points that can be exchanged for rewards. They reward points for a variety of different interactions that have a financial value.
• Loyalty Levels: These programs are largely similar to point accrual programs but with the addition of tiers that increase in value at each tier. They are designed to reward customers based on their respective spending in-store.
• Cashback: These programs are different as they reward a cash value for customer loyalty. They return cash for each purchase made by customers and store those values in customer accounts, which encourages customers to spend using their services.
• Punch Card: Punch cards are among the simplest types of loyalty programs. They work by rewarding a free product or reward after an “x” amount of purchases, attempting to generate repeat purchases.
• Subscriptions: Subscription programs are typically used for consumables or where recurring purchases are necessary. They automate recurring purchases by subscribing customers to your services for some sort of additional benefit.
• Coalition Programs: These programs are based on some sort of partnership between separate businesses, where customers receive some sort of dual reward. They feed customers to one another and customers receive exclusive advantages in return.
• Gamified Programs: These types of programs utilize some sort of engaging content to attract customers such as games of chance. They are a fun and interesting way to generate customer engagement and can enhance brand perception.
• Paid Programs: These programs typically have some sort of locked services that customers receive if they pay an upfront fee. In return, they receive exclusive offers or additional services.
• Hybrid Programs: Hybrid loyalty programs are the most diverse and can be a combination of several different types. They are focused mainly on delivering the best possible loyalty experience.‍
• Value-Based: These types of loyalty programs focus less on the reward value, instead focusing on the type of reward. They are typically socially relevant or align with some sort of cultural norm such as environmentally friendly rewards or donations.

How do Loyalty Programs work?

Customer loyalty programs work by attracting customer engagement with the promise of discounts or rewards. Point-based programs for example use permanent in-store points that accumulate and can be redeemed once a customer has collected enough to qualify for a particular reward. Rather than rewarding customers immediately like standard discounts, they are future-orientated, which qualifies customers after spending a predetermined amount of money or number of purchases. Customers have the freedom to choose from a list of ways to earn points and how they wish to spend their points.

A customer loyalty program can be used to incentivize strategic actions like social media follows, leaving reviews, or simply purchasing a product. Loyalty reward programs are also excellent for creating a sense of exclusivity. Those who join your customer loyalty program are given special access to experiences, limited edition products, or preferential treatment. Through an array of different rewards and unique features, loyalty reward programs enhance the customer experience and create a sense of satisfaction. If you manage to successfully target your core audience, it can strengthen your retention capabilities and serve a competitive purpose.

A customer loyalty program cannot fundamentally substitute your product, which suggests that it has its limitations. A precursor to loyalty is a customer's intention to shop with your brand and their trust in your product's quality. A customer loyalty program is an enhancement to your core business and product. The key to a successful loyalty program is a process of continuous improvement, where you seek ways to keep loyal members engaged for as long as possible.

How to choose the Right Loyalty Program for your Business

The type of loyalty program you implement is an important point of consideration and serves as the foundation of your loyalty strategy, it’s important to know what type fits your industry before implementation. Choosing the perfect customer loyalty program is a balancing act between the cost of implementation and customer expectations. Another factor to consider is the normative practices in your particular industry which can prove their viability. At low price points like ice cream parlors it's normal to see something simple like punch cards, but when we consider luxury brands; customers expect novel experiences and exclusive treatment. Ultimately, choosing a loyalty program is about analyzing your business model, understanding customer expectations, and observing your industry. 

Another element we want to consider is the difficulty and cost of implementation, which can be the greatest inhibiting factor. The more extensive your loyalty program the greater engagement you can expect, but that can apply a financial burden on your business. Given your business's operational capacities, certain types of loyalty programs can be priced out entirely. Standard practices in e-commerce typically involve using loyalty apps, which can streamline the implementation process. These apps are typically comprehensive services, which give you all the control you need to create a full-fledged loyalty rewards program. These apps typically deliver the most value for their price, to go beyond would typically imply a custom solution and substantial investment.

Integrating a Loyalty Program into Your Business

In e-commerce, the most common loyalty practices involve using apps as services, which are arguably the greatest bang for your buck. These complete solutions are often the most comprehensive, and deliver a complete customer loyalty program without the need for an engineer or long turnaround. These programs feature comprehensive controls and enable you to manage your entire loyalty program from one platform. These services often have everything you may need excluding experiential rewards which are largely offline rewards. These services are also cost-effective and integrate perfectly into your other core marketing functions. 

• Introduce your loyalty points program on your e-commerce site
• Create a landing page for our program and describe how it works
• Establish what ways customers can earn points
• Balance the value of your rewards or tiers
• Feature your loyalty program on your social media channels
• Create your automatic email flows to supplement your loyalty program
• Establish the metrics you wish to monitor and analyze regularly
• Integrate your loyalty program into your customer service function
• Promote your loyalty program to ensure proper exposure
• Craft segments, implement personalization, and iterate on your rewards

How to Create an Effective Loyalty Program

Customer loyalty programs are only as effective as the goals you set, thus it's important to understand their capabilities. Loyalty programs are primarily involved in metrics such as repeat purchase rates, average order value, customer lifetime value, and churn rates. Managing a loyalty rewards program is a process of constant adaptation. The main point is to try to enhance customer satisfaction and seek ways to extend their duration of engagement. Another element of a successful loyalty program is maintaining your relationship with customers or at a minimum maintaining communication. To create an effective loyalty program you will have to narrow down your goals, understand customer motivation, and refine according to your analysis of their behavior. 

It's important to remember that trying to do too much with your loyalty program may produce diluted results and faults in accomplishing any concrete goal. The more acutely you understand customer behavior the more refined you can make your strategy. A few prominent trends in loyalty program management include personalization and custom segmentation which can guide how you interact with members. It’s also important to integrate your loyalty program into your other core e-commerce functions for optimal results. This may include rewards for reviews, rewards for social media engagement, and integrating rewards into your automated email flows. Once you understand all the working parts of a loyalty program, you can focus them towards your goals.

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The Importance of Measuring the Success of a Loyalty Program

It is highly unlikely that your loyalty program will be perfect from the beginning, analysis is a crucial part of managing a successful loyalty program. The data loyalty programs generate is often highly concentrated and can yield substantial value. This information can be used to refine operations, craft customer segments, and improve customer targeting. The nature of the data produced by loyalty programs can impact your entire organization and not just your loyalty program. Optimization is a continuous process, especially for a central component of your marketing strategy, such as loyalty programs. Much of what customers provide will be your only source of information. Beyond just analyzing your findings, integrating results can have a definitive effect on your loyalty members.

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Tips for Managing a Loyalty Program

When managing your loyalty program it’s advised to follow a few industry-accepted tips to ensure that you reach your predetermined goals. While the goals you set can vary from time to time it's important to understand the versatility of loyalty programs as strategic tools. The first thing we should bear in mind is that it's possible to incentivize customer interactions like leaving reviews, following on social media, and subscribing to email notifications. We also need to understand that a lot depends on how well customers engage with your program. Thus, understanding what motivates your customers is crucial; this can be accomplished through testing, feedback, and analysis. In any case, analysis and iteration will be a fixed component of managing your loyalty rewards program.

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Once more it's important to understand that duration of engagement is a major factor and that we should be constantly seeking to extend this factor. Engagement can be achieved in a few different ways such as giving loyalty members more options or freedom to choose how they spend their rewards, enriching the quality of your rewards, or personalizing your rewards to better fit customer expectations. Differentiation is also an important factor to consider, especially since customer loyalty programs can be a common practice in your industry. Mango is a brand that utilizes social causes exceptionally well, as you’ll see in the article below. They use Partnerships with NGOs and donate old garments to the needy, and better yet they reward points for these donations. This results in resilient customer engagement, but that isn’t all that possible with customer loyalty programs and the examples in the article below discuss these differences in detail.

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Conclusion

E-commerce is a prominent industry but it has its fair share of challenges. Amongst those many challenges are the emergence of new competitors and the rising costs of acquisition. Customer loyalty programs combat those challenges directly through customer retention and a customer-centric focus on experiences with your brand. Loyalty marketing is in large proportion about enhancing customer satisfaction and experiences which extends their duration of engagement. A successful loyalty program can be the centerpiece of your overall e-commerce strategy and fuel your brand's growth. Hopefully, after reading this article you’ll have a better idea of what sort of effort goes into managing a loyalty rewards program, and that you’re able to craft a resilient program for your business.