At this point, the idea of customer loyalty programs is nothing new. Today’s brands aren’t asking if a rewards program is good idea, they’re asking what rewards program is right for their brand. As conventional thinking continues to shift toward a balanced approach between acquisition and retention marketing, more big name brands are actively seeking to build customer loyalty with a variety of different rewards strategies.
Bond found that loyalty program enrolment has increased by over 30% in the past four years, increasing the average number of programs the average customer belongs to from 10.9 to 14. However, not all programs are created equal. Although these stats might sound promising, the numbers alone don’t tell the whole story. I’ll bet that many of the loyalty cards in customers’ wallets go unused, either because they don’t know how the program works or no longer find value in what the program is offering.
If you’re not careful, your rewards program could fall into the unfortunate (but all too common) “get it and forget it” trap, where customers sign up for services they never actually end up using! Without a solid understanding of good loyalty strategy, your retention efforts will suffer. Thankfully, all you need to turn it around is a little loyalty 101. By the end of this refresher course, you’ll understand:
- How a rewards program works
- Why customer rewards are effective
- The Golden Rule of Rewards
Since there’s no time like the present, let’s get started. After all, your loyalty strategy won’t run itself!
Loyalty Strategy 101: How a Rewards Program Works
I know this section might seem a little bit redundant because you’re already operating a rewards program, but hear me out! While your strategy might be up and running, its success depends on how well you understand its basic mechanics. Think of it like driving a car - anyone can pop the hood, but only a skilled mechanic actually understands what makes that engine go.
So what does the engine of your rewards program look like? More importantly, do you understand all of its moving parts?
Investopedia defines a rewards program as a program offered by a company to customers who frequently make purchases. However, this is only one piece of the puzzle. While this definition addresses who is involved in a rewards program, it is missing the equally important why, as in why are customers being rewarded? Answering this question allows us to push our understanding even further, acknowledging that businesses offer rewards as a means of encouraging valuable actions from their customers.
Although this definition is closer, it still doesn’t describe how customers are being rewarded. In order to address that, we need to discuss the types of rewards members can receive, such as access to new products, discount coupons, and free merchandise. These rewards are determined based on the industry the brand operates in as well as their target demographic. Together, these two factors help merchants create the best value that also encourages program participation.
If we put all of these ideas together, we get the following definition:
When you look at it this way, it’s clear that a rewards program has three main moving parts that all directly inform each other:
In order to keep the rewards engine going, your program needs to encourage customers to come back, complete profitable actions like purchases, and earn rewards that they can turn around and feed back into the engine with new purchases. With this cycle acting as the backbone of your loyalty marketing strategy, you are well on your way to establishing a profitable business model.
The next thing we need to tackle is why this system is effective.
Loyalty Strategy 102: Why Rewards Programs Are Effective
With so many businesses running large-scale rewards programs, it's clear that customer loyalty strategies work. What this doesn't tell us is why they work. In order to answer that question, we're going to need to take a brief look at the psychology behind rewards: motivation.
Motivation is an extremely powerful psychological tool. We’ve talked about the science of customer motivation in the past, and from that in-depth analysis we were able to determine that motivation is only powerful when these three ideas are true:
- Customers believe they can achieve a desired outcome
- Customers can see and understand how their actions will lead to a valuable outcome
- Customers receive the rewards they want
When you break it down into sequential pieces, it’s easy to see that each of these components strongly impact the others. As a result, you can only motivate your customers if each of these things are present - in other words, motivation is only as strong as its weakest link. With such a straightforward system driving the success of today’s rewards programs, why do so many businesses struggle to run effective programs? The answer to that question lies within The Golden Rule of Rewards.
Loyalty Strategy 103: The Golden Rule of Rewards
Based on what we know about rewards programs and why a loyalty strategy is effective, it stands to reason that a well-executed program does the following things:
- Rewards customers for completing profitable actions
- Makes it easy for customers to understand, join, and participate by completing said actions
Seems simple enough, right? The problem is, too often merchants are afraid of the costs involved with starting and running a loyalty program. While they understand the importance of retention marketing, their willingness to truly reward their customers only extends so far. Some merchants are happy to “reward” customers but aren’t as excited to follow through on those promised rewards. In an effort to limit the rewards customers can claim, they set exceedingly high redemption thresholds that are difficult for most customers to reach.
This type of frugal (or, if we’re being harsh, cheap) thinking is extremely detrimental to a loyalty strategy. If customers are never actually rewarded, they won’t ever experience the positive emotions a rewards program is designed to elicit.
Without that emotionally-charged foundation, a brand/customer relationship isn’t likely to last, and those customers you initially wooed with rewards will end up leaving you. They might even go so far as to start tarnishing your reputation with negative reviews, which will have a huge impact on your Net Promoter Score. These losses are going to hurt your bottom line significantly more than the costs of running your program effectively, especially since the customer lifetime value of repeat and loyal customers is so much higher than the average shopper.
Limited promotion can also reduce the impact of your loyalty strategy. Let’s say you’re willing to offer your customers extremely generous rewards, but don’t tell them you’re running a program. Burying your rewards information on only one or two pages of your website is almost as bad as not following through on rewards because the end result remains the same - a rewards program with little to no engagement. Customers can’t use a program they can’t find, so make sure you promote your rewards program loud and proud to let your customers know you’re behind it 100%.
Making a rewards accessible means you need to make it easy to find. Explainer pages, navigation links, and on-page launchers are a few ways you can do this, but regardless of the method you choose the fact remains that visibility is the key to effectiveness.
This, then, is the Golden Rule of Rewards:
With only 8% of your customers bringing in 40% of your revenue, there’s not denying that your program needs to be engaging and rewarding to find true success. Therefore, if you want to run a truly effective rewards program, you need to redefine your loyalty strategy by putting value for your customers first. This means making low barrier redemption processes accessible, taking them from behind closed doors to the most visible areas of your site.
By making these changes, you will not only increase your program’s engagement but will also help improve other redemption metrics along the way. Who wouldn’t want that?
Develop a Loyalty Strategy That Works
When it comes to running a rewards program, you need to understand who your customers are, what they value, and how best to deliver that value to them. This knowledge comes from a clear understanding of what a loyalty program is, why it’s effective, and how to put that information into practice.
By building your program around a value cycle that successfully motivates your customers through clear communication and follow through, you can set your loyalty strategy up to be visible, profitable, and ultimately valuable. These things, when combined, will elevate your customer experience to a level that puts customer satisfaction at the forefront of your business, which is something any customer can get behind.
With these ideas guiding and improving your business model, it’s clear that a rewards program isn’t simply a tool - it’s a way of thinking. So change the way you look at your rewards program, and who knows? You just might start seeing the types of results you’ve been seeking.