5 Types of Retail Loyalty Programs That Make Money and Retain Customers
Retail customers aren’t all the same: some are fairweather friends. These intermittent visitors only drop by when the time is right. Their purchases can be small and unpredictable. The patronage of such customers just isn’t worth as much to your average retail brick and mortar store. And it costs five times more to acquire them. (Research: National Law Review).
But there’s a different type of retail customer whose visits are worth gold. Truly loyal retail customers are money-generating metronomes — their patronage can be counted on, day after day, season after season. When loyal customers keep coming back to your business, it means that less time and money is needed to attract new customers. It also means higher sales, as their purchases are actually worth more than a purchase from a one-time buyer. In fact, highly-engaged customers spend 60% more per transaction and buy 90% more often than less engaged customers (Research: Customer Loyalty in the Time of Covid).
How do you turn a fairweather flyer into a steady metronome?
There are a variety of answers. Many different types of loyalty programs have emerged over the years, responding to evolving consumer expectations and tailoring rewards to match individual preferences. The programs vary in how loyalty is measured, what kind of rewards are offered, up-front costs, and customer loyalty software. Over the years of SnowShoe’s leadership in loyalty hardware, we’ve looked at a lot of loyalty programs. We’ve learned what distinguishes each type of loyalty program. We know loyalty.
Let’s be honest — there is no one loyalty program to rule them all. Instead, there is usually a best fit between a certain type of program and a certain type of business.
In this article, we’ll outline the following details about loyalty programs:
- Structure: The basic format behind all loyalty programs
- Types: Different types of loyalty programs
- Examples: Samples of which businesses fit each program type
- Measuring Effectiveness: How to measure the effectiveness of your program
Structure of Loyalty Programs
Retail loyalty programs are a marketing tactic. Other tactics with similar outcomes include coupons, holiday sales, and paid advertising. The end goal of a loyalty program is to increase profits: it is important to keep this in mind when it comes time to evaluate the effectiveness of your program. Although making your customers feel good and creating positive associations with your business are worthwhile benefits, ultimately you want to show that your program produced a net profit and increased sales.
The strategy behind a loyalty program is to encourage repeat business from current customers by offering them incentives to buy again. You’re turning a fairweather friend into a lifelong companion. Loyalty incentives usually come in one of two forms—discounts or perks. It’s important that you know your customers’ values and then choose the incentive that is most motivating to them.
- Discounts: Your customers value saving money. They are motivated by price.
- Perks: Your customers value getting more for what they paid. They are motivated by quality, experience and exclusivity.
Overall, customer loyalty programs are about making it easier for your customer to choose coming back to you rather than going somewhere else. Successful programs reduce barriers and increase incentives for consumers.
5 Types of Customer Loyalty Programs
1) Points Programs
A basic points system is the simplest and most straight-forward type of program. In short, for every dollar a customer spends, they receive a certain amount of points in return. These points accumulate until the customer is able to redeem them for a reward. For the most part, the number of points received per dollar is fixed and does not change between customers or purchases.
The North Face’s VIPeak Rewards is a good example of a basic points retail loyalty program. Customers sign up for free and immediately receive points with their next purchase. Shoppers earn 10 Points for every $1 dollar spent at retail stores and thenorthface.com, and 5 Points are earned for every $1 spent at outlet stores. Rewards are issued three times per year in the form of store credit. The amount of credit is based on the number of points accumulated: 2,000 points earns $20, 3,500 points earns $25, and 5,000 points earns $30. VIPeak members also get instant access to a 10% discount on their first online order, first access to limited-edition products, and member-only sales.
This type of program works best for: Businesses frequented by local customers, such as coffee shops, boutique retail and gift shops, and independent hardware stores.
2) Stepped Points Programs
Stepped points begin to add a weighted system to a loyalty program. The weighted system can be used to encourage certain behaviors as well as tap into the exclusivity factor desired by many consumers. Let’s look at two examples of stepped points programs:
Starbucks® Rewards is a very popular rewards program given our society’s love for coffee. The program is free to join either via the company’s website or app (the latter option being strongly pushed in the program’s messaging). In this case, points are called stars, and customers earn one, two or three stars per dollar spent depending on the method of payment. Paying with cash or card earns one star per dollar. Using a preloaded digital Starbucks Card on the app earns two stars per dollar. And paying with the Starbucks Rewards Visa Card earns up to three stars per dollar spent. Clearly, Starbucks is trying to encourage usage of the app or Starbucks credit card over the use of cash or other card.
Another example is DSW’s VIP Club, which uses a stepped rewards system to make their most loyal customers feel important, appreciated, and valued. When shoppers sign up for the VIP Club, they start by earning one point for every $1 spent. Once 100 points are earned, shoppers receive a $5 Reward. Club members also get free shipping, $5 off a purchase during their birthday month, and 50 points for every pair of shoes donated. When a shopper spends $200 in a calendar year, they automatically move up to VIP Gold status and receive additional benefits, such as first access to exclusive inventory, gifts for friends, and two double points days. A $500 annual spend bumps the shopper up to VIP Elite status, earning two points per dollar spent and receiving rewards twice as fast. Elite members also receive one triple points day and unlimited free returns in store and online.
This type of program works best for: National brands with many locations working to increase individual customer spends, such as clothing and restaurant chains.
3) Pay to Play Programs
If your first thought was, “Who would pay an upfront fee when there are so many free rewards programs?”, you’re not alone. But if you start to take inventory of your rewards memberships, you may discover upfront fees are pretty common, from annual fees for airline mile credit cards to your Amazon Prime membership.
Let’s look at Barnes & Noble’s B&N Membership. In order to be a member of this loyalty program, customers pay a $25 annual fee, which automatically renews each year. Upon signing up, members receive a Sign-Up Bonus of 20% off their first purchase. Members also receive free shipping on all orders with no minimum purchase required, 40% off Hardcover Bestsellers and 10% off all purchases in stores. Additional benefits include early access to special sales prices and events, a special birthday offer, and 10% off Noon devices and accessories.
This type of program is best for: Businesses selling items used by consumers on a regular basis and aiming to increase customer frequency, such as bookstores, homegoods and pet supply stores.
4) Partner Programs
Some companies choose to partner with each other to reward their mutual customers and encourage repeat business within the network. A partner program can be a great way of introducing your brand to a new group of potential customers with the endorsement of a brand that they already trust. One of the largest partner programs is the AAA Membership. There is an up-front cost that varies by market, and this provides you with coverage for roadside assistance, towing, and other automobile-related services. In addition, members receive discounts and rewards with dozens of other brands for everyday home and travel expenses. AAA members automatically save at more than 100,000 online and store locations across the country, including with brands such as 1-800-FLOWERS, Hard Rock Café, and Samsung.
This type of program is best for: Brands with multiple locations across the country, or for stores which are located nearby one another. It is also a great option for brands that offer products which tend to be purchased together, such as peanut butter and jelly.
5) Referral Programs
Many brands which are household names today used referral programs when they were just starting out. PayPal, Uber, and AirBnB all used referral programs to generate initial buzz about their companies in their first years of business. Let’s look at the AirBnB Referral Program which the company ended in February 2021. AirBnB Members were able to earn thousands of dollars’ worth of Travel Credits if they sent a referral link to a friend who in turn created an account and made a reservation. Referral links could be shared via email, text message, and, of course, via the almighty social media. AirBnB even used specialized API to determine which friends in a member’s network would be most likely to use a referral link, and the company would then suggest sending a link to this particular list of friends.
Measuring the Effectiveness of your Loyalty Program
As previously mentioned, retail loyalty programs are a marketing tactic, and the point of marketing is to produce an increased profit after marketing expenses are factored in. Therefore, it’s important to track not only the expenses of your program, but also the revenue associated with your program. This revenue may come in the form of overall sales or in the value of individual loyal customers.
There are many metrics you can use to measure your program’s success. For example:
- Purchase Frequency: Are members of your loyalty program shopping more frequently than non-members? Are you able to maintain or increase the shopping frequency of individual loyalty program members or of this group as a whole?
- Transaction Amount: Are loyalty program members spending more per transaction than non-members, and are member transaction amounts holding steady or increasing?
- Customer Retention Rate: What percentage of shoppers in a given period of time are returning customers, and has this percentage changed since implementing your loyalty program?
- Customer Lifetime Value: Looking at historical data, how much have your loyal customers spent with you in total, and how does this compare with the spending total of your non-loyal customers?
Other Metrics to Consider:
- Redemption Rate: How often and what amount of rewards are being redeemed by loyalty program members? A low redemption rate could suggest that the type of reward offered is not desirable to your customers or that there are too many obstacles for customers to earn points and redeem rewards.
- Participation Rate: How many enrolled members are actively earning points and using benefits of the program? If you have a low participation rate, try increasing communications with your members about the benefits of your program and how easy it is to earn rewards.
Ready to invest in your own customer loyalty program?
As with all marketing efforts, introducing or updating a loyalty program for your retail business can require some up-front monetary and time investments. Although this means adding new tasks to the list of day-to-day items required just to keep your business running, retail loyalty programs are well worth the investment in the long run.
Loyal customers are where the biggest profit margins and the greatest opportunities for growth lie. Large and small companies alike make room in their budgets to invest in customer loyalty programs and software that encourage and reward loyal customers—and these programs pay off in multiple ways. Not only does a loyal shopper spend more at the register, it also costs less to retain that person as a customer than it does to acquire a new one. As a bonus, loyal customers tend to be good brand ambassadors, recommending your business to friends and passing on hot tips about new inventory and weekend sales.
SnowShoe understands just how important loyalty is to small business and retailers, which is why we focus on customer loyalty solutions to fit a range of needs. SnowShoe has deployed more than 30,000 unique location verification products around the world, and more than 25 million events have been recorded on our mobile loyalty solutions to date.
If you’re ready to learn more about how SnowShoe solutions can help you retain customers and increase profits, visit snow.sh/start to get started.