What are Loyalty Programs?
Loyalty programs are also known as, rewards programs increase retention, purchase frequency, lifetime customer value, and referrals. Loyalty programs provide powerful motivation for buyers to create accounts, come back, and spend more. Even better, they build meaningful connections.
How do Loyalty Programs work?
Loyalty schemes borrow elements from psychology, behavioral economics, and game design. They transition the focus from percentage off, points earned, and sign-up bonuses to more experiential rewards like interest-aligned gifts, surprise upgrades, or exclusivity-based milestones.
The points-based reward system is based on a simple principle: the more you spend, the more points you get in return. Every time a customer purchases on the company website, they get a certain amount of reward points depending on how much they spent.
Loyal customers who buy repeatedly are more profitable than ones that buy once. Because repeat customers have a higher lifetime value, the business can predict a high return on investment throughout a customer’s projected buying time with the brand.
For instance, if a company spends $5 to earn a customer and it knows that throughout that customer’s lifetime with the brand, they will likely spend about $100, that’s a great lifetime value to churn (or cost to acquire a customer) ratio (LTV to CAC).
Benefits of Loyalty Programs
Customer loyalty refers to a customer’s willingness to work with or buy from a brand repeatedly due to positive customer experience, satisfaction, and the value the customer gets from the transaction.
1. A customer loyalty program helps push customer loyalty by providing rewards to customers that frequently patronize the business’ products and services.
2. Online retailers operating in a niche with price-sensitive customers are ideal candidates for a loyalty program. Price-sensitive customers respond better to rewards than customers in big-ticket or luxury markets where the price is not an important factor.
3. Online businesses operating in markets with several competitors are ideal candidates for a loyalty program. These retailers see the greatest benefit from loyalty programs since they are at the greatest risk of losing customers to competitors. A loyalty program may also help a business stand out amongst the competition, giving the company an upper hand and appearing more customer-centric than other brands.
4. The biggest advantage of a loyalty program is that it can align a brand’s entire business toward the most profitable segment of the customer base. This means that the company will begin catering more to customers who have high repeat purchases or average order value (AOV) – depending on what type of loyalty program it implements.
Over time, a business can use the data collected from a loyalty program to figure out ways to make the least profitable customers more profitable, increasing its customer lifetime value, and thus company revenue and overall projected profitability.
