Why Loyalty Programs Are a Necessity, Not a Luxury

Introduction

So let’s cut to the chase - we may be a tiny bit biased, but facts are facts: if you don’t have a loyalty program in 2024, you’re risking some serious business. 

Loyalty programs have been positioned as a marketing “luxury” since forever. Especially if we’re talking about the loyalty stamp cards (I have like, the 7th one in my wallet for my favorite coffee place, no judgment) or traditional earn and burn models. 

But the concept of loyalty is so simple yet so effective. Once I became a regular at the coffee place, it’s more cost-efficient for the owner to make sure I come back every day for my coffee dose than to count on a new customer coming in instead of me. 

More so, if I formed this relationship of going back to the coffee shop every morning, I’ll probably also grab breakfast while at it. In other words, it’s way easier to upsell and make more money out of my daily 5 minute trip.

All of this is not new information, especially to people who work in e-commerce and retail and care about acquiring new customers and retaining existing ones. 

But the never ending debate is - is a loyalty strategy actually crucial to a business? Or is it just a nice-to-have, I’ll-think-about-it-later marketing fad? 

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A Quick Look at The Stats

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• Loyalty Programs can boost revenue by 18%-13%. 
• 52% of customers make extra efforts to buy from brands they’re loyal to. 
• Increasing customer loyalty increases the CLTV of each customer by 85%. 
• 56% of customers would rather buy from a brand they’re loyal to, even if it’s more expensive
• Increasing customer retention by 5% can increase profits from 25-95%.
• The success rate of selling to a customer you already have is 60-70%, while the success rate of selling to a new customer is 5-20%. 
• It’s 5-10x more expensive to acquire a new customer than to retain an existing one. 
• Loyal customers spend 67% more than newly acquired customers. 
• Loyalty programs can boost annual revenue by 15-25% by enhancing purchase frequency and basket value. 

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Higher Order Value and Purchase Frequency

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Now for the money! Loyalty programs are all about motivating customers to make more purchases and spend more per transaction. 

McKinsey's research highlights that top-performing loyalty programs can boost annual revenue by 15-25% by enhancing purchase frequency and basket value. 

Additionally, loyalty programs can raise the Average Order Value (AOV) by rewarding customers based on their total spend.

Nordstrom’s The Nordy Club, for example, provides more points per dollar spent during ‘bonus points events,’ prompting customers to spend more per transaction. When it comes to increasing purchase frequency, loyalty programs can trigger a purchase need by offering discounts on favorite products or by shifting sales from competitors.

To increase purchase frequency in a loyalty program, you can employ two strategies:

1. Trigger Purchase Needs: Offer discounts on customers' favorite products to encourage them to return for their next visit.

2. Capture Competitor Sales: If a customer buys a product three times a month, but only twice from you, use the loyalty program to entice them to make the third purchase from your business, thereby increasing your share of their purchases.

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Increased CLTV

Acquiring a new customer is five times more expensive than retaining an existing one. Loyalty experts claim that it costs between $500-1000 more to get a new customer in, while it only costs about $50-100$ to keep a customer. 

So what do loyalty programs have to do with it? 

A great loyalty program increases CLTV and decreases CAC (Customer Acquisition Costs) which can sometimes reach up to $2000 per customer. CLTV (Customer Lifetime Value) is how much your customer will spend on your business - so since loyalty programs are designed to increase repeat purchases and basket size, naturally they also increase CLTV.

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Cost Optimization

Furthermore, marketing to existing customers through loyalty programs (for example, when the barista tells me I get a 15% discount if I order a croissant with my coffee) is way more effective than traditional advertising methods aimed at new customers (if I see a sign on the road saying I get a discount at a coffee shop I never tried before, will I actually go for it?). 

Loyalty programs might seem like you’re spending more on rewards, but it’s actually the opposite. Think of it as investing into your customer base now so they can provide even more later. It’s the perfect win-win situation.

Imagine having 100% loyal customers making predictable purchases—this would allow you to forecast and minimize unnecessary expenses, focusing only on essential costs related to production, orders, deliveries, and inventory. 

Having even half of your customer base loyal provides valuable insights into their purchasing behavior, unlike unpredictable disloyal buyers. 

Additionally, loyalty programs help with team management by identifying sales peaks and adjusting employee schedules accordingly, ensuring customers are well-served without overworking staff. As your loyalty program grows, so do your costs, but this increase is often offset by the revenue growth it drives. In summary, a loyalty program refines your sales and business model, optimizing costs and satisfying stakeholders.

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Competitive Advantage and Differentiation

A great loyalty program can be a cornerstone of a brand's competitive advantage and attract new customers - giving your business an edge and helping it acquire and retain customers in a crowded marketplace .

Today's insatiable shoppers can easily compare hundreds of prices online with just a few clicks. If your customers are focused solely on your products rather than your brand, you'll be drawn into a price war that larger stores like Amazon will win. One of the biggest advantages of customer loyalty programs is that they help you avoid competing solely on price. By connecting with your customers' emotions, you can differentiate your store and brand, offering a more personal and enhanced customer experience.

Studies show that purchasing decisions are highly emotional, especially for products bought out of desire rather than necessity. Loyalty programs are a highly effective way to surprise and delight customers, rewarding them for their loyalty and appealing to their emotional side. Each reward helps build a bond, transforming your brand into more than just a range of products.

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Data Enrichment

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One of the no-brainers on why loyalty programs are so essential is that they’re basically a system for collecting valuable data about your customers, enabling you to learn more about them and create more customized offerings, ultimately driving more sales.

Loyalty programs provide you with two main databases that create a comprehensive view of your customer. The first is behavior and sales data, where you know the customer’s purchase behavior and what product/services they’re most interested in, and the loyalty preference data, where you find out how customers like to be rewarded and how they redeem their points. Having both these types of data at hand, you are now prepared to do more detailed customer segmentation that’s armed with behavior and loyalty preference data. 

In cases where you want specific data from customers, whether it’s their birthday or their feedback on your store,you can also reward them in exchange for valuable data.

A PwC report shows that 82% of customers would share personal information for a better experience, highlighting the power of customer knowledge. Positive customer experiences enhance word-of-mouth marketing, with 74% of people citing it as a major purchasing factor. Aligning loyalty rewards with the overall customer experience and integrating them into every touchpoint ensures customers remember the unique benefits of your loyalty program, leaving a lasting positive impression.

This is also helpful in creating sales processes, planning strategic partnerships, and optimizing sales and post-sales processes. 

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Customer Retention

Acquiring a new customer is exciting, but retaining existing customers is far more rewarding and cost-efficient - and leads to a steady revenue stream you can trust. 

The goal of any great loyalty program is to eventually make sure your “occasional” customers now stick around forever, and you don’t lose them to anything or anyone else.  Loyalty and Retention are basically two sides of the same coin. 

While earning customer loyalty requires time, effort, and investment, happy customers serve as brand ambassadors, making retention a crucial KPI for all businesses.

Customer retention also leads to higher revenues - loyal customers spend 67% more on average than newly acquired ones.

So if you’re losing customers, you’re missing out on an opportunity to maximize value with as little cost as possible. 

Economic Resilience

Whenever the economy is not doing so well (which, let’s face it, seems to be happening a lot in our time), loyalty programs help maintain stability by encouraging existing customers to continue purchasing, even when their overall purchasing behavior says otherwise. 

By consistently rewarding customers with rewards that feel personalized to them, customers feel more valued even when times are challenging, with over a half of consumers turning to loyalty programs as a way to make more out of their money spent.‍

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Conclusion

In this day and age, having a loyalty program is definitely not a luxury, but a marketing and retention cornerstone. 

D2C businesses everywhere, especially digital-first businesses, have an incredible opportunity at creating lifetime value for their business that stands against the tests of time. 

So if you’ve been thinking about competition, revenue, word-of-mouth, churn rates, resilience recently….what are you still thinking about? 

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