Loyalty programs are a potentially effective method to encourage repeat customers and reduce marketing spend. Consumers get rewarded for their continual business, while retailers can work on improving retention and package it in a way that shows they care about their customers. A recent industry study found that consumers in the U.S. hold 3.3 billion memberships in at least one rewards program in 2014, a 26 percent year-over-year increase.
There is undoubtedly an opportunity for ecommerce businesses to benefit from loyalty programs, but an oversaturated market requires precise strategy and careful analysis.
Determining the cost and net gain from a loyalty program is a tricky process, dependent on the structure and incentives of a given program. Finance firm PWC suggests a simple formula to evaluate the performance of a loyalty program: incremental revenues subtracted by incremental costs.
Incremental revenues include:
Incremental costs include:
Some of these metrics — such as referral rates — are very difficult to track. In addition to the more specific methods above, overall business performance metrics should be included in the loyalty program conversation. Social shares, direct website visits and backlinks are indicative of happy customers who are spreading the word, some of which can become full-fledged brand ambassadors. Also pay attention to customer reviews — these can be directly linked to an effective loyalty program that pleases shoppers.
If you're weighing the pros and cons of launching a loyalty program, propose the following benefits to the primary decision maker.
There is no uniform solution for building the perfect loyalty program, but the following best practices will help it resonate with customers.