A customer loyalty program can increase customer retention.
Your most valuable customers are your loyal customers, and loyalty programs can show your appreciation and boost retention. — Getty Images/andresr

It’s one of the most cited statistics in the business playbook: 80% of your venture’s profit will come from 20% of your existing customers. Loyal customers are your most valuable customers, which is why many small business owners go above and beyond to incentivize their customers to return time after time. A loyalty program can improve customer retention, bring in more positive customer reviews, and build the kind of brand loyalty that can help you sustain the business through a recession. Here’s how to set up and run an effective customer loyalty program.

[Read more: Customer Loyalty: What’s Love Got to Do With It? A Lot]

Design your program around a goal

What’s the customer behavior you wish to incentivize? Design your loyalty program to reward your customers for taking a specific action. For instance, if they visit your cafe for a coffee four times a month, the fifth coffee is free. This encourages more frequent visits, bringing in foot traffic and increasing sales.

Here are the main goals your loyalty program might help you accomplish:

  • Increased spend: Make each transaction more profitable.
  • Frequent visits: Encourage customers to make a purchase more often.
  • Market research: Use your loyalty program to learn purchasing habits, solicit feedback, and test new products.

There’s a fairly easy way to determine which of these goals is most helpful to your business. If your venture is a low-ticket business, such as an ice cream parlor or a cafe, choose to incentivize frequent visits. If your business is a boutique or another place with more high-ticket items, use your program to encourage higher spend.

Points vs. perks: Choosing a structure

There are a few ways to structure your loyalty rewards:

  • Punch card: Great for businesses trying to encourage frequent visits, the punch card is a simple, low-cost way to reward loyal customers. The downside, however, is that you rely on customers to remember and keep track of their cards, and you aren’t collecting any meaningful data in the process.

  • Points program: Like the airline miles loyalty program, a points program rewards customers based on their spending behavior. It’s simple and scalable, meaning you can set rewards on different tiers based on how much a customer spends. However, there’s no instant gratification for customers, and the program can be time- and resource-intensive to keep track of.

  • Cash back: Customers will earn money back from previous purchases that can be used toward future transactions (discounting purchases made in the future). This both incentivizes a future visit and higher spend, but customers may resent delayed gratification and it can be expensive to build and implement this type of program.

  • Sign-up rewards: Reward customers for opting in to your marketing program—for instance, signing up for an app or an email newsletter, or following you on social media. This is best used for gathering data about your customers, but not necessarily for incentivizing purchase behavior.

There are plenty of tools and platforms that can help you set up any one of these options. But perhaps the most important step is the next one: figuring out what rewards to offer.

Many business owners shy away from offering rewards for fear they will cut into the business’s bottom line.

Choosing the best reward for your business

It can be tricky to decide what incentive or reward will be most effective at pleasing a customer without hurting your profit margin. There are a few best practices to bear in mind. First, recognize that not all loyal customers are equally loyal. “In order to maximize loyalty and profitability, a company must give its best value to its best customers,” wrote Harvard Business Review.

It’s also helpful to keep in mind the longevity of the behavior you’re trying to incentivize. One-time promotions can be expensive and don’t, as a rule, generate loyalty. A buy one, get one free deal can change customer behavior once, but won’t encourage the same positive behavior to be repeated over time. Look for ways to incentivize sustainable loyalty: a shift in shopping behavior that creates value over time.

Many business owners shy away from offering rewards for fear they will cut into the business’s bottom line. But keep in mind that these are your most loyal customers: They deserve a little preferential treatment.

Make it appeal to the customer

If you want people to sign up, according to research from Clover:

  • 73% of consumers said rewards must be relevant.
  • 68% said rewards must be easy to redeem.
  • 55% said the program must be easy to understand and use.

In fact, other studies have shown that customers value five things when assessing loyalty programs. These things are cash value, choice of redemption options, aspirational value, relevance, and convenience. There aren’t many programs that can offer all five elements, but make sure to include at least a few in your program design.

If you’re using a punch card system, the simplest solution is to offer the item you sell most as a reward. “If you’d really like to treat your best customers, offer a bonus after they hit multiple multiples of however many you’re requiring for redemption — if it’s the 10th free, at 30th offer two free, at the 50th, pay their whole ticket (within reason),” wrote one expert.

For those using a points system, make the reward more meaningful. Customers who spend more with you will be looking for value. Offer a coveted product, significant discount or access to an exclusive event, or use your loyalty program as a cross-sell opportunity. Make it worth the customers’ while to continually accumulate points.

Keep it simple

Market your rewards program at checkout, through social media, and in your email newsletter. Promote all the benefits of joining, showcasing why it pays to be a superfan of your brand. For instance, consider adding a points ticker in the online checkout process to show customers how many points they can earn each time they shop.

Once you’ve raised awareness, make it easy for your customers to participate in your rewards program. Provide plenty of opportunities to sign up and start earning rewards: online, via email, in store, or at partnering businesses. Sign-up should be relatively straightforward. Only ask for the information you really need to accomplish your goals (e.g., a customers name, email, and phone number). The less information someone needs to submit in order to join, the easier it will be for them to say yes.

Have the right tools

There are plenty of apps and platforms that make it easy to integrate a loyalty program with your existing POS and marketing suite. Belly and Fivestars are just a few options for small businesses looking to easily add a loyalty program. Clover POS includes a loyalty program add-on, as does Square. Make sure whatever program you choose, digital or offline, is within your budget, is simple to implement, and provides a great customer experience.

[Read more: 3 Expert Strategies to Encourage Positive Customer Reviews]

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