Customer Incentives and Loyalty Programs

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Here we discuss various types of customer incentives and rewards, the benefits and risks involved, and provide tips for building customer loyalty

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Nearly every business presents a customer incentive or retention program, whether a loyalty program, a referral discount or simply a free coffee after ten purchases. But what are these businesses trying to achieve? The answer is loyalty and commitment from their customers, and a small gesture can go a long way in making customers feel appreciated.

Incentives are a powerful marketing tool because they offer consumers a tangible reason to maintain their loyalty to a particular brand or product.

In the short term, customer incentives can result in an immediate boost in sales as customers take advantage of the discount or bonus on offer. However, the real value of customer incentives lies in their ability to foster long-term loyalty and commitment. By encouraging customers to continue doing business with a particular company, customer incentives help to create a loyal customer base that is essential for sustainable growth.

What's the difference between customer incentives and loyalty programs?

Customer incentives are a form of marketing that aims to deliver sales growth and increase brand reach by offering perks, discounts or rewards to customers who achieve a particular purchase target or perform another action that benefits your brand. Consumer incentives can be an effective way to boost sales, drive growth and increase customer satisfaction, but they must be well-designed and carefully targeted to the right audience.

Loyalty programs are a retention strategy designed to reward existing customers for their continued interactions with your brand and incentivize shoppers to choose your products or services over your rivals. It costs between five and 25 times more to attract new customers than to keep existing ones, according to the recent report from Harvard Business Review, so it's essential to keep this in mind when deciding where to focus your marketing resources.

Types of Customer Incentives

Businesses can offer a variety of consumer incentives to encourage customers to purchase their products or services. Common incentives include:

Discounts on products or services. Price reductions can be on specific products offered to all consumers, deals provided to first-time customers, or discounts offered to inactive customers to entice them to return to a brand.

Free samples can help promote a new product, create a talking point, and build brand awareness. Free samples also draw in hesitant buyers by mitigating any risk (removing the fear that they may invest and then not like the product) and encouraging existing customers to try more of a product range. Wherever possible, free samples should relate to the customer's consumer interests.

Gift with purchase. The gift could be an item selected by the customer, up to a specific value, as a reward for spending over a set amount, or a standardized gift with purchase.

Remember to set a realistic spending target for your customers to reach, and make sure the gift is something your customers will want. A goody bag filled with product samples, travel-sized versions of their favourite products, or a chance to try a new product before it hits the shelves are great ways to incentivize shoppers to spend a little more to qualify for a reward.

Free shipping is the mecca of e-commerce incentives. Studies have shown that free shipping is one of the most effective ways to increase sales and conversion rates. On average, shoppers are willing to spend an additional 20% on their order if they don't have to pay for shipping. Furthermore, free shipping can also help to build customer loyalty, as it encourages shoppers to return to a site that offers this perk. 60% of shoppers say they would be more likely to shop with a retailer again if they offer free shipping. It's no wonder that free shipping has become such a successful marketing strategy.

Rewards for written reviews. Consumers read product reviews online before trying a new product or brand, especially on big-ticket items. Unfortunately, it's much less common for consumers to write product reviews actively. You can stimulate written reviews by including an incentive in your post-purchase emails; this could be a % discount or free shipping on their next purchase, or even the promise to donate on their behalf to a local charity.

Referral programs help to incentivize your customers to spread the word about your business to their friends and family. Obtaining referrals can be an effective way to grow a business, as it harnesses the power of word-of-mouth marketing. It's vital to offer an incentive that is significant enough to motivate people to make the referral at a cost that doesn't outweigh the benefit. The reward could be a discount, a free product or service, or to go in the draw for a larger prize. The referral process should be easy to follow, with clear instructions on referring friends and redeeming rewards.

Incentives like these foster loyalty and commitment by making customers feel valued, and that's good for business.

Types of Loyalty Programs

Points-based rewards. With a points-based loyalty program, customers earn points for every purchase and can redeem the points for discounts, gifts, merchandise or credit towards their next purchase. Points-based loyalty programs offer a high degree of customization, making them ideal for meeting business goals and the needs of each customer. Businesses can also award points for non-purchase activities such as leaving a review or sharing their customer experience on social media.

Tiered loyalty. Under a tiered loyalty program, customers are grouped based on how much they spend, usually over a set period. The higher the tier, the more benefits and rewards the customer receives. This approach encourages customers to keep spending more money with a company to reach the next tier and receive additional benefits. Benefits could include free shipping, exclusive coupons and discounts, early access to new products, or invites to VIP events, depending on their tier level.

Value loyalty. A value-based loyalty program intends to connect customers with a charity or organization whose values align closely with the consumer base. Customers can feel good about their purchases when they can redeem their rewards for charitable donations or when a percentage of their purchase goes to a particular charity. Aligning your brand with a charitable organization whose values are shared by your customers will positively impact customer loyalty.

Paid loyalty. Instead of having customers earn rewards through purchases, they can pay a monthly or annual membership fee to receive immediate and ongoing benefits. In exchange for their loyalty, members typically receive exclusive discounts, first access to new products, and other special perks which save them money and allow them to enjoy VIP treatment. Paid membership programs are standard in the retail, travel, and entertainment industries.

What are the Benefits?

Data collection

Customer incentives and loyalty programs are immensely valuable for collecting 1st party customer data. Customers are encouraged to interact more with the brand, often providing more information than they would have otherwise in exchange for the benefits they seek. This data can deliver a better understanding of customer behaviour and preferences, which helps inform strategic decisions about marketing, sales, and future product development.

Competitive Edge and Customer Retention

Your target audience will always have multiple options when looking to make a purchase, so by offering a discount, incentive, or reward that your competitors are not, you give your company the upper hand. A well-delivered loyalty program will ensure continued brand engagement, so your brand stays top of mind for future purchases.

Increased customer spending

Tier-based loyalty programs motivate customers to spend more to reach the next tier and earn more rewards, and in general, 56% of consumers say they would spend more on a brand they are loyal to, even if cheaper options exist.

Building stronger connections with customers

Offering customer incentives shows an appreciation for customers and reminds them that they are valued. A loyalty program can give customers a sense of investment in the company and make them feel appreciated for their business.

Fostering loyalty and commitment to your brand

By offering a great deal on your products or services, you can create a positive association with your brand that customers will remember the next time they need what you are selling. They are a powerful marketing tool, helping spread the word about your brand and building customer loyalty.

Instilling feelings of community and identification

Incentives can help create a sense of exclusivity, community and belonging among customers, further reinforcing their loyalty and the likelihood that they'll recommend the business to others. A feeling of belonging to a brand can be the difference between someone returning for repeat business or taking their business elsewhere.

What are the Risks?

Time Investment
A loyalty program is a great way to build customer relationships and keep them coming back, but it's essential to understand that it's a long-term commitment. It takes time to establish trust and rapport with customers, so a loyalty program should be treated as an investment in the future of your business. While there may be some immediate benefits, such as increased sales and more repeat customers, the true value of a loyalty program will be seen over the course of years. Regular reviews are necessary to determine whether the rewards on offer connect to the target audience and deliver a reasonable ROI.

Resource hungry
Each business must consider what financial and human resources they can commit to running customer incentives or loyalty programs. Running customer incentives requires a constant flow of new ideas and marketing deliverables to keep attracting customers. Loyalty programs require POS and e-commerce software to track customer spending, rewards & redemptions, customer tier/categorization data, etc. Staff may need training on how to oversee and promote loyalty programs during customer interactions and handling customer support enquiries over the program's lifetime.

Careful consideration should be given to the type of incentives on offer, ensuring that they apply to the business and the target audience to avoid overcommitting or wasting marketing resources.

Damaging Discounts
When hefty product discounts are repeatedly made available, customers may believe that the full-priced product has been over-priced and become incentivized to only shop when sales/discounts are available. Businesses should consider who their target audience is, where their product/brand sits in the market, and avoid repetitive discounts that only attract a bargain-driven audience.

Not everyone is receptive to customer incentives
Businesses need to be aware that not all customers will be receptive to incentives or rewards. Some customers may be apathetic and see no value in participating in a loyalty program, while others may be detractors who actively avoid anything that smacks of marketing or advertising. Businesses need to be aware of these different customer types and tailor their approach accordingly to ensure that all customers feel valued.

Must offer actual value
Whatever incentive or reward, it must provide genuine value and be relevant to the target audience to avoid damaging the customer relationship or the business reputation. If the promotion reeks of sales-motivated jargon or offers cheap/undesirable rewards, customers may see this as a reflection of how little the company values their business and loyalty. Businesses should deliver customer rewards in a way that reinforces strong customer connections and becomes an exciting part of the overall customer journey.

How to know which incentives or loyalty program best suits your audience

Consider how you currently communicate with your existing customers; social media, email marketing, phone, industry events, print and media, or face-to-face engagements; choose incentives or rewards that will be effective through those channels.

Secondly, know your audience. Completing a customer analysis and segmentation process before planning out your customer incentives and loyalty programs allows for personalized targeting of your high-value customers. Consider what type of rewards or incentives will resonate with the most profitable segments of your audience and what type of customers you are trying to attract.

By taking the time to consider these factors, you can ensure that your rewards will be a hit with your target audience.

Top Tips for Success

Loyalty programs should have a simple and easy-to-understand structure and a clear path to redeeming rewards to avoid frustrating customers or having them opt out.

Customers need to easily view and track their status, progress, and rewards, whether through regular email updates, an online portal, or a personalized app.

Staying consistent on the reward offering throughout the program's lifetime is essential. For example, never devalue points (e.g., If $1 spent = 1 point earned, that should remain consistent), prizes promised must be delivered, and "goal posts" on tiered loyalty programs should not shift to make top tiers harder to reach.

Any successful incentive or loyalty program starts with a good plan. Creating a program that meets your business needs and achieves your desired results can be difficult without a clear goal and strategy. Moreover, a lack of planning can result in program participants becoming frustrated and disengaged. Furthermore, it can be challenging to assess the success of a program without careful planning. By taking the time to develop a comprehensive plan, you can increase the chances of creating a successful incentive or loyalty program that meets your objectives and delivers lasting benefits.

Any incentive or loyalty program is only as successful as its advertising. If potential participants are unaware of the program, they cannot take advantage of it. Promotion helps to build excitement and anticipation for the program, which can encourage more people to participate.

By taking the time to understand your audience, putting together a well-rounded incentive or loyalty program, providing excellent customer service, and consistently delivering on promises, you can increase customer satisfaction and retention while boosting your bottom line.

AudienceZen can help give you a deeper understanding of your audience and provide detailed guidance on the best way to market to them. Register Today