For ages, customer loyalty programs meant you got a little punch card to tally your purchases so you could eventually be awarded with a free coffee, car wash or sandwich.
In the early 1980s, American Airlines decided it wanted to take the idea of nurturing its customer base a big step forward and give fliers something extra special. The airline created the first frequent flyer programs that allowed travelers to accrue miles for future flights — as long as they kept flying with American Airlines, of course.
The program was one of the first widely accepted customer loyalty programs in the country, and it set up a framework that became a standard not just for the entire industry, but also for what customers expect from airlines.
Today, customers are accustomed to seeing rewards in myriad forms at businesses large and small. Popular examples include special coupon discounts from grocery stores, Amazon's Prime program, Zappos VIP membership, and numerous discount cards at retailers like Aeropostale and Barnes and Noble. Your credit card also probably offers you some payback the more you spend.
Companies spend more than $2 billion on loyalty programs a year, and statistics show the average American household belongs to about 14 different rewards programs, even if they're only active in six.
"They want to protect the customer relationship," says Chris Cottle, vice president of marketing and products at Allegiance, which has provided customer feedback services to 1-800-CONTACTS and several banks, and is based in South Jordan, Utah. "It's so easy for customers who are price-sensitive to slip away or go to a competitor. One of the ways you can make your customer relationship more sticky is through a well-planned and well-executed reward program."
Today, companies have new technologies to enhance the experience, from social media platforms that celebrate customers who promote your business to data mining tools that help target your customers, and help keep them coming through the doors for years to come.
Customer loyalty experts offer the following tips on how to start your own program.
Starting a Customer Rewards Program: Is it Right for You?
Does it make sense for your business to offer a loyalty program? It depends on what industry you're in. For retail stores, restaurants, and travel companies, maintaining a customer rewards program is almost a necessity to stay competitive because programs are so widespread in those sectors, Cottle says.
A business that deals with customers on an infrequent basis, such as a repair service or landscaper, might not be able to pull in enough return visits to warrant offering a discount or other loyalty bonus, says Donovan Neale-May, executive director of the Chief Marketing Officer Council, a clearinghouse for ideas on relationship building and leadership among major marketing leaders, which is based in Palo Alto, California. But return traffic isn't the only purpose of a loyalty program. A tax attorney, for instance, can use a rewards program or loyalty discount to encourage customers to refer more clients, Neale-May says. "In some cases, referral may be more relevant than loyalty," he says.
Your company should have a little bit of data on your customers already before deciding to start a loyalty program. How much are your best customers spending on average? How often do they use your services?
Most companies first identify their most loyal customers, who are usually the top 10 percent most frequent or profitable patrons. Targeting them makes more sense than offering something like a broad discount for all patrons, experts say.
"They're probably worth five or six times more than everyone else, the other 90 percent," says Bob Konsewicz, a strategic consultant for Maritz Loyalty, which has worked with AT&T, Bank of America and General Motors. "When you design those programs, you really want to design it for your best customers."
Dig Deeper: Thinking Through Customer Loyalty
Starting a Customer Rewards Program: What Should You Offer?
Now you need to figure out what kind of incentives you are going to offer customers. Will it be a club card that provides a discount with every purchase? A points program that lets patrons cash in their loyalty for goods and prizes? Upgraded shipping? Should it be something free or an item or service only available through a paid subscription?
The kind of program varies depending on your type of business, but experts say some general tips apply to everyone. They advise against limiting your rewards program to just discounts, because discounts don't have a lasting impact on customers' memories. Physical prizes or earned bonuses like frequent flyer trips resonate much more, Konsewicz says. "If you get a discount, it's kind of over and done with," he says.
The ultimate goal of your program should be to underline your overall brand strategy. Starbucks, for instance, is able to lure people into its shops on a regular basis thanks to its ambiance of sociability, and a rewards card that accumulates points with each purchase.
"The ultimate brand experience is: you will go and buy something from this company even if you don't need it," Cottle says.
You should figure out which relationships are most important for your business and design a rewards program that cultivates those customers, says Michael Hemsey, president of Kobie Marketing, which has worked with Verizon, Samsung and Lucasfilm.
Is customer tenure that's most valuable? What about dollar-value of purchases? Would you rather be a company that delights clients with surprise bonuses or upgrades? Two other big issues should shape your decision: What your competitors are doing, and how much your company can afford to spend on the program.
Neale-May recommends researching your competitors and creating a program that either mirrors others, or one that distinguishes itself by offering something unique. This works even for smaller businesses: an independent print shop could look at the Max Perks program offered by Office Max and imitate it on a smaller scale, he says.
Programs where customers earn points are best suited for services where lots of transactions are involved, such as a credit card, Hemsey says. Restaurants that might see the same patron once every month or so are better off just offering a free drink or instant discount to loyal customers, he says.
Some companies, such as Barnes and Noble, charge a fee for reward membership programs. But a program that comes with a sign up cost has to have a clear and appealing set of rewards, like flight upgrades for airlines or access to VIP events for retailers. Otherwise, customers won't participate. "If it's a strong enough offering, there's no reason in the world they shouldn't charge for it," Neale-May says.
Dig Deeper: How to Build Personal Relationships With Customers
Starting a Customer Rewards Program: Communicating With Customers
Making sure customers know about your program is a key factor to its success. At most retail stores, cashiers will ask customers if they want to participate. That kind of model doesn't work well in a high-turnover sales environment where it could back up the line, such as a supermarket. Professionals say companies should use the full extent of their communication arms to spread the word, through e-mail, newsletters, and website updates.
Your employees should be ambassadors for the program too, Hemsey says. They should understand the program fully and be able to relate its value to customers.
Customers want to see results as well: high-end consumers expect to be able to redeem rewards within three to six months, Konsewicz says. "That's the biggest reason customers get out of loyalty programs," he says. "They can't see the light at the end of the tunnel."
Claiming rewards shouldn't be overly complicated either. And, when you do reward loyalty, make sure the customer knows it. Too often, Konsewicz says, a customer will get a reward in the mail — a book or gift card, maybe — without a note from the company explaining why.
Companies should be making that a much more meaningful interaction for the customer to make them feel special.
"Make it a little bit more of an experience rather than a process they go through," he says.
Dig Deeper: Managing Smart E-mail Campaigns
Starting a Customer Rewards Program: Using Social Media
Customer loyalty programs began with simple punch cards you kept in your pocket, and now they're evolving through something else in your pocket: the smart phone.
While larger companies are still slightly nervous about using social media, the hospitality industry has really embraced it as way to identify loyal customers, Konsewicz says. A lot of that has come by offering rewards through FourSquare, the social media platform that lets users check in at locations with their devices. The Brooklyn Museum, for example, will award a free yearlong membership to the "mayor" (the person with the most check-ins at that location) on certain days.
Zicam, the cold remedy manufacturer, has used Twitter to send coupons to people who mention their products on short messaging service. Using social media is a much more effective way to reach the coveted 18- to 24-year-old demographic, who are less responsive to traditional advertising, experts say.
Dig Deeper: How to Use Location-Based Social Networks for Your Business
Starting a Customer Rewards Program: Using Your Loyalty Data
Loyalty programs aren't just used to keep patrons happy. They can also help you gather important purchasing information on the buying habits of the customer base that can help you shape your business strategy.
Using a club card or a system that requires users to provide basic information can help you learn patterns and trends that an anonymous punch card can't uncover. The data from rewards programs is a rich gold mine that's often times untapped, Cottle says. Supermarkets use this information to know which promotional messages to send you. Travel companies use it to know which deals you might be interested in.
Companies can also use this to cross-promote or up sell: a customer that buys a lot of cookies at your bakery might be interested in a coupon for the dairy down the street, for instance. "It's more about getting insight into your customer and leveraging that customer insight," Neale-May says.
Using purchasing habits to personally target consumers has been a successful strategy for Amazon and Google, and it's one even smaller companies should adopt to eliminate waste in their advertising efforts, Cottle says. "As a consumer, generally I am excited to give those sorts of permissions," he says. "If the company I'm giving it to is smart, that means I get less marketing and more targeted marketing."
Dig Deeper: How to Send E-Mail Your Customers Will Love
Starting a Customer Rewards Program: Additional Resources
Buying Loyalty, a white paper from Allegiance.
Think Ultimately; Act Proximately, a white paper from Maritz.