3 Ways to Drive Crazy Increases in Customer Loyalty
BY Victor Ho
How to apply innovations at companies like Starbucks and Amazon to your business
Most small business owners intuitively understand the power of loyalty. They instinctively seek to turn new customers into regulars and regulars into word-of-mouth advocates.
Besides improving product and service quality, the most common loyalty tactic among small business owners are simple rewards programs. And they work. But are there other loyalty tactics owners should consider?
Sure, it’s great for your business when customers pay ahead of time, but what about prepayment as a loyalty strategy? If structured correctly, prepayment can drive huge increases in customer spend--customers, after being incented to prepay, significantly increase spend because their prepayment acts as an ever-present motivation to get the most out of their investment.
One of the most famous examples of how prepayment drives out-sized gains in loyalty is Amazon Prime. Amazon customers essentially prepay for their shipping fees for the year when they sign up for membership at $79 per year, but analysts estimate that Amazon Prime customers spend on average 150 percent more after they join, which more than pays for that free shipping.
Another famous example is the Starbucks loyalty program. Customers can prepay to earn rewards like a free drink on their birthday or free refills. By putting rewards and prepayment on the same card, Starbucks has essentially combined two loyalty tactics (rewards and prepayment) into one. One study I read estimates that Starbucks customers who prepay spend 162 percent more than the average Starbucks consumer!
It’s not just for big business. I have three suggestions on how you might try to do this:
1. Membership Fees
This would be like implementing your own version of Amazon Prime. If free shipping is not relevant for your business, consider other benefits like a permanent discount on drinks or on the total bill or even a special VIP-access that allows members to always get a reservation. While it may seem counter-intuitive to offer discounts and benefit, you need to trust that the increase in visit frequency will more than pay for the discount. Basically a membership fee locks your regulars in even more and provides an additional incentive to make your business their first choice.
2. Cash Bonus for Prepayment
You could also experiment with turning gift cards around and making them not just gift cards for the friends of your customers but prepaid cards for your current customers. In return for a cash bonus like 10 percent or a free gift on every load, you'll most likely see that customers that prepay will come back even more frequently and spend more when they do. When we rolled this scheme out to the merchants that work with my own company, we saw existing loyal customers increase their monthly spend by 50 percent after prepaying to get a 10 percent cash bonus on a re-loadable card.
3. Monthly Subscription
This is a tactic that's increasingly being used in retail. Amazon has its own version called Subscribe & Save. Basically you are turning your regular customers into subscribers who commit to buying on a regular basis in return for an ongoing discount. This again is playing with the idea that a pre-commitment will drive outsized gains in lifetime purchases, which far outweigh the discount offered.
While the above strategies may seem counter-intuitive, they are proven by some of the most innovative companies in retail. Try to experiment with these ideas to get some crazy increases in loyalty at your own business in 2014.