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Loyalty Programs as a Customer Retention Tactic

Posted on 3.29.2009

When you spend thousands of hours on SEO and thousands of thousands of dollars on paid search or display advertising, you better be absolutely sure that not only are you converting visitors but that you’ve got strategies in place to ensure you retain those customers so they buy from you, the merchant, in the future. Let’s look at a one essential Web customer retention tactics in loyalty programs.

While you may already be employing many customer retention techniques and tactics like personalized emails or triggered coupons, the majority of e-commerce merchants and Internet retailers are not using loyalty programs due to perceived (and real) complexities of implementation. In the end however, the value is clear and the investment low. Engaging users with loyalty programs for the sake of retaining business has been shown to yield a positive impact on a business time and time again – but not how you may think.

Best Practice for Loyalty Programs
The best loyalty and retention programs are those which strengthen the connection consumers have with a brand. The reason to start a loyalty and retention program is not to provide discounts, but to recognize and reward the most valuable customers in exchange for information that you the merchant can use to create products and services that more closely fit their needs.

For example, a local sandwich shop here in Chicago rewards you with a free sandwich when you buy 10. That’s all fine and dandy (and delicious) but that sandwich shop does not know anything about its customer’s affinity for its line of product. A more personal, data-centric approach would be for the vendor to ask its customers questions in order to participate in the program (and perhaps even ask a few questions to redeem points for their sandwich).

What the vendor receives is valuable information on customer preferences, and my opinion of their service and store. I’ll still use either program (as long as I get a free sandwich) but one really provides genuine value to the merchant. If it’s pretty much the same amount of work, why not choose the latter? Doing so will create a more informed merchant that will be better able to serve me in the future with new products in line with my tastes – something they don’t know right now. 

So if you are creating a new customer retention programs, or revamping an existing one, avoid rewarding frequency and focus instead on genuine loyalty. Some of the best-known loyalty programs (such as airlines' frequent-flier clubs or grocery chain cards) encourage customers to chase points and discounts above anything else – just like the sandwich shop does right now. You might as well call these "anti-loyalty programs" as consumers are less interested in you than they are in the points or the discounts.

The downside of frequency program (which is what we’ve really been describing here) as opposed to a true loyalty program, is that competitors can easily copy it (how many more points do we need to give to make our offer more attractive?). What if another sandwich shop opened down the street with equally delicious sandwiches and a similar points-based frequency loyalty program? You got it – goodbye old standby! When push comes to shove, merchants will get shoved aside by consumers for the vendor with the greatest discount or number of points.

Best practice is to focus on creating genuine loyalty and not a points system. That is accomplished by leveraging the data that can be collected to create personalized emails, to trigger emails based on customer preference and store availability. For example, say the sandwich shop had my email, knew that I love artichoke and proscuito sandwiches and sent me an email saying they were reserving one just for me – that’s how you earn loyalty.

The most important data analysis practice is to be selective in what you are looking for, before you start looking, and to know how you might put that knowledge to use if and when you obtain it. Keep in mind that consumers and business customers lose faith very quickly when they share personal and preference data with a company and then do not see the company act on it. Most have an expectation that you the merchant will do something sensible with the data they share with you – so don’t blow it.

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