3 Things You Need to Know Before You Start a Loyalty Program

By Lori Murray, Manta Contributor

Customer loyalty is on everyone’s mind these days. And for good reason. Studies show that, for most businesses, it costs more to acquire new customers than it does to increase the lifetime value of existing customers. The numbers vary depending on the type of business you’re in, but most experts agree that it can cost between four and 10 times more to acquire a new customer than it does to keep an existing one. It’s no wonder customer loyalty programs, which many businesses see as an efficient way to retain and reward their best customers, are on the rise.

Keep in mind, however, that loyalty programs can be costly to launch, and small businesses with limited marketing dollars must carefully weigh the potential benefits. Despite the popularity of loyalty programs in a wide range of industries, from airlines to supermarkets, they may or may not be the right approach for your business. Before you jump on the loyalty program bandwagon, let’s take a closer look at a few things you should consider.

Determine Your Goal

Think long and hard about why you’re starting a loyalty program and whether it will yield the return you hope it will. “You need to know your goal and why you’re doing it,” said Bob Palumbo, director of the New Jersey Small Business Development Center at Rutgers University-Camden. “If people are happy with what you are doing, there may not be a need for a loyalty program. You should be able to create loyalty without giving things away.”

You may be able to attain similar results by ramping up your customer service, for instance, or offering a better customer experience. This is where small businesses, which can more readily adapt, have an advantage over their larger counterparts. “Creating the customer experience is about developing loyalty, like farm-to-table. Where does this product come from, and how are the producers treated?” said Julie Ruth, professor of marketing at Rutgers School of Business-Camden. “Small businesses are like curators. They tell the story and make it interesting for the customer, and that generates genuine, authentic engagement.”

Maximize Your Value Per Acquisition

Loyalty programs are created to influence consumer behavior in a positive way. As a small business owner, you may be looking for long-term customers or referrals, but above all, you want to retain customers who you expect to be valuable in the future.

“A lot of times companies look at cost per acquisition of customer, but that’s all wrong. Instead, they should look at value per acquisition,” said Michael Braun, associate professor of marketing at the SMU Cox School of Business. “It’s not a universally true statement that you should be actively trying to retain any customer. Put your marketing dollars toward retaining the customers who are most valuable to you.” Every business owner will define that differently.

Just as you would with any business decision, you will need to crunch the numbers to determine if the incremental effect is worth the additional cost of running the loyalty program. But don’t overlook the other benefits. For instance, it may be OK to simply break even on your loyalty program—if you get the added benefit of learning about the purchasing habits and interests of your customers. Again, it depends on your goals, so make sure your objectives are clearly outlined before you begin.

Design the Right Program

The buy-nine-get-the-10th-one-free approach works for Starbucks, but that doesn’t necessarily mean it’s right for your business. While it’s tempting to latch on to what’s trendy, you should structure your loyalty program with rewards that will provide some incremental value. “The small business owner should have some intuitive idea of how consumer behavior works,” said Michael Lewis, associate professor of marketing at Emory University Goizueta Business School. “Design your program to be consistent with how consumers make decisions in a given category.”

Just as you would with any marketing endeavor, it’s also important to stay consistent with your brand. For instance, as some dentists initiate loyalty programs to deter no-shows and stand out against their competition, they need to consider whether these programs are a good fit for their business. Generally, patients want their doctors and dentists to be serious healthcare professionals with a high level of expertise. They may not be as concerned about earning points.

“Your marketing needs to be consistent all the way across,” Lewis said. “Is that consistent with the reputation or brand you want as a serious professional? Instead, you may simply want to thank your patients.”

Keep in mind that it’s never a good idea to start a loyalty program just because everyone else is doing it. Instead, it’s important to also consider other strategies. But if you decide that a loyalty program is the right approach, be sure to offer rewards that provide incremental value, and always stay consistent with your brand.