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The loyalty factor

Customer retention is vital for every business and implementing a loyalty scheme can be an effective way to keep customers coming back for more. Derek Williams, CEO of the WOW! Awards, explains how to create a successful scheme

Why is customer loyalty important for small businesses?

Most small business owners appreciate the importance of attracting new customers. But few pay any attention to customer loyalty in the early years. This is a crazy situation! It is like trying to run a bath without putting the plug in the hole. And running the water - or attracting new customers - can be expensive. So you need to put the plug in and make sure you retain your customers.

How can you actively encourage customer loyalty?

American marketing author, Ron Zemke, described customer decisions as being based on two dimensions - outcome and process. To achieve customer loyalty a business has to meet the customer's expectation of outcome - does the product or service do what you said it would do? At the same time, the customer needs to feel good in the process of buying. Research suggests that up to 68% of customers switch supplier because of perceived indifference.

What are the advantages of having a loyalty scheme?

Loyalty schemes, such as Tesco's Clubcard, have certain advantages. These points-based schemes effectively allow you to reward your customer with a discount. The information you collect from your customer about their purchase preferences can also help you to target your marketing. For instance, a lady in her twenties who is buying nappies on a regular basis is likely to be interested in offers relating to baby products.

How easy is it to implement a loyalty scheme for a small business?

A coffee shop that I visited recently gave each of its customers a little card that gets stamped each time the customer makes a purchase. After eight purchases the customer gets a free cup of coffee. This is an example of something that could be very quick and easy to implement.

What are the golden rules for creating a successful loyalty scheme?

  • Set your objectives. Do you want more customers? Or do you want to increase your sales to existing customers? Or do you want customers of a particular type?
  • Ask a sample of your existing target customers what they think of your proposals and tailor the scheme accordingly.
  • Tell your employees what you are doing. They need to understand the reasons behind the scheme.
  • Try the scheme out for a short period before committing yourself for the longer term.
  • Measure your average sales and how often the customer purchases from you. Is the loyalty scheme making a difference? If it's not working then rethink it.
  • Recognise that customers have different needs. Some people may be influenced by price and would be happy to receive a discount. Others may be more concerned with service.
  • Use the data that you collect. Think about how you could use the information that you have to enhance your customer relationship.
  • Make sure that your loyalty scheme properly reflects your brand values and truly adds value for your customer.

How can a loyalty scheme help build relationships with customers?

Loyalty schemes can encourage customers to become involved in your business. For instance, customers might like to know about changes and developments within a business. They might like to be consulted on future changes to products and services. They might like to participate in a customer survey or customer forum.

How can a loyalty scheme directly improve business?

Research conducted by Bain & Co suggested that a 5% improvement in customer retention could add between 25% and 125% to the bottom line. Do some simple calculations to estimate the financial impact. If you can improve customer retention not only are you likely to increase your sales but you may also reduce your marketing costs.

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For more information and advice on building customer loyalty, see the Resources box right.