Creating a customer loyalty scheme

Customer retention is vital for every business, and 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 and implement a successful customer loyalty scheme

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's 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 once you've won them over.

How to encourage customer loyalty

American marketing author Ron Zemke said customer decisions are influenced by two factors - outcome, and process. To keep customers loyal, a business's products or services have to meet customer expectations - do they do what you said they would do?

At the same time, the customer needs to feel good in the process of buying. Research suggests that around two-thirds of customers who switch supplier do so because they feel that the business doesn't care about them and their needs.

What are the advantages of a customer loyalty scheme?

Loyalty schemes, such as Tesco's Clubcard, reward returning customers with exclusive discounts and offers based on how often they shop with you.

A good loyalty scheme, with benefits that the customer values, will encourage them to shop with you more often and to choose you over your competitors.

The information you collect from your customers can also help you to target your marketing more effectively. For instance, someone who buys pregnancy vitamins is likely to be interested in offers relating to baby products. A customer in a grocery store who never puts meat in their basket may be interested in vegetarian or vegan products.

Customer loyalty schemes in small businesses

Loyalty schemes can be quick and easy to put in place. For example, coffee shops often give customers a card (or ask them to download an app) that is marked each time the customer makes a purchase. After eight or ten purchases, the customer can claim a free cup of coffee.

Could your business do something similar?

Customer loyalty scheme checklist

• Set your objectives. Do you want more customers? Do you want to increase your sales to existing customers? Do you want to focus on customers of a particular type?
• Ask a sample of your customers what they think of your ideas, and tailor the scheme based on their feedback.
• Tell your employees what you're doing. They need to understand the reasons behind the scheme.
• Try the scheme out for a short period before committing yourself.
• Compare how often customers purchase from you, and how much they spend, before and after the scheme is put in place. Are the rewards making a difference? If the return from the scheme is less than it's costing you to provide it, then rethink.
• 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 levels.
• Bear in mind that offering deep discounts (such as 50% off) may make your product or service seem less valuable in the eyes of customers. On the other hand, a very small discount may not influence customers to change their buying behaviour.
• Use the data that you collect. Think about how you could use the information to enhance your customer relationships.
• Make sure that your loyalty scheme reflects your brand values and adds value for your customer.

Using customer loyalty schemes to build customer relationships

Loyalty schemes can encourage customers to become more involved in your business. For instance, committed customers might like to:

• hear about planned developments, such as a new website or premises improvements;
• be consulted on changes to your products and services;
• participate in a customer survey or forum.

Using customer loyalty schemes to improve profitability

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 possible financial impact on your business of a successful customer loyalty scheme.

If you can improve customer retention, not only are you likely to increase your sales, but you may also reduce your marketing costs.