Create or update your customer loyalty program strategy: An 11-step playbook

Here’s how your business can attract and retain loyal customers

“The purpose of business is to create and keep a customer.”
– Peter Drucker, management guru.

Most managers know this: Without customers, your business will wither no matter how great your product or solution may be. This is why businesses spend substantial time and resources to acquire and retain customers.

Smart businesses know that customers must always be their Number 1 priority. What often happens, however, is that blindsided by the demands of investors and shareholders who want to see quick and steady profits, businesses lose sight of their customers, cutting costs that hurt quality or service – dealing fatal blows to the very standards that brought customers to them in the first place.

But acquiring and retaining customers should be the long-term priority of investors and shareholders too (over short-term profits) because building customer loyalty leads to increased revenue – a win-win scenario for everyone involved. In fact, a study has shown that increasing customer retention rates by 5% increases profits by 25% to 95%.

Building customer loyalty, however, is not easy. It takes time and effort. Customers have their own reasons why they choose one business over the other and it is your job to convince them that your business brings them the best of everything: price, value, quality and service.

Businesses that want to start building customer loyalty must first seriously analyse their customer base. You need to look at the unit economics to better understand what strategies are available for you to build customer loyalty and how much you can – and should – spend to acquire new customers or in loyalty management.

There are several metrics that can guide you which we discuss later in this playbook. For now, let’s address two main metrics – the Customer Acquisition Cost or CAC and the Customer Lifetime Value or CLTV.

Customer Acquisition Cost or CAC is the cost of convincing a customer to pay for your product or service. The figure varies among countries and industries. Below are some averages:

  • Travel: $7
  • Retail: $10
  • Consumer Goods: $22
  • eCommerce: $80
  • Manufacturing: $83
  • Transportation: $98
  • Marketing Agency: $141
  • Financial: $175
  • Technology (Hardware): $182
  • Real Estate: $213
  • Banking/Insurance: $303
  • Telecom: $315
  • Technology (Software): $395

If you are banking, for instance, getting the customer may cost you around $300. But remember, this cost is to acquire an average customer, not a high-value customer. To get high-value and loyal banking customers, banks will have to spend much more. 

Customer Lifetime Value or CLTV refers to the total revenue a customer brings to a business over their lifetime minus the cost of acquiring and serving that customer (including production, sales and marketing costs and even the cost of running a loyalty program). This extremely important metric helps businesses understand the exact economic value of a customer.

This step-by-step guide to creating or updating your loyalty program strategy will help you to think deeper about what your strategy should be and how you can decrease CAC and increase CLTV.

But first, let’s understand what is customer loyalty and why it is important.

Definition of customer loyalty 

Put simply, customer loyalty can be defined as a relationship of trust between a brand and a customer that leads to the customer picking that brand’s product or service over that offered by competing brands whenever they need that product or service.

Customer loyalty stands on a number of pillars including delivery of good value and quality, a positive buying experience, great service and shared values (such as commitment to the environment or gender equality). When these pillars are strong, trust develops between the customer and the brand.

Here is a definition of customer loyalty according to business strategist and best-selling author Fred Reichheld who wrote a book on the subject:

“Loyalty is the willingness of someone – a customer, an employee, a friend – to make an investment or personal sacrifice in order to strengthen a relationship. For a customer, that can mean sticking with a supplier who treats him well and gives him good value in the long term even if the supplier does not offer the best price in a particular transaction.”

Customer loyalty is more about people buying your product again and again. Customers can show loyalty in several different ways:

  • They become advocates of your product or service, convincing family and friends that your product is good. They also showcase your product or service positively on their social media accounts.
  • They aren’t actively looking for another supplier and are likely to ignore attempts by your competitors to get their business.
  • They support all new products you offer.
  • They trust you and are willing to give you a second chance if your product disappoints.
  • They are more likely to contact your company to thank you or to give positive feedback.

Given their potential to provide a business with recurring revenue and word-of-mouth advertising, it’s no wonder then that loyal customers are extremely valuable to businesses and are actively wooed by them.

Why Is Customer Loyalty Important? 🤔

1. It is cheaper to retain customers than win new ones

There’s an industry consensus on the fact that it costs businesses more to win a new customer than retain an existing one. The figures cited vary depending on which industry you are part of and which study you trust. Taking into account the range, acquiring a new customer is believed to be between five and 25 times more expensive than retaining a new one. The 5x rule is widely cited as the reason why businesses must build loyalty among their customers so that they can retain them over the long term.

Food for thought: An alternative view

Some experts believe the emphasis on the 5x rule is based on old school techniques of sales and marketing and that businesses should instead use the CLTV – the lifetime value a customer brings the company – to guide their decisions about investing in customer relationships.

“Decisions about customer acquisition, retention and development shouldn’t be driven by cost considerations – they should be based on future value,” Wharton Marketing Professor Peter Fader told Forbes. Fader added that a company could create more value for itself if it spends money to acquire a new and valuable customer instead of retaining an old but average one.

2. Loyal customers bring more revenue

Loyal customers are good for business, says research, as their repeat buying patterns and advocacy helps companies increase sales and win new customers without spending extra resources to acquire them.

Long term customers especially generate increasing profits each year. Don’t take our word for it, let’s look at some research.

  • In financial services, a 5% increase in customer retention produces more than a 25% increase in profit, estimated Fred Reichheld in a report for Bain and Company.
  • 61% of customers go out of their way to buy from brands they are loyal to. 60% will make more frequent purchases (that number rises to 70% among Millennials). Fifty percent will purchase more products, found the 2018 US Retail CX Trends Report by InMoment.
  • Focusing on customer retention can increase revenue over an 18-24 months period by as much as 80% +, reduce customer acquisition costs by 30%+, and increase total customers by 1.5x, found another study by finance expert Josh Chapman.

All this emphasises that it is imperative for businesses to build lasting connections with their loyal customers, and a well designed loyalty program helps businesses do exactly that.

3. Consumers trust friends and family more than they trust your marketing efforts

Customer loyalty is also important because loyal customers are more likely to refer your product to others.

Like it or not, research has shown that people trust word of mouth recommendations way more than expensive advertisements or the influencer or celebrity that businesses paid a pot of money to say that they love their product or brand. 

According to Nielsen, 92% of consumers believe recommendations from friends and family over all forms of advertising. Similarly, a 2019 research study by Oracle CX that surveyed over 1,100 US consumers across four generations found that consumers are twice as likely to trust family members (77%) and friends (75%) than any other source for shopping recommendations. Politicians (2%), celebrities (7%), a company employee you engage with online (12%) and influencers/bloggers (14%) are among the least trusted sources of shopping recommendations.

This is why businesses must build stronger relationships with their customers by developing a strong customer loyalty program.

Here are the 11 steps to create or update your loyalty program strategy.

Step 1: Customer segmentation

No matter if you are creating a strategy from scratch or if you are updating an old one, the first step is to create or review your current segmentation of customers. This is a simple way of organizing and managing your company’s relationships. 

Some of the most common segmentation models are:

  • Demographic segmentation
  • Geographic segmentation
  • Psychographic segmentation
  • Technographic segmentation
  • Behavioral segmentation
  • Needs-based segmentation
  • Value-based segmentation

Hubspot has created a detailed guide on how to create a segmentation strategy that you can use if you are new to segmentation. 

Make sure your team works together on creating or updating current segmentation strategies so that you have it ready as you develop your company’s loyalty program.

Segmentation is important not only because it helps you better understand your target audience and personalise your loyalty program but because it also gives you a good idea of the  customers who are most likely to change their behaviour….so that you can target them first.

Step 2: Deep understanding of your customers

Create customer profiles/buyer personas

Successful businesses are those that understand what job the customer wants done and design their product or service to fulfil that job.

Our experience shows that the most successful loyalty program strategies are also created and deployed by companies that really know and understand their customers and what job they are trying to get done.

If you aren’t familiar with the “job to be done” concept,  make sure you view this four-minute video in which Clayton M Christensen, Harvard Business School Professor & Disruptive Innovation Expert, explains how McDonalds understood what their milkshake customers actually wanted when they looked at it from the perspective of the customer.

Similarly, in the video below, marketing expert Matt Hodges explains how he used the “Jobs to be Done” methodology for American software company Intercom.

To be able to deploy better loyalty strategies, you need to first understand your customers in-depth. It is only then that you can create concepts and campaigns that really matter to them. When you successfully do this, you help your customers connect emotionally with your brand, helping them become repeat customers and active promoters of your brand.

To inspire you, we have collected two detailed marketing briefs. The first is for a subscription club for mobile games and the second is for a subscription club for kids apps. We want you to look at the amount of data and information collected about what the customer wants and what job they are trying to get done when they hire a games club or kids club.

Resources you can use

One of the most used tools in the world to identify a customer’s jobs to be done, pains they want to avoid, and gains they are looking for is the Value Proposition Canvas by Strategyzer. Click here to download the canvas for free and see instruction videos.

You can also read Daniel Nilsson’s blog on How to create strong value propositions. Nilsson has also written a blog explaining How to create customer profiles / buyer personas, which you can read.

Remote working tip

If you are unable to work onsite with your entire team to work on a Value Proposition Canvas or on other exercises to get to know your customers better, we recommend that you use Miro, an outstanding online workshop tool.

Step 3: Review your segmentation again

As you learn more about your customers and start to really understand the jobs they want done from your product or service, you may want to review your segmentation one more time. As you continue creating your customer loyalty strategy, it is very important that both your segmentation and understanding of customers is as accurate as possible.

Step 4: Review available loyalty and customer retention statistics and data

You must also review all the available loyalty and customer retention data and statistics that you can get your hands on. If you have your own customer loyalty program already, you can start by analysing that data. Relevant surveys and reports by third-parties – such as Nielsen, KPMG and InMoment to just name a few – are also valuable sources. The data will give you valuable insights into customer behaviour that drives loyalty, which you can use as a guide as you design your own customer engagement strategy.

Step 5: Customer unit economics 

In this step, you must define as well as you can the key unit economics for your different customer segments. 

Unit economics is a powerful tool that demonstrates how much value each unit/customer generates for your business, helping you assess your financial performance as well as make accurate financial projections. If you are lacking the data to define the numbers, then make sure you acquire it. Some of the most common unit economics metrics are:

  • Customer Acquisition Cost (CAC): This is the amount of money a company spends to convince a potential customer to pay for their product or service. A simple CAC calculation is: the cost of your total sales and marketing expenses for a specific period divided by the number of customers you acquired over that period. So, if you spent $1000 on sales and marketing for a year and you gained 1000 customers, your CAC is $1. By keeping CAC low, companies can see higher profits.
  • Cost Per Acquisition (CPA): This metric measures the cost to acquire a non-paying user. For instance, if you sign up for a free trial of a streaming service, you will be measured using CPA. Once your free trial is over and you start paying for the service, however, you will be measured using CAC. Often people think that CAC and CPA are the same thing. They are not. CPA is a broader term than CAC.
  • Customer Lifetime Value (CLTV): This extremely important metric measures the exact economic value one customer generates for the business over the entire course of their association with the company (aka the customer lifespan). The longer a customer buys from the business, the higher their lifetime value. At a very basic level, Customer Lifetime Value can be calculated as: The total revenue a customer brings a business over their lifetime minus the cost of acquiring and serving that customer. Let’s assume you have a customer who brings you $200 in revenue a year and has been a loyal customer for three years. You have spent $150 in acquiring and retaining that customer. Your CLTV will be $450 – or ($200 x 3) - $150. 
  • Churn rate: This metric measures the percentage of customers or subscribers who end their relationship with the company during a given time period. Churn rate is a very important metric especially for companies that follow a subscription-based business model. Churn rate can be calculated as “Customers who have left” divided by “Customers you have acquired” x 100. So if in a given time period, you acquired 100 customers but lost 10, your churn rate will be (10 ÷ 100) = 10%. High churn rate numbers aren’t good for business.
  • Repeat purchase rate (RPR): This important loyalty metric helps businesses measure the percentage of customers who make a repeat purchase. To calculate RPR, take the number of customers who bought from you during a given time period and divide it by the total number of customers in that same period. The higher the number, the better for your business.
  • Redemption rate (RR): Many customer loyalty programs offer points that are often not redeemed. The redemption rate metric helps companies understand whether their loyalty program is engaging customers or working. The redemption rate is calculated by dividing the total rewards redeemed with the total rewards issued. The redemption rate should ideally be above 20%. The higher the better because that indicates that your customers view your rewards to be valuable and are happy to redeem it. In doing so, they are more likely to associate your brand with positive, happy feelings.
  • Average Revenue Per User (ARPU): This common metric measures the total amount of money a company generates from one customer during a fixed period. It is calculated by dividing the total revenue of a company by the total number of customers over a specific period (usually monthly). ARPU is an extremely important metric for SaaS subscription businesses as it measures product usage across the customer base. A high ARPU means that your business is healthy and your sales and marketing efforts are working.
  • Active engagement rate: This metric is used to measure what percentage of your customers are engaged with your loyalty program. It can be calculated by taking the number of customers using your loyalty program (such as those that have signed up or earned rewards and so on) and dividing it by the number of total customers.

Step 6: Define your loyalty investment per segment

With well-defined unit economics as explained in Step 4, you calculate and understand how much it costs to acquire a customer, how much it costs to lose one, and how long the customer stays. 

The next step is to define and set the loyalty investment per segment. If you have high-value customers make sure they have been defined as a separate segment. 

Step 7: Define a strategy to make customers feel special and valued

For your different segments, you must now define a strategy for how you will attract and retain your customers – think about how you can make them feel special and valued, for instance. To make this work, you need to define and set how your customers will earn points and how you can help them set points goals, the tiers you will have and so on. 

To get an idea on the loyalty program features that you can get the most out of, take a look at the graph below that displays results of a 2017 loyalty report with regard to loyalty program features. The study surveyed 28,000 respondents and 400 loyalty programmes in the US.

The graph shows that monetary features such as cashback and promotions are widely available (the more to the right of the graph, the more common the program) but yield below average impact being low on the graph. Less common loyalty program features such as personalisation and tiers score higher in satisfaction. 

Tiers, waiving fees, ability to support charities, personalised recommendations and benefits from other brands are among some of the most satisfying features of loyalty programs according to this survey. 

Source: The Battle For Love & Loyalty – The Loyalty Report 2017

To increase customer engagement in your loyalty programs, make sure you define loyalty program features that will be truly valuable and exciting for your different customer segments.

Step 8: Define an anti churn strategy 

In SaaS businesses a healthy churn rate is considered to be about 5%. By reducing your churn, the CLTV will increase and make your acquired customers more valuable. Define and set strategies for how you will fight churn. This could be everything from improving the customer journey to identifying in advance when a customer is about to churn. One of the most interesting companies that provide anti-churn solutions is ChurnZero. We recommend that you have a look at their Definitive Guide to Fighting Customer Churn. All of you may not be able to use their services for your specific business, but their resources are very useful and will help you to think about your anti-churn strategy.

Step 9: Define a strategy for your super-loyal customers

Customers that are emotionally connected to your brand, who spend more, and are more likely to recommend your brand to others are your super-loyal customers. Members of this specific customer segment are your biggest and most important promoters. Set a strategy for how you will identify this segment and how you can keep them invested in your product or service so that they can continue to help you acquire new customers. Doing so may even give you insights on how you can convert other customers into super-loyal customers

As an example, American Express offers a program where if you refer a friend you will get a substantial amount of points plus your friend will get extra benefits if they are recruited by you (as compared to just signing up on the website).

By now, you should have all strategies in place as well as a well-defined loyalty program. It’s now time to finally deploy them. The Reward360 team will help you set up your strategy and definitions into its loyalty and rewards platform and assist you in the launch of your loyalty program to ensure it is implemented perfectly.

Step 10: Create campaigns 

With your loyalty program in place, it’s time to engage customers. Use your segmentation and strategies to create creative and interesting campaigns that will delight your customers and attract them to sign up for it. 

Step 11: Measure learn and improve 

Rome was not built on a day and this is applicable to a loyalty program too. Measure all campaigns, activities and so on and identify how you can improve your program and the customer unit economics. Make sure you continuously run projects where you look at how you can improve customer journeys, customer service, and the general customer experience. 

Conclusion: Data is the key

At the end of the day, customers will come back to you again and again if you offer them a solid value proposition. The core of a solid value proposition is your ability to understand your customer in-depth. Data is crucial to this understanding. Analysing your customer base, creating or reviewing customer segmentation, building customer profiles, studying your unit economics to decide how you can spend to acquire new customers, deciding how to differentiate your offering from others, defining your loyalty investment per segment and defining a strategy to make customers feel valued – is all dependent on data. 

Similarly, once your loyalty program is in place, measuring and monitoring its performance and then analysing the data will help you refine it further.

To sum up: Insights from your own data combined with those from relevant third-party reports and surveys will be vital to the success of your loyalty program.

Once you have all the data you need and you have drawn up a customer engagement strategy tailor-made for your customers, the Reward360 loyalty platform team will help you set up your strategy into our platform and assist you in the launch of your loyalty program to ensure it is implemented perfectly and attracts your customers. 

Reward360 has the most comprehensive global rewards solution that exists today. Whether it is buying an airline ticket globally, booking hotel rooms across thousands of hotels, movie and entertainment tickets, music and movie downloads, e-books and e-magazines, mobile currency, e-education, experiential rewards etc., our platform lets loyalty program customers do all of the above and lots more with their loyalty points.