Practical Ecommerce

Online Loyalty Programs Can Increase Repeat Shoppers

Online merchants want to find ways to increase revenues by encouraging customers to make repeat purchases. Using an online loyalty program will certainly help, but it must be done carefully and with the right tools.

There are many factors involved in creating a successful loyalty program. However, before you consider initiating a loyalty program of your own, start by focusing on delivering the best experience you can to your customers. Great experiences, like loyalty programs, will spur repeat business from customers.

Calculating a Customer’s Lifetime Value

When determining how much to invest in a loyalty program, an etailer should first calculate what a customer is worth to his/her business.

Getting a customer to purchase a single product isn’t the goal of most ecommerce site owners. However, most owners fail to calculate the potential lifetime value of a customer when determining how much to invest in a loyalty campaign. So what is it worth to the bottom line to attract and keep a quality customer?

There are some complicated ways to calculate the lifetime value of a customer. However, a simple method is to multiply the average sale at your site by the number of times an average customer reorders. For instance, if the average shopping cart size at my scrapbooking supply store is $40 and the average customer places an order six times per year, the “value” of the customer is $240 per year and $1,200 over five years. If you run a 20 percent margin of profit with your business, would you invest a year’s profit of $48 to capture and retain one customer that would stay for a lifetime?

A loyalty program hinges on the premise that it is cheaper to keep a customer than to attract a new one. Once you have a customer, building a relationship with them is critical. It’s through that relationship that a bond is created between consumer and retailer. It’s always great to generate new customers, but it’s usually much less expensive to hold onto existing customers.

Three factors you can implement right away to prompt your customers to return for subsequent purchases:

  • Site usability
  • Quick fulfillment
  • Good customer service

When your site’s navigation and usability make it easy to find products and necessary information, they will want to return again and again. Put simply, the shopping experience must be enjoyable.

“There is a direct correlation between shipping days to the customer and repeat purchases — the longer it takes for a customer to get the purchase, the less likely they are to make a repeat purchase,” said Jim Novo, author of “Drilling Down: Turning Customer Data Into Profits With A Spreadsheet.”

Price is not the primary driver of loyalty. To generate loyalty, you have to go beyond price and offer customers an experience, and consider ways to improve the experience your customers receive when they purchase your products. “Think about your customers and what they would see as a ‘better experience’ and then find ways to deliver it,” Novo said. Sometimes the nature of a product or experience can be confusing, and the experience issue is not something that is obvious or what customers are complaining about. Thus, you should use your database to analyze the data to find specific areas that can be addressed.

Gift Cards and Other Tools

Gift cards, frequent-purchase programs and points programs are examples of loyalty programs. These types of loyalty programs may offer cash back, discounts and even free items. For example, if a regular customer purchases five items from your product list, a frequent purchase program would give them a sixth product free.

“Whether you offer cash back, rewards like gift cards and merchandise, opportunities, access, donations or the like, the key is identifying what would be valued by your customers that will ultimately motivate them to behave in a certain way,” said Bram Hechtkopf, director of marketing technology at Kobie Marketing.

Hechtkopf suggests the following when determining the appropriate loyalty program for your business:

  • A robust data analytics strategy that allows you to profile, identify and differentiate.
  • A solid technology platform that supports the program with a points engine to keep up with loyalty rewards, a campaign management system that can provide a comprehensive approach and a data warehouse to house a shopper’s historical activity.
  • Having a clear and consistent communications plan.

“Companies should offer customers a program that rewards them for all their purchases,” said Greg Grunston, director of direct marketing at 1-800-flowers.com Highly promoting the program throughout the entire shopping experience is also recommended.

Grunston believes loyalty programs motivate consumers to spend more and to spend more frequently. “On average, customers enrolled in a loyalty program are twice as likely to make a purchase at that retailer than a customer that is not enrolled.”

Implementing a Program

There are many ways to implement and manage a successful loyalty program. In order for a loyalty program to achieve a high return on investment, a merchant must analyze the existing data and behavior of their customer base. If merchanta do not feel comfortable analyzing their own data, there are service providers that specialize in helping merchants build, customize and deploy loyalty programs specific to their business model, products and customers.

For those merchants who want to build and implement a loyalty program on their own, many shopping cart systems offer add-ons to keep track of points or coupons sent to customers. One shopping cart software product, MIVA Merchant, offers the Membership SuperMod. The module is designed for smaller retailers without the ability to actively manage a program.

Many service providers manage automated online loyalty programs by inserting tags in your site’s page or providing a “loyalty website” that is branded to your business. They collect all the data for you and manage the program. One drawback to this method is the ability to customize the program to your audience. Incentive Logic is one provider that can fully implement and manage an online loyalty program.

The most expensive, and the most profitable, route to take when implementing a loyalty program is to build a customized program to your specific business model. However, “you need at least 20,000 active customers to get into an area where a customized loyalty program could pay off because there are fixed costs for design and implementation,” Novo said.

Since building loyalty is a long-term initiative, finding a marketing agency specific to a loyalty program is critical. “We believe there is tremendous value in working with a single agency with specific expertise in building and managing loyalty programs, rather than multiple agencies performing independent services,” Hechtkopf said. This way, your emphasis can be placed on the customer and the customer experience, and not on coordinating various details with various suppliers, all of which can potentially lead to losing focus on the primary objective.

Hechtkopf offers a few tips for implementing a successful program:

  • Evaluate what internal resources you currently have that can support the loyalty program. What resources will you need to complement these? Prioritize what is most important if budget is an issue.
  • The technology platform is important. Make sure to evaluate functionality, the ability to scale (as the program grows) and the ease/cost of making changes since these programs evolve over time.
  • Be sure to talk to the agency’s existing clients — anyone can make a system appear to be robust, but clients will provide you with real experiences.

Before you decide to start a loyalty program, consider what works best for your business based on the number of customers in your database, their behavior, your budget and your overall goals.

Dave Young

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Comments ( 3 )

  1. Legacy User August 2, 2007 Reply

    Have been trying to figure out how to build a loyal community of buyers for years. The 'net breeds disloyalty, since it is easy to shop from our competitors, too.

    I am doing a few of the things suggested, including free stuff with each purchase, etc. Too early to judge results, but am monitoring closely.

    Regards

    http://www.daimonlures.com

    — *Bryon*

  2. Legacy User August 3, 2007 Reply

    Interesting article. Our company, MyStoreRewards.com, is probably the largest pure loyalty service for small sellers on the web.

    The points about being able to deliver an effective online experience are all true. However, in our experience, very few retailers fail to do that today. The piece cites shipping quickly as an experiential differentiator for sites. To be sure, if you are an online seller who ships once a week versus every day — the last thing you need is a loyalty program. Shipping faster is a necessity for your business.

    Fortunately, almost all sellers we have worked with — or buy from — are not in that category. Most do a brilliant job of shipping quickly and replying to emails. If there is one criticism we find it is a lack of product-depth. For a variety of reasons, many sellers carry only a limited amount of inventory (e.g. to better manage cash-flow).

    Presuming you ship product on time, well packaged, handle emails quickly and have professional photos and good copy on your site (which the vast, vast majority of online sellers do)… then driving a repeat sale requires three things: A frequent communication with your buyers to let them know what you have for sale; a pricing/reward strategy to reward buyers to shop and purchase (ps: I would never discount price as much as the article seems to discount it); and third, ensure that the product mix you have is sufficiently broad enough to drive the buyer back to make a purchase. If you don't have the right product at the right price and intersect with your buyer at the right time — no sale will happen.

    In our experience, those three elements are the key to driving repeat sales (presuming you are not a lousy seller to begin with!).

    Brian

    — *Brian*

  3. Legacy User August 3, 2007 Reply

    I like the article though I found a few things I might challenge. Consumers are so over-saturated with loyalty programs (I recall a statistic that the average American consumer belongs to 12 Loyalty programs) that creating another one won't be the thing that helps you stand our from your competition. Unless your business has the potential for tremendous repeat business (such as weekly shopping), I expect most consumers wouldn't work hard enough to earn the rewards a typical consumer could make available.

    Peronally, I'm a big fan of the Coalition loyalty programs that allow merchants to band together by offering a currency the consumer finds valuable and combines all the loyalty programs into one big program. This gives me as the consumer control over what I get or how I use my points, but allows me to be loyal to those merchants who participate in the program. My experience as a Loyalty Marketing consultant shows me most merchants aren't in a position to launch their own service unless they are as big as Best Buy, and even then many programs fail. If you're reading this article and these comments and trying to figure out your loyalty strategy, consult an expert and get some advice, then consider participating in a program where the overall success of the program will help all of the merchants and won't require you to start a new part of your business. You should focus on what you know best and let the Loyalty experts help you with what they know best.

    Evan Weisenfeld
    Principal, Loyalty Marketers, LLC

    — *Evan Weisenfeld*