How To Run A Profitable Loyalty Program

While loyalty programs are essential for building a customer base who are incentivized to keep coming back, unfortunately, they have a tendency to become a financial drain. Discover why ensuring your loyalty program’s profitability is absolutely crucial for your business’s success.

What is a loyalty program?

A loyalty program is a marketing strategy designed to encourage repeat purchases. These programs foster strong relationships between retailers and customers by providing additional value and incentives, like discounts or special privileges. With a variety of options available, such as visit-based systems or tiered programs, you have the power to design a program that suits your business’s needs.

Loyalty program benefits

    • Maximize customer retention to reduce expensive acquisition methods.

    • Collect customer data that reveals shopping habits, preferences, and trends.

    • Create a sense of exclusivity and belonging, making customers feel valued and appreciated.

    • Boost sales, raise average order sizes, and enhance brand reputation in the marketplace.

What are the challenges of running a loyalty program?

Two of the biggest roadblocks to a successful loyalty program are profitability and retention.

Loyalty programs sometimes struggle to be profitable due to various factors. One reason is the inadequate design or implementation of the program itself. For instance, if the rewards or incentives offered are too costly or not aligned with customer preferences, it can lead to unnecessary expenses without generating enough return on investment.

Another aspect to look out for is a lack of customer engagement or participation in the loyalty program. If customers do not find the rewards enticing or relevant to their needs, they will be less motivated to continue with the program.

How to earn, not lose money with a loyalty program

Learn what your customers actually want

Before you build out, or update, your loyalty program turn to your customers. First, identify who your customers are.

Ask yourself questions like, “What do they value,” “Why do they choose to shop with us,” and “How might a competitor win them over?” If you’re having trouble honing in on the answers, talk to customers directly.

Look at your inventory

When you know what is enticing and relevant to your audience you can then determine your goals. One of the best ways to ensure your goal is profitable is by maximizing your inventory. Using an inventory management system, pinpoint the following opportunities:

  • Products you’ve been sitting on
  • Top-selling products or categories
  • Products with high profit margins

These products are a great starting place for the rewards you offer. Consider a coupon or free product to get your customers hooked on new items by strategically focusing on inventory that works for you without sacrificing profits. 

Determine the right loyalty program for you

Now, you’re ready to decide the type of loyalty program to implement that meets your customers’ needs and inventory goals. For example, if you want to increase visibility on a new product that’s been slow to move, consider a tiered program with the product as the reward for moving up to gold status. However, if want to give coupon codes, look to value-based programs to send discounts based on your customer’s purchase history.

1. Tiered: As customers move up different levels or tiers, they unlock additional rewards, perks, or exclusive privileges.

2. Value-based: This type of program collects customer data, such as shopping habits, preferences, and demographics, to curate personalized rewards.

3. Visit-based: This program aims to incentivize customers to visit regularly and increase foot traffic to the business.

4. Amount-spend-based: In this program, you motivate customers to increase their spending or make larger purchases to earn more rewards.

Measure your success and optimize

Ineffective tracking and measurement of your program’s performance makes it challenging to assess its success and make necessary adjustments to optimize profitability.

Here are the data points we recommend starting with.

  1. Visit report
  2. Sales report
  3. Inventory report
  4. Customer retention
  5. Repeat purchases

By building a tech stack with your POS/e-commerce system, loyalty program, and you have the information and tools needed to ensure your loyalty program is profitable.

When loyalty and profitability go hand-in-hand

Running a loyalty program is not just about offering rewards and incentives; it’s about creating a mutually beneficial relationship with your customers that drives profit. Remember, a profitable loyalty program is an investment that pays off in the long run, as it creates an engaged customer base that will keep coming back for more. So, take the time to evaluate and optimize your loyalty program to ensure it remains profitable and continues to bring lasting success to your business.

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