Published September 9, 2022

Growth strategies: Is a customer loyalty program a good idea?

In the first year of the COVID-19 pandemic, 10% of all US food businesses permanently shut their doors, totaling just under 80,000 businesses no longer in operation. Those who successfully weathered the global crisis now contend with how to lure customers back after a prolonged two-year absence and get back on track to achieving growth goals.

Is introducing a customer loyalty program the answer to both these problems?

What is a customer loyalty program?

A customer loyalty program is a retention and growth strategy that rewards customers who purchase or engage with a business regularly rather than a competitor. The aim of a customer loyalty program is to incentivize shoppers to make repeat purchases, often by offering points, perks, coupons, merchandise, or other rewards.

Customer loyalty programs are popular for a reason. According to Harvard Business Review, businesses with strong customer loyalty programs grow their revenue 2.5x faster than their competition and generate 2-5x higher returns to shareholders.

It’s easy to think about customer loyalty programs as just giving freebies to customers. But this is far from the case. Instead, by equipping your business with technology, you can use customer data and insights to present customers with relevant offers and timely promotions that help them engage with a business and provide a significant opportunity for growth—without impacting the bottom line.

The most important thing to consider when thinking about whether or not to introduce a customer loyalty program is that it must be mutually beneficial for both the business and the customer. For example, it wouldn’t make any sense for a business to offer a customer loyalty program that costs them money without any returns on investment. Similarly, there has to be a worthwhile incentive for the customer to want to show their loyalty to your business.

What are the different types of customer loyalty programs?

Customer loyalty programs take many forms and will look different depending on the nature of your business. For example, a loyalty program for a coffee shop will be entirely different from a loyalty program for a steakhouse. Here are a few of the different loyalty programs available to food businesses.

Points-based loyalty programs

Points-based customer loyalty programs are the most common type of reward plan. Customers accumulate points that they redeem as credit towards their next purchase. Points are tracked through a loyalty card, mobile app, or an online account.

Customers typically earn points through making purchases with a business, but some operations may offer the opportunity to generate points through social shares, reviews, birthdays, or gamification.

Points-based loyalty programs need to be accessible. Launching a new points-based program that gives your customers 14 points for every $3 they spend will open the floodgates to customer confusion. Remember to keep it simple and easy to understand for the consumer (and yourself!)

Example: Domino’s Piece of the Pie Rewards

Tiered loyalty programs

Tiered loyalty programs focus on a membership model that allows customers to access different benefits depending on their ranking. Think of a tiered customer loyalty program as similar to a video game. Once you complete one level of spending, you unlock a new level with different perks and benefits.

Example: Wayback Burgers

Paid loyalty programs

Paid loyalty programs give customers access to recurring benefits and rewards for a monthly or annual fee. According to McKinsey, paid loyalty programs generate value by changing customer behavior—something restaurants and food businesses are looking for in a post-pandemic landscape.

Source: McKinsey

Of course, the most obvious example of a paid loyalty program is Amazon Prime, which boasts over 200 million members worldwide, growing 300% since 2015. Even better than that is that 98% of Americans renew their Prime membership every year. Not bad for a loyalty program.

Example: DoorDash DashPass

5 benefits of a loyalty program

1.   Drives repeat business and increase customer retention

The most obvious benefit is that introducing a loyalty program incentivizes customers to make repeat purchases with your business, and frequent purchases help to improve customer loyalty and retention.

2.   Increases customer referrals

If your customer loyalty program is brilliant, more people will tell their friends and family about it, helping to drive more word-of-mouth referrals and customers.

3.   Develops long-lasting relationships

Customer loyalty programs are called that because they increase loyal customers, which helps develop long-lasting relationships with a business.

4.   Increases cost-effectiveness

We all know that acquiring a new customer costs more than retaining an old one. A customer loyalty program is a cost-effective way to spend less on customer acquisition and focus on retaining your current customers.

5.   Maximize customer lifetime value

A customer’s lifetime value (LTV) is the average amount of money a customer will spend with your business over time. The longer a customer makes repeat purchases with you, the higher their LTV will be. So it makes sense that your most valuable customers are the ones that make frequent, high-value purchases. And guess what drives regular sales and purchases? Customer loyalty programs.

The challenges of a loyalty program

Implementing a customer loyalty program doesn’t come without its challenges. For example, there’s pressure on the business to perform at a high level during every engagement to retain loyalty. Additionally, customer loyalty programs can be complex to launch, especially if you opt for a non-points-based program.

You’ll also need to spend time measuring customer loyalty and potentially have a dedicated team member who manages this growth and retention strategy.

How to evaluate whether a customer loyalty program is the right choice

If you’re a business looking for a long-term customer acquisition strategy that helps you grow and scale, introducing a loyalty program might be the answer you’re looking for.

Rather than spending money on large discount offers to grow your customer base, which often results in guests who want to take advantage of a deal and never return, focus your efforts on the lifetime value of a customer. This growth strategy will help you ensure repeat customers, increase your LTV, lower your customer acquisition costs, and help to drive word-of-mouth referrals that scale your business.

SHARE THIS ARTICLE