How to Grow Customer Loyalty in Retail?
Retail loyalty programs are a thing of their own. Customer loyalty programs in retail usually operate on a large scale with hundreds of members and across different touchpoints. Unsurprisingly, such a scale requires time, money, and a fair share of automation. Both employees and customers must be ensured that the loyalty program will work quickly and efficiently if it is to succeed.
Despite the initial costs of building a loyalty program in retail, such rewards schemes have great potential and can contribute to the company's significant development and increase its profitability. One such example is a highly successful loyalty program from Ulta that drives 95% of sales for this beauty retailer.
In this post, I’ll cover the following topics:
- Why is building a loyalty program crucial for retailers?
- How can retailers build customer loyalty?
- What are the characteristics of customer loyalty programs in retail?
- The biggest challenges for retailers in building loyalty.
- Tips to follow for highly successful retail loyalty programs.
- New trends in retail loyalty.
- Top retail loyalty program examples.
Why is building a customer loyalty program crucial for retailers?
Let’s start with the basics. The retailer is a middle-man connecting manufacturer with end-customers. This peculiar position forces retailers to constantly adapt manufacturer’s supplies to customer needs and wants. Entering the retail market is fairly easy; however, staying on top of things becomes increasingly difficult with fierce competition and multinational conglomerates such as Walmart or McDonald’s slowly monopolizing the industry.
As any other industry, customer retention is of huge importance to retailers as customer acquisition costs climb higher than ever before. While 44% of companies continue to have a greater focus on customer acquisition, your retail business can lead the change with pivoting to customer retention. After all, it is estimated that even a 5% increase in retention can lead to as much as 25-95% increase in profits.
However, customers won’t give away their loyalty for free. And loyalty programs on their own won’t make up for high prices or bad customer experience. Before turning to loyalty programs to save dwindling customer numbers and high churn rates, it is advisable to improve customer experience. Only then, you can think of building a rewards program on the stable foundation of great CX.
How can retailers build customer loyalty?
The key to surviving (and hopefully thriving) in the retail industry is building a distinctive customer experience and finding a niche on the market that would bring customers to you and not to your competitors. Especially when switching to a competitor can take as much as one click. One way to prevent this is by building retail loyalty programs or reward schemes to engage individual customers and motivate them to come back to you regularly.
Other KPIs you can achieve with customer loyalty programs in retail include:
- Boosting customer retention.
- Increasing CLV (Customer Lifetime Value).
- Getting to know your customers better thanks to loyalty program data.
- Improved segmentation that leads to budget-saving.
The retail industry is primarily customer-oriented and, as such, devotes a huge budget chunk to attracting customers with sales promotions, discounts, and vouchers, to secure a bigger piece of the limited market share. However, extra offers are not everything in the market full to the brim with similar competition – that is where a loyalty program can give you the competitive advantage you are looking for.
You must realize other retail-specific features to understand the mechanisms behind top retail reward programs:
- The retail industry operates multiple channels – physical & ecommerce stores.
- Smaller order sizes compared to wholesalers.
- The larger number of orders compared to other business models.
- The wide spectrum of customer personas – retailers rarely cater to specific demographics.
- Large selection of products – it is rarely focused on one product type or category.
Although customer loyalty can be generated in plenty of ways, according to SAS research, 40.5% of consumers would be less likely to use a retailer without a loyalty program or card in place. This is why, as a retailer, you should at least consider launching your own rewards program.
What are the characteristics of customer loyalty programs in retail?
Most retail chains already operate a loyalty program. Based on their results, we can identify several commonplace features for rewards programs in the retail sphere.
Most retail loyalty programs follow a more traditional point-based approach to building loyalty. The approach to rewarding criteria also tends to be more conservative – the more you spend, the more points you collect. As retail customers are usually price-vulnerable, the key to evoking loyalty boils down to offering a better deal than the competitor. This effect can be successfully created with a mix of reasonable price and extra value for the purchase (receiving points).
Discounts as rewards
Research suggests that the key factor in opting for a loyalty program are the perceived savings associated with becoming a member.
“Survey respondents offered specific input for loyalty programs in the area of discounts. Cash back, gift cards, exclusive sales, points redeemable for discounts, and coupons were among the suggestions. Clearly, the general shopper equates membership in a loyalty program with savings in exchange for loyalty.” SAS
Unlike DTC loyalty programs, retailers are focused not on offering brand-specific and exclusive features for becoming loyal customers. Instead, discounts and special offers are the key motivators to join the program.
Online & offline memberships
Retailers need to appeal to a wide range of demographics, including different age groups. Unlike Gen Z customers or Millennials, older customers would be less likely to engage in a mobile-only program. One anecdotal evidence of this trend is the Yves Rocher loyalty program. My mum is not a digital native and does not feel confident in joining a mobile-first program. This is why she uses a physical loyalty card to collect stamps (points) for making purchases. On the other hand, I have enough things in my wallet and opted for a mobile version of the program.
This way, Yves Rocher managed to succeed with two very distinct types of shoppers with widely different expectations. What is the takeaway? Digitization is obviously the future of retail; however, we are not there yet. Don’t abandon building loyalty offline; otherwise, you run the risk of losing a big chunk of your audience.
The biggest challenges for retailers in building customer loyalty
The biggest roadblock on the way to building steady customer loyalty in retail is the choice of the right technological tools. Lack of proper software infrastructure and development resources can effectively nip any retail loyalty project right in the bud. Luckily, there exist out-of-the-box promotional management solutions that can be integrated within several weeks and used successfully by digital teams. Voucherify (our product) is one such example.
The last thing to bear in mind is the wide demographic that retailers need to appeal to. Different types of shoppers (for instance, pleasure and practical customers) will have widely different expectations regarding what the loyalty program should offer. This is why the biggest retailers usually introduce high-scale programs ready to cater to different customer needs – by, for instance, offering both digital and physical loyalty cards.
Tips to follow for highly successful retail loyalty programs
Innovate with rewards
Not every retailer can afford monetary perks and attractive cash backs – and that’s okay. Limited budget does not mean that you cannot build an outstanding loyalty scheme. You will just need to be a bit more creative when it comes to loyalty mechanisms and offered rewards.
Here are some ideas for more original loyalty rewards you could use in retail:
- Offer better service for loyalty members (e.g., dedicated cashiers and shorter queues).
- Free delivery & curb-side pickup (especially viable for ecommerce retailers).
- Longer opening hours for loyalty members.
- Access to exclusive products & free samples.
- One-time events and classes (e.g., Sephora exclusive beauty tutorials).
- Special treatment (e.g., free coffee in IKEA Family Club).
- Giveaways & contests.
- Discounts available only on brand-selected products (e.g., Carrefour).
As you already know, retailers tend to target varied demographics. But this doesn’t mean that there is no scope for personalization. Gear up your CRM and customer databases with customer segmentation possibilities For instance, Stylepit, a Danish clothing retailer, managed to build specific customer target groups (such as high churn probability, High CLV, and more) with Segment CDP. Through careful segmentation, Stylepit managed to increase their ROAS without breaking a sweat.
You should try the same approach with building loyalty and targeting only specific segments with different offers and promotions. In the next step, you need to differentiate loyal customers from ordinary shoppers and ensure that your loyalty program targets these users specifically. In the last step, you can apply segmentation to building loyalty levels with different perks. This way you won't only gamify your loyalty scheme more, but also target the right clientele and save budget on hit-or-miss offers.
“Our findings showed that omnichannel customers loved using the retailer’s touchpoints, in all sorts of combinations and places. Not only did they use smartphone apps to compare prices or download a coupon, but they were also avid users of in-store digital tools such as an interactive catalog, a price-checker, or a tablet.” HBR
Nowadays, customers use more than one channel to interact with your brand. Their user journey can begin in-store, through mobile and finish on your ecommerce site. Any kind of inconsistency can lead to customer frustration and eventually, churn. Remember to keep branding and offering consistent throughout all available touchpoints.
It is also important to enable customers to sign up to the program both online and offline. It is not recommended to invite users right during the checkout in the physical locations – instead it is better to have a designated staff to handle this interaction. One example of things going south here is the H&M loyalty program, when H&M staff was asking clients to sign up for the program right at the checkout, forcing other clients to wait longer in the queue as the new member had to fill in a short form and activate the app right there on the spot.
Before launching your program, you need to be aware that you won’t be able to measure its effects effectively until at least several months pass. Loyalty is a long-term game. You also need to develop a loyalty program exit strategy to be ready to phase the program out slowly to avoid angering your most valuable clients.
You won’t build customer loyalty if the only time customers think about you is during shopping. To build continuous engagement (without spamming), you need to identify crucial moments to get in touch with customers. You can also offer product subscriptions and notify customers about the need to re-purchase. You can add an extra promotion to the notification to motivate the customers to repeat the purchase. Beware of spamming though – non-personalized offers are not only a waste of budget, but also a source of frustration for customers.
New trends in retail loyalty
If you are ready to build a loyalty program for your retail business, it’s crucial to understand the current market and future predictions.
Mobile-first customer loyalty programs
Loyalty is going mobile. The popularity of smartphones and mobile-first everything is already shaping customer habits and how shopping gets done. In response to the new mobile-defined reality, it is important to offer a mobile version of the customer loyalty program too. A good example of a mobile-first loyalty program is the Lidl Plus app from Lidl, a grocery chain store.
The Lidl Plus loyalty app offers special discounts, quick access to product brochures, and an extended returns policy. Thanks to e-receipts, customers can effectively control their expenses. When paying for purchases at the checkout, the Lidl Plus user is identified with a virtual card available in the app. Whenever customers use the app, they are rewarded with a small scratch coupon code.
Read this post to learn more about mobile loyalty programs.
Convenience-driven customer loyalty
You cannot build loyalty based only on points and discounts as rewards. Retail loyalty is primarily driven by convenience (shopping difficulty, location) and price. Nearly 75% of consumers list discounts or location as the most important factor when choosing a retailer.
To make your rewards program a success, you need to infuse it with better pricing options (discounts as rewards) and extra layers of convenience. A great example of building loyalty with convenience is the Carrefour app. Carrefour is the first retail chain in Poland to offer customers the new "Scan & Go" service. Thanks to the app, customers can scan products with their phones and pay with the digital wallet.
The scanned products are automatically added to the virtual basket, and the purchase value is summed up. Thanks to the constantly displayed cart total, customers have full control over the amount that they will pay at the checkout. In my view, that's one good reason to keep using the app and shop with Carrefour.
Another convenience-targeted switch you can make is turning towards digital loyalty cards instead of physical ones. To digitize this area, you also need to make sure that the POS integration is in place so that cashier can quickly scan the app or a card to add points to customers’ digital wallets.
Loyalty based on contextual data
To cut through the noise of other apps and non-stop stream of information, retailers need to engage customers in the moments that matter. Loyalty programs with a general approach to personalization fall flat compared to retailers who use contextual customer data to spark engagement (such as device type, weather, location, gender, age). As Braze's research suggests, contextual messages can drive up to 331% lift in engagement over general promotional messages.
Machine learning & AI
Another new development in retail loyalty is the introduction of machine learning to aid in personalizing customer experiences as a scale. Even the best offers can be ignored or end up in the trash can if not delivered at the right time and place, and even more importantly, in the right pocket. This is why retailers are increasingly interested in cooperating with technology companies to deliver unique one-to-one marketing and effectively boost engagement.
Best retail loyalty program examples
Even if you do not shop in this American giant's online store, there is a good chance that you’ve heard about Amazon Prime. It is a monthly subscription that can be canceled at any time. In the beginning, we get a 30-day free trial period, and after a month, the service costs £7.99 a month for the British marketplace, €7.99 per month for other European locations, and $9.99 for the US. Besides shopping perks, better deals, and expedited shipping, Amazon Prime members also access Prime Video and Prime Gaming platforms.
Many of the products and offers on Amazon are marked with a small Prime logo, suggesting that subscribers to this service can count on something extra when shopping. For example, some of the attractive sales promotions on Amazon are completely reserved for people with Amazon Prime.
“Prime services have enticed an estimated 70 million-90 million people to sign up for membership, though the company doesn’t reveal the exact number of Amazon Prime members. It did, however, report that in 2017, Amazon shipped more than 5 billion items worldwide via Prime, and it signed up more new paid members throughout 2017 than in any previous year.” Forbes
What made Amazon Prime a success?
- Expedited & free shipping increases convenience and makes Amazon an obvious choice when in dire need of a product.
- Special deals & discounts are an obvious differentiator between Amazon and competitors.
- Free entertainment with thousands of free ebooks, movies, and game add-ons.
It is important to note that Amazon Prime is not a loyalty program in the traditional sense of collecting points and redeeming rewards. Instead, loyal members need to pay a small fee for these privileges. This approach gives customers a sense of ownership over their membership, increasing the program's value in their eyes.
You can learn more here about the psychology of the Endowment Effect.
“We are a company committed to meeting our customers’ needs. Customers know they can trust us and depend on us, and we’ve designed this program as the ultimate life hack for them. Walmart+ will bring together a comprehensive set of benefits where we see the greatest needs from our customers and where our scale can bring solutions at an unprecedented value.” Janey Whiteside, chief customer officer of Walmart
To compete with Amazon, Walmart launched its new subscription loyalty program in 2020. The key features of the Walmart + program include several exclusive features for a small fee:
- Unlimited free shipping and as fast as the same day.
- Scan & Go functionality.
- Fuel discounts – shoppers can save up to 5 cents a gallon at nearly 2000 gas stations.
Besides the new program, Walmart also operates a point-based program that lets customers earn points and rewards for shopping. Users can earn 5 points per $1 spent on purchases made online or via the app and 2 points per $1 spent in-store. Another perk is the cash back feature that offers members 5% cash back on online purchases and 2% cash back on in-store shopping. This way, Walmart manages to cater to both traditional shoppers and mobile-only demographic. By offering both low prices, flexible cash back schemes, and convenient locations across the US, Walmart marketing plays well to the top loyalty benefits that shoppers expect and value most.
Sephora is a giant French cosmetics retailer. They have made a name for themselves in the sphere of customer loyalty with their Beauty Insider loyalty program. The program's rules differ from those of Amazon or Walmart, yet still proved to be highly effective in acquiring more members and reducing churn. Sephora’s rewards program lets customers choose the loyalty benefits they prefer. Members earn 1 point for each $1 spent. Collected points can be redeemed for gift cards, exclusive products, and extra perks (such as beauty tutorials).
Sephora’s Beauty Insider program has grown wildly popular. The program has more than 17 million loyal members (as of 2019) that combined make up as much as 80% of Sephora’s annual sales.The success of the program lies in its individual approach to customers. Sephora’s clientele does not shop out of necessity but rather for pleasure (as cosmetics are not considered a necessity product, unlike groceries). Following this logic, Sephora decided to add a feeling of exclusivity to its program with non monetary perks and gamified level structure.
Kohl's is an American department store retail chain. Having to compete with giants like Walmart, the chain opted for a transaction-based program and attractive discounts to drive sales. The mechanics behind the rewards scheme is straightforward – customers earn 5% on every purchase, called Kohl’s Rewards. The balance is converted and issued in $5 Kohl’s Cash increments on the first day of the following month. The monetary reward is available for 30 days. To increase engagement and stay top of mind, Kohl’s uses push notifications to notify users about unspent rewards.
“We will maximize value for our Kohl’s customers nationwide with the launch of Kohl’s Rewards by rewarding them with more Kohl’s Cash every day. Kohl’s has always been synonymous with value – and over the last decade, we’ve built one of retail’s leading loyalty programs, a critical element in delivering an outstanding experience for our customers. Following a successful pilot that resonated so well with our customers, we are excited about this next evolution of loyalty at Kohl’s. It’s unlike any other program, benefitting every rewards member – whether they are just getting to know us or shopped with us for years.” Greg Revelle, Kohl’s CMO.
To make the program more engaging, Kohl’s has introduced a special period where members can get $10 Kohl’s Cash for each $50 spent. The success of the program can also be attributed to its well-planned implementation. Members of the previous program, Yes2You, have been automatically moved to the new program. Their rewards have also been converted into a new currency, ensuring consistency and no hard feelings on customers' side.
Besides new technologies entering the retail market with mobile shopping, AI personalization, and VR, the upcoming decade will be a decisive period for growing loyalty and increasing tribalization of shopping attitudes brought about by retail molochs such as Amazon or Walmart.
Retailers have plenty of opportunities for growing customer loyalty. After all, their business model is primarily customer-centric. With a great customer loyalty program in place, you can collect first-party data and craft memorable experiences across any channel, both offline and online. With customer acquisition costs skyrocketing, focusing on customer retention is more important than ever.
With plenty of loyalty strategies out there, it is important to remember the key principles of growing loyalty – omnichannel presence, continuous engagement, long-term strategy, and memorable incentives.
Grow your retail business with a loyalty program