Loyalty in Retail: 10 Things You Need To Know in 2023
Retail loyalty programs are a thing of their own. Customer loyalty programs in retail usually operate on a large scale with hundreds of members across different touchpoints. Unsurprisingly, such a scale requires time, money, and a fair share of loyalty 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, rewards programs 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.
What is a retail loyalty program?
A retail loyalty program is a type of reward system that incentivizes members to shop and engage with a given retailer more frequently. The biggest difference between retail and other industries' loyalty programs is that retailers see much higher purchase frequency and tougher competition for a limited market share, which is more often than not dictated by location and convenience. This is why retail loyalty programs are often transaction- and savings-focused. However, there is a space for more creativity and perks programs of the likes of IKEA Family or Nike Membership.
Why is building a customer loyalty program crucial for retailers?
The retailer is a middleman connecting manufacturers with customers. This peculiar position forces retailers to constantly adapt manufacturers’ supplies to customers’ 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 Amazon slowly monopolizing the industry.
As with any other industry, customer retention is key 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 can you think of building a rewards program on the stable foundation of great CX.
How can retailers build customer loyalty?
The key to surviving (and 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 to claim rewards, cashbacks and other member-only perks.
Other KPIs you can achieve with a well-implemented customer loyalty program for retail include:
- Boosting customer retention and reducing churn.
- Increasing CLV (customer lifetime value) and AOV (average order value).
- Getting to know your customers better thanks to loyalty program data. Learn here about zero-party data in loyalty programs.
- Improved segmentation that leads to budget-saving and better personalization and CX.
The retail industry is customer-oriented and, as such, devotes a huge budget chunk to attracting customers with sales promotions and discounts 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 have a loyalty program in place. Based on their results, it is possible to identify several popular loyalty features for rewards programs in the retail sphere.
1. Point-based programs
Most retail loyalty programs follow a 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-sensitive, 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).
Often this formula is combined with tiered loyalty, where more exclusive perks and better point multiplication are unlocked as members progress higher. This hybrid formula works best for price-sensitive buyers focused on instant gratification and savings.
2. Discounts as rewards
The key factor in opting for a loyalty program are the perceived savings associated with becoming a member. Savings can be presented in different ways – discounts, cashback, gift cards, or exclusive sales. However, what’s sure is that the general shopper equates membership in a loyalty program with savings in exchange for loyalty.
Unlike DTC loyalty programs, retailers are not focused on offering brand-specific and exclusive features for becoming loyal customers. Instead, discounts and special offers are the key motivators to join the program.
Learn more: How to build loyalty as a DTC brand?
3. 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 I can give you 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. A lack of proper loyalty 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 for successful retail loyalty programs
1. Innovative loyalty rewards
Not every retailer can afford monetary perks and attractive cashbacks – and that’s okay. A 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 & curbside 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).
2. Customer segmentation
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 to 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 customer loyalty program more, but also target the right clientele and save budget on hit-or-miss offers.
3. Omnichannel presence
“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 for 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.
Commitment to an omnichannel loyalty experience means that you need technology to integrate all touchpoints, including POS, to scan QR codes and barcodes to identify customers in-store. This way, cashiers can scan the loyalty app, allowing members to collect points and earn rewards.
Learn more: The failings of the H&M loyalty program
4. Long-term planning
Before launching your retail loyalty 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.
Learn more: How to measure loyalty program ROI?
5. Continuous engagement
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.
Gamification mechanisms can be introduced to both offline and online retail loyalty programs. Think of badges, challenges, bonus points days or other games that can be played on in-store tablets or kiosks for increased foot traffic and engagement. You can also think about QR photo contests or treasure hunts and shopping challenges organized in-store. Gamified features in loyalty programs incentive members to interact with the program on a frequent basis.
Learn more: Examples of gamification in promotion marketing
New trends in retail customer 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.
1. 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.
Learn more: All you need to know about mobile loyalty programs
2. Convenience-driven customer loyalty
You cannot build customer loyalty based only on points and discounts as rewards alone. Retail loyalty is primarily driven by convenience (shopping difficulty, location) and price. Nearly 75% 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 a 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 checkout. In my view, that's one good reason to keep using the app and shop with Carrefour. The same solution was introduced by Walmart in its paid loyalty program, Walmart Plus.
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.
3. Customer loyalty based on contextual data
To cut through the noise 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, and age). As Braze's research suggests, contextual messages can drive up to a 331% lift in engagement over general promotional messages.
4. Machine learning & AI
Another new development in retail loyalty is the introduction of machine learning to aid in personalizing customer experiences on a scale. Even the best loyalty 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.
5. Web3 and cryptocurrencies
Customer loyalty in Web3 and the introduction of cryptocurrencies and blockchain technology to loyalty programs opens up completely new opportunities for brands and customers. It completely changes the prize pool that consumers can enjoy – NFT tokens or cryptocurrency prizes are becoming more and more popular. This way, brands can create closer relationships with customers, who, in turn, have the chance to participate in product development. So the consumer has much more to say. And with the growing number of retailers accepting crypto (Whole Foods or Home Depot), Web3 loyalty is something that is definitely worth monitoring.
The battle to attract and retain customers in the retail market where everyone is selling the same product has never been more intense. Retailers rely on loyalty programs as one way they can distinguish themselves from competitors. But to run an effective rewards program, you need to fuel it with proper loyalty technology.
Voucherify Promotion Engine provides global brands with API-first loyalty infrastructure compliant with MACH principles. Drop us a line if you are looking to build a loyalty program for your retail brand.
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