How you can incentivise your customers to increase customer lifetime value and what it takes to implement the most effective customer retention strategies.
The ultimate guide to customer retention incentives
Looking for personalized customer acquisition tactics? Check out our cookbook on How to revive lead generation techniques with personalized coupons.
The WHY part of the customer retention strategy discussion is mostly clear today. What’s interesting for marketers and product managers nowadays is how to put the strategy to work. In other words, how to connect the various departments, data stores, and CRM tools in a way that yields increased customer lifetime value. In this article, we’ll go through modern customer retention program tactics, in particular, how you can incentivize them to influence customer lifetime value and what it takes to implement this.
Customer retention foundations ramp-up
If you haven’t thought about how to approach customer retention thus far, you should probably wrap your head around it with Help Scout’s resources. They provide best-in-class materials on how to grow a loyal audience for free. 22 Customer Retention Strategies that Work is a good starting point which outlines values you and your team should embrace to achieve your customer loyalty goals.
There are 2 points in particular which I’d like to take away from this guide. And the reason for this is that the experience that our customers have backs them up. To quote Eli from Help Scout:
Don’t overspend to delight
Handing out discounts and freebies can be costly. Instead, you should embrace the art of the frugal wow — creating reciprocity through small, thoughtful gestures. In fact, psychologist Norbert Schwarz found that as little as 10 cents can create reciprocity between two individuals (it really is the thought that counts).
Make it personal
In a study from the Journal of Applied Social Psychology, researchers found that waiters and waitresses could increase their tips by 23 percent from the simple act of returning to tables with a second set of mints. The researchers concluded that the mints created the feeling of a personalized experience for the customers who received them. So, it was the personalized service that made their day, not the small gift in itself.
Paraphrasing, you don’t have to burn your margins on your way to boost customer retention rates - a thoughtful, personal, and omni-channel approach to incentives should do the trick. Keeping these assumptions in mind, we’ll go through some incentive-based customer retention techniques and show you how to wire them into your e-commerce infrastructure.
Incentivized customer retention programs
Within the next several paragraphs, we’ll introduce retention techniques broken down into 4 factors:
Scheme: what is it all about
Predicted result: what’s in it for you
Tech requirements: what are next steps tech-wise
Watch out for: potential hurdles to overcome
The order of techniques follows more or less the subsequent customer journey stages.
Welcome emails - first impressions and its impact on retention
As they say, the first impression can only be made once. Your welcome email is, therefore, a great opportunity to embark on a mutually beneficial relationship with your customer. One of the ways to show that you care about them from day one is giving an instant reward, e.g. a discount coupon or a gift card for the first or the next purchase.
Predicted results: psychology studies prove that no-strings-attached gifts lead to increased engagement of the receiver. This is based on the reciprocity rule which says that even a small amount with a personalized message is enough to trigger the required behavior. You can read more about the detail in an article from the series “Psychology of Discounts”.
Potential hurdles: reciprocity works if you render a personal approach. In this case, it can manifest itself with a unique coupon/gift card code. The one-off code will also help in overcoming potential coupon misuse. You might also consider excluding low-margin products from the deal or adding an expiry date to ingrain urgency into the promotion.
Tech requirements: to make this work for new customers only, you need an ability to create and update a dedicated customer segment.
Then, your CRM should “listen to” the segment contents and notify your email service that it can trigger an email. The email itself should have a randomly generated code from a coupon database which tracks its usage.
Finally, your shop engine should know when the code is valid and how it influences the cart value. After the successful email send out, the code should be marked as used in the coupon database and the customer should be removed from the “New Customer” segment.
Anniversaries & holidays & local events - use a calendar to retain customers
If you have little idea of how to personalize your offers, tapping into the calendar is the way to go. Firstly, anniversaries. You can create a customer-focused anniversary out of every event, for example:
- first year since sign-up,
- 6 months in those new shoes he bought at your store,
- the 10th time she’s been watching her long-awaited top etc.
Secondly, the national holidays but also local events can give you a chance to convince your shoppers to come to your brand.
The key thing though is to blend your promo deal into the theme. E.g. in case of a birthday, you can include a coupon discount for his favorite products. For local events, it can be a themed popup on your website informing about an auto-applied discount.
Predicted results: showing your customers that you don’t treat them as just another transaction increases their loyalty. Narrowing the promo campaigns down to fine-grained segments safeguards your promotional budget.
Potential hurdles: a large number of fine-grained calendar-based promotions can lead to maintenance overhead. Your team needs to remember which customers are eligible for the discount and when. The more local events you want to feed into your promotions, the more calendars you have to maintain. Also, to please customers with a personalized anniversary deal, you also need to collect the information about their habits and favorite products.
Tech requirements: as in the previous example, to handle this kind of personalization, you need a robust connection between your CRM and online shop. With a certain scale, you need to be able to plan when the campaign becomes active and inactive up-front. Apart from timewise, you should control the promotion geo-wise, e.g. to save your margins, French shouldn’t see (let alone use) English deals and the other way around. Another tricky thing is to wire customer preferences into discounts. Your online shop should be able to support product-specific discounts and perhaps some upselling tactics like Buy One Get One Free.
Refer a friend to retain customers
OK, so you incentivized your welcome and anniversary messages and, therefore, put your foot in the door to a lasting relationship. Your customers might have responded with their dollars. Now, you should keep up the momentum and try leveraging these contacts to multiply your traffic. Using a referral program is a no-brainer here.
Predicted results: nobody has to be convinced about the power of word-of-mouth. But to get a more precise ROI formula, you should pay attention to these factors: referral service cost, incentives cost or LTV of referred customers. Referral marketing is a numbers game, so maturity of your marketing channels (primary site traffic, mailing list volume, social media followers, influencers & advocates reach) is essential. You can also try estimating the ROI with the following formula:
ROI = ((LTV * (1 + k)) - Reward) / Reward
Where k is avg number of invites per user * conversion rate
Potential hurdles: another key factor for referral program success is its relevancy. Today’s consumers favor a personalized approach here too, and that boils down to several implications for your referral program:
- Persona-driven messaging - engagement copies should be filled with the contextual information and unique referral link
- Omni-channel approach - the information about the referral program should be ubiquitous (emails, website, social ads, etc.)
- Engaging reward structure - consider a variety of rewards and a referral scheme which rewards for performance
There’s no silver-bullet method for designing a well-oiled program from the get-go. You need to iterate through tests; building a flexible and personalized referral marketing channel takes time. E.g. Airbnb, allegedly, needed a 5-person team to devote 3 full months and 30,000 lines of code to do their referrals system.
Tech requirements: to overcome the hurdles, you need a software package which allows for running A/B testing. In other words, you need to launch your first friends-refer-friends campaign on a small scale to learn what works. Additionally, it should support the following features:
- Customer segments working with personal attributes and order history
- Rewards structure, with:
- internal referrers (coupons & gift cards for products from your offer)
- external affiliates (cash)
- custom conversion scenarios (specifying under what conditions a referrer is entitled to get the reward)
- levels (driving engagement through rewards growing with the number of referred users)
- limits (preventing spam/fraud)
- Number of distribution channels and rewards delivery including: email, SMS, livechat, popups, in-app widgets, social media
Lastly, be sure to implement performance tracking (leaderboards, overall spend charts, disabling/activating programs with a single click). Also, exposing a referral engine API is a good thing to consider as the number of marketing channels can increase or change with new trends or business model improvements.
Social media engagement - engage and retain
Yes, you can drive retention with social media, McKinsey even claims that social media campaigns are 60% more effective than traditional ads. But, how can you go about it in this crowded area? You can either post quality content like BOOK A TIGER does with kittens or you can engage shoppers with compelling and exclusive promotions.
Predicted results: customer retention impact, in this case, relies on several factors. One of these is the discount structure and conditions (we have a guide on this). The more personalized they are, the more attention you get. The other elements which have an impact on creating loyal fans are the quality and timing of your posting. Here are some variables that might influence the bottom line of your promotion:
- Eye-catching & amusing imagery
- Posting promotion reminders
- Timeframe and frequency
- And of course, your campaign budget
Potential hurdles: paradoxically, one of the biggest problems is the number of shares and likes your posts will get. Although your team might be happy about the promotion performance, a popular code might harm your promo budget. So, how to fix this then?
Tech requirements: one of the ways to tackle coupon leak is to create dedicated landing pages which serve unique coupon codes. Additionally, you can gate the access to the code behind the email address request. This approach, in turn, opens up an opportunity to come up with even more personalized deals, e.g. only customers from Germany or only the first-time customers are eligible.
If you can’t use links (Instagram) and you’re forced to use public codes, your team should be able to cap the maximum number of redemptions of the code. This can also be used for gamification (e.g. first 500 shoppers get the deal!).
Ultimately, you should have an option to stop the discount campaign with a single click when you notice that your campaign has gone south. Ideally, you should equip your marketing operations team with a tool to define the campaign’s schedule up front according to the time frames that work best for you.
Customer support/feedback keeps customers satisfied
This channel has the greatest potential for having an impact on your retention rates. Usually, dissatisfied customers give us a chance to repair the damage. How can we use the incentives in this channel to win the customers back? Let’s take a look at some examples broken down by the channel line:
- Complaints (email/livechat) - one-off “sorry” coupon or gift card (can be limited to a particular product)
- NPS survey / public reviews - enticing customers to submit a review with rewards
- Online communities - one-off “sorry” coupons but also reward contests for submitting defects found in the product/service
Predicted results: reduced churn. Measured either directly (number of retained customers, you can actually measure if the customer treated by the incentive is still with you and for how long) or indirectly (drop in number of complaints due to the fact you acted on the feedback from reviews).
Potential hurdles: often, the speed of reaction is of high importance in this case. Don’t we love when you return defective stuff to IKEA and they hand in a voucher right away? But the company pays attention to its margins and puts some limits on the gift card - it can be used only to pay for the returned product.
Tech requirements: that’s why your customer support agents should be able to quickly generate a discount code which can be assigned to a particular customer only (email address validation). Another solution which requires even less work from a customer is the discount automatically applied to the next order. This kind of tool, however, requires strict integration:
- with the customer support tool so the customer agents can hand in / turn on the discount on the fly
- with online shop engine so that the discount gets accepted
Post-GDPR re-engagement offers
Apart from anniversaries or incoming requests from your customer base, you might also proactively fight for new purchases using email, SMS, or push notifications. This is tricky in the realm of the post-GDPR world though (see our article on how you can deal with GDPR restrictions with coupons). The good news is that incentives can help you get the consent for offers, given that they are personalized and contextual. You can achieve this by sending out unique offers based on time (e.g. 6 months since the last purchase) combined with favorite products (your bag is discounted this weekend) and with geolocation (now available in Seattle).
Predicted results: these kinds of emails/messages are simply a surefire way of increasing LTV. There’s a data-backed case study by professor V. Kumar, a marketing professor at Georgia State University, which shares tips on how to design “win back” offers you can use in your re-engagement ads. We highly recommend reading.
Potential hurdles: Re-engagement campaigns have superb ROI if they’re automated. Sending them in bulk manually is inefficient for 2 reasons: wasting your marketing team time and hitting your customers with irrelevant offers.
Tech requirements: the hurdle to overcome here is that the automation requires several systems to work and few software platforms can do this out-of-the-box in a flexible way:
- Customer segments should let you know customer attributes but also when was the last order, what are the shopping preferences, and finally, what’s the LTV
- Email/SMS/push notification service should allow for designing a nice template and embedding the promotion details like a QR coupon code
- At the right time, the backend system should orchestrate the message send out on top of the CRM data and GDPR consent data
- Online shop software should accept the coupons or prompt a popup with the discount to be applied
Bonus: if you managed to implement this machinery, you can already tap into other channels which you haven’t intended for re-engagement purposes in the first place. For example, you can embed your offers into emails that are often expected and read by your users, like invoices or shipping status.
Every e-commerce needs a loyalty management system. Period. Today, when customers hop across to other brands just because of a single coupon, you have to equip your marketing team with the tools to fight back. Tailored loyalty software is one of those tools. How does it work? Basically, you reward your customers for purchases or other beneficial actions like submitting a review or shares on social media. Each action has a given number of points assigned. When a customer crosses a pre-defined milestone, they are automatically rewarded with a discount or notified that they can choose how to redeem the points.
Predicted result: Predicted result: with loyalty programs, you drive engagement using gamification phenomena (if you’re interested in the psychology behind this, read our recent article). Loyalty programs are so popular because it’s, on average, 7 times cheaper to convince a customer to re-purchase than acquire a new one. Measurement of customer loyalty is so essential that we’ve put together a separate guide presenting the techniques and formulas on how to do it.
Potential hurdles: to work and yield results, however, the customers need to be reminded about the program. But reminders are not enough. The essential part of the program is the rewards themselves. If they’re not relevant to customers, they don’t care, so, they should go hand in hand with shopper preferences. Lastly, you need to put an expiration date on the collected points, so you entice the clients to act.
Tech requirements: we’ve covered the answer to how to deal with these obstacles in one of our recent posts, read “Must have features of a loyalty management system” on our blog to find out more.
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Summary and how you can make your first step
As we’ve, hopefully, shown, the road to a personalized as well as a promo-budget cautious customer retention infrastructure is paved with technical obstacles and corner cases. But when approached in the right way, it gives massive savings in customer acquisition costs. Zalando, Amazon, and other big fishes have long understood this and assigned hundreds of developers to build their data-driven promotion monsters. The good news is that now you can start competing with them. We at Voucherify have released some incentives building blocks which you can gradually introduce into your marketing channels and ultimately increase the customer retention rate.