How to set up a successful loyalty program

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What are the keys to a successful loyalty initiative for a small or medium business? Here are four things they have to get right:

1. Know your customers

The first step in rewarding customers lies in deep customer understanding. Business owners must have an accurate view of historical data, to avoid the mistake the paint company made – to understand which customers drive profits, not just sales. They also need a thorough understanding of how customers actually behave and what they care about, so they can be segmented into the right buckets.

I did some work with the Shaw Festival, in Niagara-on-the-Lake, Ont., a few years ago. The customer analysis and segmentation revealed unique ways to reward customers, such as partnering with local hotels and wineries. Shaw was able to reward customers by giving them access to a discounted trip package, and the festival's own cost was much lower than if it had designed a custom points system or discounted their theatre tickets.

Here are some quick tips on how to more thoroughly understand your customer base:

• Survey your customers, formally or informally (the method is less important than the objectives). Learn about the purchase process (what steps are taken and in what order), purchase criteria (what is most important in purchasing your product or service, such as quality or price), purchase influencers and influences (who and what nudges a customer toward or away from your offering), their core behaviours (are they social, sporty, politically aware, active in the community) and what you are doing right and wrong (customer experience, service, prices) to get a good picture of how customers see themselves.
• Observe your customers. Sometimes you will learn a lot about what customers actually do and how they behave with respect to your product or service by simply watching them. It’s not that customers lie, it’s that they sometimes do things without realizing they do them.
• Talk to experts and others in your industry about your customers. What do impartial people think about them, and how do they think you can better serve them?

2. Carefully define loyalty

For small businesses, loyalty is about getting customers to want to come back, not to just come back.

Unfortunately, it's possible to design a loyalty program, based on discounts and other incentives, that builds no real loyalty. For example, many dry cleaners offer discounts at certain volume levels, but how many customers would switch dry cleaners for a new closer location or deeper discounts? Many.

So, in the short term, the system may be unprofitable, and in the long term, customers may defect to other businesses playing a me-too rewards game anyway.

Creating a sense of community is far more effective. Make customers feel understood and catered to. Create in them a small sense of obligation to the business owner and other customers. For example, a small grocery chain may derive more loyalty from hosting free cooking classes for frequent customers than by creating a custom rewards scheme.

3. Reward the right behaviour

Three tenets of customer loyalty are "recency," frequency and monetary. Recency relates to the date of the last visit. Frequency relates to the number of visits by a customer. And monetary relates to either money spent per visit or over a period of time or both. Loyalty theory says each of these metrics is important, but to different extents depending on the nature of the business.

In some businesses, the number of visits may be a better indicator of success than total spend, and so forth. A retailer may prefer customers to visit often and buy in small batches, to keep inventory levels in check, than to shop infrequently and buy a lot, because that could cause stock-outs.

So businesses can create lasting value with a weighting system that assigns value to the right behaviours, then rewards those behaviours.

4. Reward all customers

The idea is to get all customers to feel connected to the brand. So scoring customers on their value to the business is important – recency, frequency and monetary metrics are the best ways.

After dividing customers into high-value, mid-value and base-value tiers, the goal should not be to only reward the high value ones. You should instead drive the base-value customers up into the mid-value tier, and so on, and to retain high value customers. Different approaches and rewards may be necessary for all three tiers.

Mark Healy, P.Eng, MBA, is a partner at Satov Consultants, a management consultancy with practice areas in corporate strategy, customer strategy and operations strategy.