Many retailers don't believe in loyalty programs, seeing them as time-consuming to administrate or an erosion of gross profit. While this is true, the reason most loyalty programs fail to truly drive sales growth is that they simply aren’t structured correctly.
The Loyalty Program Profit Formula:
To ensure your loyalty program will be hugely profitable, consider the following:
1) How many of your customers are actively using their rewards?
2) What is the average transaction value?
To gain a lucrative return on your customer loyalty program, both sides of this formula need to be high (not just one!).
For example, If you have lots of customers with $5 worth of points available and the average transaction value when using those points is $15, this would result in a high volume of lower value sales.
On the flip side, if your customers redeem their rewards against highly-priced purchases but there's only a small portion of customers using their rewards, you still end up with low revenue (which isn’t ideal!).
Ensuring your loyalty program responds to both usage volume and high transaction values will help you drive program success.
If you’re looking to put in place a successful customer loyalty program, you’ll need to encourage adoption and usage amongst your customers AND higher transaction values.
The 4 Key Changes You Need to Make:
To drive program success (and profitability!), these are four simple changes you can implement right now to drive returns for your customer loyalty program.
1) Fix a minimum spending threshold.
To drive up the average basket price of transactions, use a minimum points redemption threshold. Set a minimum level of points, and therefore a minimum spend value that must be accumulated before points can be redeemed on a new transaction.
Typically retailers see a 500% upsell on promotional vouchers, from a well-planned loyalty program.
For example, a customer with $5 of points will generally spend $25 in new sales. However, if we set the minimum spend threshold to $20, they are more likely to spend more $100.With that in mind, your minimum point redemption threshold should be set at around 20% of your average retail transaction value.
2) Ensure the loyalty program is a win-win for you and your customers.
Your loyalty program structure needs to be a win-win on both sides of the equation. Your points earned per dollar spent ratio must be attractive to your customers and encourage them to return to your store. An especially smart move here is to offer two or three times bonus loyalty points for items you are carrying as excess inventory.
3) Drive program ‘stickiness’ with automated SMS communications & emails.
To ensure a large portion of your customers actually use the loyalty program, you need to do an amazing job with your customer communications! Use automated SMS alerts and email marketing to prompt your customers to redeem their points or set reminders for birthdays and exclusive offers.
4) Set an expiration date on reward points.
By setting an expiration date on rewards points, you can create a real sense of urgency and a call to action for your customers. For example, set the expiry for your customer points to 60 days from the date they were earned, but remind them 14-15 days in advance via SMS or email.
5) Select a loyalty program structure that is aligned with your business.
Many retailers are currently using the wrong loyalty structure. Many only achieve around a 10% lower redemption rate, compared to over 60% redemption rates for retailers that implement these steps, choosing a loyalty program structure that is tailored to their business and margins.
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