There are two kinds of customer loyalty programs in the loyalty program marketing in our market space.
- An upfront reward or discount voucher program
- A point-based loyalty program.
Our POS Software can implement both with flying colours. The shop selects the appropriate method based on its particular requirements and objectives.
Since I have worked on many occasions with reward programs, I can say that they are good tools for business owners.
How Upfront Reward/Discount Vouchers and Point-Based Loyalty Programs work
Upfront Reward/Discount Voucher Program
An upfront reward or discount voucher program provides customers immediate discounts or rewards upon purchase.
How It Works:
- Distribution of Vouchers: Retailers distribute vouchers at each sale in the receipt; sometimes, they issue them free as advertising offers.
- Customer Usage: Customers receive these vouchers and can use them instantly to get a discount on their next purchase.
- Instant Redemption: The reward is applied at the point of sale, giving customers immediate benefits.
- Tracking and Analysis: Retailers track the redemption rates and sales generated from the vouchers to evaluate the program's success.
Example: A newsagent offers a 60-cent discount voucher on a purchase. Customers can now use this discount on their next purchase. This encourages them to return to the store.
Strengths of the Voucher Program
The upfront reward/discount voucher program is straightforward and effective. Here's why:
- Low, upfront technology/integration costs: This program requires little effort. A retailer with our POS system can have it up and running in less than 30 minutes.
- Simplicity: It’s easy to implement and to understand by customers and staff.
- The immediacy of rewards: Customers receive instant gratification, which drives quick sales and makes it ideal for creating spontaneous transactions
- Keep customers: They encourage customers to come back.
Weaknesses of the Voucher Program
However, there are some downsides to consider:
- Limited customer data/insights: There is no tracking of customer purchases.
- Perceived value: A voucher is generally a minor amount, so it is often dubious as a motivation.
- Margin erosion: Offering discounts can significantly impact your profit margins, especially with lower revenue.
Opportunities for Vouchers
Despite their limitations, vouchers present several opportunities:
- Appeal to price-sensitive customers: Drive immediate sales.
Threats to Vouchers
However, be aware of potential threats:
- Race to the bottom: Excessive discounting can lead to a race to the bottom, harming your shop’s perceived value.
Point-Based Loyalty Program
A point-based loyalty program rewards customers by issuing loyalty points on each purchase. After a certain number of points, they can redeem them. Generally, a cent equals a point.
How It Works:
- Enrollment: Customers sign up for the loyalty program, usually providing some information to create an account.
- Earning Points: For every purchase, customers earn points based on the amount spent.
- Accumulating Points: As the customers accumulate points over time, these are tracked in their loyalty account.
- Redeeming Points: Once customers reach a specific threshold value set by the shop, they are hopefully incentivised to redeem their points for rewards, typically a discount, free products, or special services.
- Ongoing Engagement: The program encourages repeat business by offering ongoing rewards and benefits for continued purchases.
Example:
Once a customer has earned enough points, a pet shop might offer them a $10 discount on their next purchase.
Strengths of the Point Program
A point-based loyalty program offers long-term benefits:
- Long-term loyalty: Delayed rewards foster long-term customer loyalty without an upfront investment, as unused points cost nothing.
- Tiers: It allows your customers into a different tier
- Meaningful rewards: As they grow over time, they can be something of substance.
- Credibility: This proven model is trusted and has credibility
- Customer data collection: Enables personalisation and better understanding of customer preferences.
- It allows customer communication: A shop can send monthly customer loyalty statements that advertise the shop. This is an excellent way of increasing your customer experience with your shop.
Weaknesses of the Point Program
Yet, there are also some drawbacks:
- Management overhead: It requires an advanced POS System like ours to run effectively
- Long-term: It takes time for the program to be meaningful to the customer.
Opportunities for Points
Points programs also offer significant opportunities:
- Loyalty development: Building a loyal customer base early can provide a strong foundation for growth.
- Unique rewards: Differentiating your program with unique, memorable rewards can enhance customer engagement.
- Future CRM integration: As your business grows, you will benefit from our free retail CRM and loyalty tools.Threats to Points
Threats for Points
- Competition: Keeping up with larger competitors' loyalty programs can be costly.
- Reward expectations: Struggling to provide aspirational rewards might disappoint customers.
- Operational distraction: Managing such a loyalty program can take time.
Return on Investment (ROI)
Measuring its return on investment (ROI) is vital to establishing a successful customer loyalty program. Never forget that we are dealing here with price cannibalization.
Here are key performance indicators (KPIs) that I have seen used to track them:
Both of them
Cost of the program: You are giving away a lot of discounts, so you need to calculate the amount
Time of the program: Conducting such a program will take time, so you must add it up.
KPIs for Voucher Programs
- Redemption Rate: The percentage of distributed vouchers that are redeemed. A higher rate indicates strong customer engagement.
- Incremental Sales: You must establish sales generated directly from the voucher program. This helps measure the program's impact on revenue, but it is very difficult to do.
- Customer Acquisition Cost (CAC): The cost of acquiring a new customer through the voucher program.
- Average Transaction Value: The average amount spent by customers using vouchers. This metric helps assess the program's impact on spending behaviour.
- Repeat Purchase Rate: The percentage of customers who make subsequent purchases after redeeming a voucher.
KPIs for Point-Based Programs
- Enrollment Rate: The percentage of customers who join the loyalty program. This indicates the program's attractiveness and reach.
- Active Participation Rate: The percentage of enrolled members who earn and redeem points. High participation suggests strong engagement.
- Customer Retention Rate: The percentage of customers who continue to shop with you over time. This metric measures long-term loyalty.
- Lifetime Value (LTV): The total revenue a customer generates during their relationship with your business. This helps evaluate the overall effectiveness of the loyalty program.
- Points Redemption Rate: The percentage of earned points that customers redeem. This shows how valuable and attainable the rewards are perceived to be. What you should closely monitor is the point when these are redeemed.
Calculating ROI
To calculate the ROI of your loyalty program, use the following formula:
=(Net Profit from Program) - (Program Costs) / (Program Costs) x 100%
- Net Profit from the Program is the additional profit from the loyalty program.
- Program Costs include all expenses related to running the program, such as discounts, rewards, and administrative costs.
Conclusion
Choosing between an upfront reward/discount voucher program and a traditional point-based loyalty program depends on your specific needs as a small retailer. Both strategies have their pluses and minuses and be effective. Like everything, you have to use some intelligence to make an informed decision.
