Small Business Insights | The Select Funding Blog

7 Ways Creating a Customer Loyalty Program Can Help Grow Your Business

Written by Justin Irvine | Nov 30, 2022 7:00:00 PM

New customer acquisition gets a lot of attention from business owners. A new customer represents an obvious source of income and it’s undeniable that attracting new customers or clients is a key to business growth. However, if you focus too much on new customers, you may be missing out on one of the most important factors in business growth: customer retention.

At Select Funding, our clients often talk to us about the challenges associated with business growth. One such topic is the issue of customer loyalty – specifically, why and how to create a customer loyalty program to improve customer retention and increase sales. Here’s what you need to know with seven specific ways that creating a customer loyalty program can contribute to business growth.

What is a Customer Loyalty Program?

A customer loyalty program is a program that rewards the existing customers of a business for making repeated and regular purchases. Each purchase earns the customer a perk of some kind. Examples include free products, discounted products, coupons, or points that accrue toward a larger reward.

Loyalty programs may be simple in structure or complex. For example, a simple loyalty program is the loyalty card. Customers get a stamp on a card each time they make a purchase and when they fill the card, they get the reward. 

Other reward programs use customer tiers to give the biggest rewards to customers who make the most purchases. The idea behind every customer loyalty program is to encourage people to make more purchases. Since it can cost far more to acquire a new customer than it does to retain an existing one, customer loyalty programs can be an effective way to drive business growth.

The good news for small business owners is that the giveaways in a customer loyalty program don’t need to cost much to be effective. Even small perks can increase the likelihood that a current customer will buy from you again. Showing your customers that you appreciate them can also help turn regular customers into brand ambassadors – people who talk about your products and recommend them to the people they know.

What is the Difference Between Customer Loyalty and Customer Satisfaction?

Customer loyalty is related to customer satisfaction but these terms measure different things. Both are important to business growth.

Customer satisfaction is a measurement of a customer’s attitude toward your company and its products or services. If a customer buys a product and it delivers on the promises you made about it, then their satisfaction is likely to be high. 

By contrast, customer loyalty represents a customer’s actions that demonstrate loyalty to your brand. Examples may include making repeated purchases, choosing your products over your competitors’ products, and recommending your products to people they know.

There’s an undeniable link between customer satisfaction and customer loyalty. Customers who are satisfied are most likely to become loyal customers. Satisfaction indicates that they’re happy with your products or services. Said another way, customer satisfaction is a driver of customer loyalty.

How Do You Measure Customer Loyalty?

There are several key performance indicators (KPIs) that can help you track customer loyalty:

  • Net Promoter Score is a measurement of how likely your customers are to recommend your company to people they know. You can measure it by surveying your customers, asking them on a scale of 1-10 how likely they are to recommend your products. People who respond with 0-6 are considered detractors while 9s and 10s are promoters. You can calculate your NPS by subtracting the percentage of detractors from the percentage of promoters. Any score above 50% is good.
  • Repeat Purchase Rate (RPR) is a measurement of how many of your customers are repeat customers. You can calculate it by taking the number of customers who made repeat purchases in your chosen timeframe and dividing it by the total number of customers. A high percentage is an indicator of strong customer loyalty.
  • Customer Lifetime Value measures how much profit you can expect to earn from a customer over the lifetime of their relationship with your company. You’ll need to start by multiplying the average sale amount by the number of sales times the retention period. For example, if you had a customer who made 10 purchases averaging $100 each per year and you expected to retain them for five years, their lifetime value would be $5,000. You would then multiply that number by your profit margin to project your earnings.
  • Customer Engagement Score can be useful for measuring customer behaviors that signal their loyalty. Examples might include enrollment in your loyalty program, subscriptions to your newsletter, or engagement with your social media accounts. You can calculate for any of these metrics by taking the number of engaged customers and dividing by your total number of customers.

Tracking these KPIs can help you gauge your customers’ loyalty to you and your products.

7 Ways that a Customer Loyalty Program Can Help Your Business Grow

Customer loyalty programs are undeniably effective. Here are seven specific ways that creating a customer loyalty program can help your business grow.

#1: Increased Customer Retention

We’ve already talked about the importance of customer retention. It may cost up to 10 times more to attract a new customer than it does to retain an existing customer, so it makes sense to invest in customer retention.

75% of consumers say that they prefer giving their business to companies that offer rewards. In terms of customer retention, an increase of only 5% can boost your company’s profits by up to 25%. 

#2: Improved Customer Engagement

As the saying goes, out of sight is out of mind. If customers buy from you once and never hear from you again – or they aren’t incentivized to repeat their purchases – they won’t be engaged with you or your brand.

Customer loyalty programs provide your customers with a reason to come back to your company. Mentioning your loyalty program to new customers at the time of their first purchase lets them know that there are benefits to brand loyalty. Your loyalty program can increase engagement and lead to additional sales.

#3: Reduced Marketing Costs

Keeping in touch with your customers is important but it can also be expensive and time-consuming. Finding ways to reduce your marketing costs can make it easier for you to retain customers.

Loyalty programs help to keep you and your company at the front of customers’ minds, giving them a reason to come back to you for repeated purchases. When your customers know that there’s a reward at stake, they’re likely to return even if you don’t remind them to do so.

#4: Mailing List

Email marketing is still one of the most effective and cost-efficient ways to increase your sales and grow your business. Setting up a customer loyalty software can help you collect customer data and build your email list, convincing customers who may have been reluctant to share their email address to opt in.

You should use your mailing list to provide updates about the reward program, reminding customers to make purchases. You can also use it to reward loyalty in ways that don’t cost you anything, such as giving loyalty members early access to your latest sale or a heads-up regarding a new product launch.

#5: Drive Sales in the Slow Season

Many businesses have a slow season when sales slow down and profits do, too. While a loyalty program might not be able to completely make up for a slow-down in sales, it can help to make up some of the difference.

You can use your loyalty program to increase sales in the slow season by offering special incentives or double points. It’s a simple thing to do and it doesn’t cost you very much.

#6: Increased Lifetime Value

One of the most important KPIs related to customer loyalty is a customer’s lifetime value. You can calculate it by taking a customer’s average purchase and multiplying it by the number of purchases in your chosen time period. Then multiply the result by the amount of time you expect to retain a customer.

Loyalty programs incentivize customers to make larger and more frequent purchases, both of which can increase lifetime value and increase your profits.

#7: More Referrals

Finally, having a customer loyalty program can drive customer referrals. Customers who are satisfied and loyal to your brand are more likely to recommend your products or services to their friends and family – or to their social networks. In other words, it can turn your customer base into brand ambassadors who serve as influencers to help you attract more customers.

For the best results, you may want to combine your loyalty program with a structured customer referral program. For example, when you email customers about their loyalty status, you can let them know that they’ll earn extra reward points or an extra discount if they refer someone who makes a purchase.

Grow Your Business with Select Funding

Starting a customer loyalty program is one of the best ways we know to increase your profits and drive business growth. The key is understanding what your customers want and then structuring your loyalty reward program to deliver it.

Are you seeking affordable financing to help your business achieve its goals? Select Funding can help! Click here to learn about our business financing options and apply today.