Why Smart Loyalty Programs Focus on Retention


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It’s a common phrase in marketing and in business: market expansion. It’s undeniable that generating new customers is paramount in building a successful business. However, such a narrow focuses overlooks a more important point: to increase market share, a business must have loyal customers.

In reality, it’s more cost effective to focus on retention over acquisition, regardless of an organization’s size. Because of this, customer loyalty programs are most effective when they emphasize retaining existing customers, rather than acquiring new ones.

Let’s explore the benefits of loyalty programs aimed at customer retention.

Keeping Customers Yields a Higher Return on Investment

The principle is so fundamental that it’s a staple of entry level marketing courses: it’s less expensive to keep customers than it is to acquire new ones. Convincing new customers of the value of your product is difficult, hence the need for a marketing funnel and sales team. Existing customers already know that your product is valuable.

Not only is keeping customers cheaper, it’s also more profitable. The results of a recent customer loyalty study revealed that while loyal customers only make up about 1/5 of a business’ overall market, they drive some 4/5 of total revenue. Yes, 20 percent of your customers can drive 80 percent of your bottom line. Repeat customers also spend around 10x more than new customers.

Realizing these type of gains won’t happen overnight. But don’t be put off by slow initial gains; as the aforementioned numbers demonstrate, once customers become loyal to your brand, they’ll repay you in kind.

But the return on investment from customer loyalty shouldn’t only be measured by the amount of revenue they contribute.

Customer Retention Can Contribute to Acquisition

In both local and national markets, word of mouth is still very-much alive. Such conversations have simply shifted to different mediums, such as forums and social media. Customer satisfaction is inherent in customer loyalty, meaning if you’ve invested in loyalty your customers will tell their friends (and networks) how satisfied they are.

Consumers are still heavily reliant on their peers for information, which makes customer advocacy an invaluable resource for acquiring new business. When potential customers are considering a purchase or contract, they’ll strongly consider the opinions of existing customers who they know and trust.
For local businesses such as dining and entertainment, loyal customers can translate into rapid growth through this same type of word-of-mouth advertising. A simple loyalty program coupled with a satisfactory experience can result in a cascade of new customers as a result of customer advocacy.

Retention Builds Other Assets

A less obvious benefit of building a dependable base of loyal customers is the detailed information they provide you about your business. Loyal customers are more likely to provide accurate feedback and fill out research surveys, supplying businesses with valuable perspective on how to grow and improve. Customer satisfaction data can also identify opportunities for improvement, such as whether to open a second location or whether to modify an existing product.

Suffice it to say, loyal customers are the cornerstone for any successful business. They spend more money, contribute to organic customer acquisition, and supply your organization with data that helps you make better decisions. Loyalty programs must focus on building these types of customers first. The benefits are too great to pass up.

Zach Watson
Zach Watson is a research analyst at TechnologyAdvice. He covers project management, business intelligence, and healthcare IT.


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