Why is Customer Loyalty Important

May 27, 2024
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E-commerce stands at the frontier of modern business and for many industries it has become an essential tool for business growth. As important as e-commerce may be in our modern times, it comes with unique challenges that could range from competition to technical implementation. At the intersection between all of the challenges and possibilities are retention strategies such as loyalty programs.

“Retention is undoubtedly the #1 goal in e-commerce.”

As is the case with any competitive environment, differentiation is essential for a successful brand. The smaller the distinction between competing products the higher the rates of brand switching, and as a result the lower the chances of market growth. This fundamentally emphasizes the importance of customer loyalty in e-commerce and shifts our focus away from “traditional methods.”

Traditional commerce has been for the most part about location, promotional discounts and branding as a few examples. In e-commerce location is no longer relevant, branding is now a matter of technical execution, and customer loyalty is more important than promotional discounts that are arguably short term strategies. If loyalty is more important than outdated promotions, should we be following a new loyalty focused playbook?

It's time for a reality check.

Basic discounts and similar promotional content do nothing to support continuity in e-commerce. These strategies have only ever been temporary solutions that bite into profit margins which make them a double edged sword. We typically see discounts used to offload products and make space for new collections or simply boost product turnover. Loyalty programs on the other hand are focused both on attracting and retaining customers long term.

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What is customer loyalty?

Customer loyalty is an expressed preference towards a particular brand in a competitive environment with comparable products. Customer loyalty is measured by duration and a businesses effort to cultivate a relationship.It’s important to understand that this relationship is generally substantiated by a key differentiating factor that highlights a brand's unique qualities or some sort of benefit for the customer. Customer loyalty programs are known to utilize progressive rewards that increase in attractiveness the longer a customer has shopped with a brand.

Customer loyalty can be categorized as a competitive strategy that is substantiated by some sort of benefit, which encourages repeat business. Customer loyalty programs often focus on enhancing the customer experience by awarding exclusive treatment or continuous rewards for members. It’s believed that customer loyalty optimizes marketing spending through retention and as a result extracting maximum value from loyalty members.

“Customer Loyalty represents a brand's ability to identify and tailor their brand around the needs of their core audience. It is a process of building a relationship with customers, minimizing issues, and incentivizing loyalty.”

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Customer Loyalty vs Brand Loyalty

Brand loyalty is primarily based on a businesses reputation and their degree of market presence, while customer loyalty is focused more on the customer’s experience. Cultivating customer loyalty is more about creating value for customers through rewards and benefits, while brand loyalty mainly occurs in maturing businesses that carry recognition for their defining characteristics. 

We can identify customer loyalty through its implementation. Customer loyalty represents the methods used to identify, isolate and reward customers based on their ongoing support. This results in an enriched and exclusive experience that enables a brand to accumulate customers. It is typically a competitive goal that looks at repeat business through benefit and implementation.

Brand loyalty is arguably the more challenging goal which requires mass market recognition. A business possesses brand equity when a consumer recognizes their product as being the standard or leader in an industry. These brands typically have the highest degree of market penetration and with the most resilient demand. Brand loyalty is inherently a comparative concept that isolates a particular business from competitors based on key differentiating factors.

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How to measure customer loyalty

Customer loyalty metrics are used to monitor customer engagement, allowing you to accurately track and optimize your loyalty program. They monitor your strategic objectives and indicate when to adjust your program or identify opportunities. Tracking these customer loyalty metrics will give you a complete scope of your program's performance and are essential part of managing customer loyalty.

Customer Retention Rate

This metric represents the percentage of customers that are successfully inducted into your loyalty program. Expressed as a percentage of your total customer count, this figure can help identify what element of your e-commerce function is lagging behind. While this metric alone lacks enough depth to give you a complete picture, in conjunction with other metrics it can help pinpoint faults.

Customer retention rate equation

Customer Acquisition Cost

This metric reveals the activity level of your loyalty members, indicating frequency of activity while isolating idol users. Capturing customers is one challenge but proving that there is meaningful activity is another question entirely. This is an essential metric because it could be that your participation rates are lacking while your retention rates describe a different story. Extracting value from loyalty members is fundamental and understanding participation rates is necessary.

Customer acquisition cost equation

Customer Lifetime Value

Customer lifetime value is likely one of the most important metrics for customer loyalty. It describes the value derived from customers over their history with your brand, it can also represent the effectiveness of loyalty programs in motivating customers. When broken down CLV to reveal how you can derive the most value from customers. CLV can be compared next to your total marketing costs to potentially improve operational efficiency.

Customer lifetime value equation

Repeat Purchase Rate

RPR is another crucial metric that demonstrates the effectiveness of your loyalty program to influence repeat purchase rates. Repeat purchases are one of the clearest indications of a successful loyalty campaign. Compare your figures to non-loyalty members and cross examine to identify a course of action that could benefit your loyalty programs performance. While it may be difficult to attribute repeat purchases to loyalty programs because of coincidence, it's possible to also track redemption rates which will help affirm your evaluations.

repeat purchase rate equation

Net Promoter Score

Customer sentiment could be one of the most insightful and revealing loyalty metrics you can track. Your core audience is exactly who you are building your loyalty program to retain. Holding a close ear to the sentiments of these high value customers can result in the most impactful decisions. Integrating customer feedback and narrowing down crucial factors is what makes customer loyalty possible.

net promoter score equation

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Benefits of customer loyalty

list of benefits of customer loyalty

Retention is undoubtedly the most important goal a business can set for its e-commerce strategy, which underlines the importance of customer loyalty. It’s important to understand that e-commerce has its own unique challenges that we need to overcome. Expecting customer loyalty without taking action is more of a dream than reality. Determining how a business benefits from customer loyalty is a natural part of the consideration process, this section is devoted to those.

Increases repeat purchase rates

Loyalty programs are active engagement tools that promote repeat purchases through persistent rewards. Through the availability of permanent rewards and personalized services loyalty programs can both capture customers and maintain relationships. The openness and availability of customers for loyalty marketing can produce repeat purchases.

Reduced customer acquisition costs

The cost of acquisition is determined by the amount of money spent in order to acquire a single customer. Through re-engagement the cost of acquisition can be reduced by every concurrent repeat purchase. It is said that through customer loyalty, we create a vehicle for more efficient marketing function.

Positive Reputation and Referrals

Loyalty customers represent your core audience who have an inherent interest in your brand. With the addition of incentives that can motivate advocacy, ugc, and referrals; its possible to leverage your loyalty members to bolster your reputation. Loyalty programs are ultimately competitive strategies intended to enhance the customer’s experience and that alone can improve your reputation. 

Increased Competitiveness

Loyalty programs are intended to be used in a competitive environment to differentiate a brand from its direct competitors. They utilize permanent rewards and customer centric benefits to encourage loyalty. These improvements to the customer’s experience increase the likelihood of repeat business which could lead to loyalty. They retain shoppers which could potentially prevent brand switching. They are uniquely effective when competitors have similar products.

Increase in Profits

Loyalty programs are known to have a notable effect on factors such as repeat purchase rates, customer lifetime value, and average order value. Loyalty is largely a retention strategy which can be a continuous source of value for a business. By expanding your database and minimizing defectors, it’s possible to scale your loyalty program effectively. A growing list of interested customers can be of substantial value.

Formed focus group

Modern loyalty programs are data driven tools used to capture and manage the most engaged audiences. These engaged customers are used as a source of highly focused insight. Loyalty program members often provide the most impactful feedback and express opinions that could benefit your brand. Integrating this information can enrich your brand and refine your goals.

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Stages of customer loyalty

list of the stages of customer loyalty

Customer loyalty is important but the process occurs in stages. To move your loyalty program through these stages a few basic elements are required. For instance, you must be accurately targeting your core audience in order to allow loyalty to exist. Your product must also fulfill customer expectations or else your brand may be relegated. Finally, your business must implement means of managing and encouraging customer loyalty to sustain it.

Discovery

This stage represents the first encounter a potential customer has with a product or brand. It is possible to optimize this stage by working on your branding and communication to fit your target audience. By refining the discovery stage it is possible to improve progression to later stages.

Consideration

The next step is consideration where customers interact with your sales point or marketing content and make their purchasing decision. They process your information and ultimately make their decision based on what they know. During this stage your product display, branding, and advocates have an opportunity to shine.

Purchase

During this stage customers commit to their purchase. In order to ensure the completion of their purchase means of optimizing the customer journey are essential. The primary culprit for a lost sale are pain points that complicate the process. It is worthy knowing that during this stage, discounts and other incentives play an influential part.

Interaction

Once a product is received; their intrinsic values are assessed and conclusions are drawn. Depending on the customer's impression of the product, customers make the decision to shop again. Here customer expectations play a central role and will determine if loyalty is possible. During this stage competitive factors are relevant and rewards that encourage loyalty can minimize brand switching.

Retention

Once customers have had an opportunity to interact with a product it is now possible to retain them for the long term. It would be reasonable to suggest that your product and brand play a substantial role in the likelihood of customer retention. Loyalty programs are used to improve chances of retention through value creation related to the customer's experience or incentives that vary from standard discounts.

Advocacy

The ultimate goal for a growing brand is customer advocacy, which represents the highest degree of customer loyalty. The underlying cause for advocacy can vary from case to case, fulfilling their “core” expectations will enhance your chances. It's important to understand that enabling customers to take action through tools is what actually creates advocacy and loyalty. 

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Factors affecting customer loyalty

list of factor affecting customer loyalty

Customer loyalty is important and by understanding what influences loyalty we can craft a more attractive and successful program. These factors range from the user’s experience, customer service, and transparency. It is important to see loyalty as something more than just retention but rather the factors that culminate into customer retention.

Customer Expectations

At the heart of any successful loyalty program are the customer’s expectations. The concept of expectations has a lot of variables, but ultimately they are tied to quality and price. Customer loyalty can be very difficult to sustain with an over reliance on loyalty rewards that ignores the fundamentals of demand. Promising and exceeding customer expectations can also be the great source of customer loyalty and naturally it’s a critical factor.

Ease of Use

In e-commerce, complications in the shopping journey can cause detrimental problems for businesses. One of our core responsibilities includes making the customer’s experience as smooth as possible from discovery to the retention process. This could imply anything from customer service, website functionality, delivery, and returns. The main point is that loyalty is difficult to sustain and if the customers find themselves jumping through hoops just to complete a basic function.

Benefits and Rewards

The benefits of your loyalty program is an obvious factor to the success of your program. The standard e-commerce loyalty program will feature in-store points, some of the more advanced loyalty programs focus on experiential rewards. We want to emphasize that in many circumstances it’s possible to create a successful loyalty program with a simple app, but to compete with the best loyalty programs some creativity is absolutely necessary.

Brand Reputation

Reputation is critical in e-commerce, it's even well understood that the average shopper does their research before committing to a purchase. Reviews are considered critical in e-commerce for this very same reason, especially when it involves a brand that a customer is trying for the first time. Customers will look to independent review sites and social media for the verification they need.

Market Competition

Market competition can place any business in an uncomfortable position. While loyalty programs are designed to be competitive tools they have their limitations. The product is the main point of focus for consumers and loyalty programs cannot substitute issues with your core services. How you craft your reward structure can help both alleviate competitive factors or worsen them. 

Degree of Personalization

Personalization is a complicated process in e-commerce and it's an issue for customers because they often receive irrelevant offers. Personalization is a major talking point because its a process of making the shopping experience more tailored to the individual as opposed to the general audience. This can greatly improve your loyalty program. The better you understand your customers the higher your chances of purchase and a satisfied customer.

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Examples of successful loyalty programs

Building a successful loyalty program can be a complicated task with so many influential factors. Drawing inspiration from higher performing loyalty programs can be a strong starting point as it may reveal common ground between them. What we know is that the world's best loyalty programs have either serious value, precise understanding of customer wants, or creative elements that highlight their values. Let’s check out three top examples to see if we can draw some inspiration of our own.

Starbucks Rewards

screenshot of starbucks loyalty program

Starbucks stands out as one of the world’s most popular franchises, many would consider them the first of their class. With countless brands battling for their market share, could loyalty be their best idea since emerging as a world renowned franchise?

They focus primarily on the mobile app experiences where customers can create orders with additional loyalty features. This allows them to create an integrated loyalty function that works in the background, yet keeps customers coming back for their rewards. They have their mobile app fully integrated into their physical cafes allowing customers to also pre-order and automatically pay through their own devices.

screenshot of starbucks loyalty rewards
  • They made their loyalty program easy to access which enables almost anyone to join
  • They made their brand more engaging through their app services
  • The rewards make it more enjoyable for customers and encourages their loyalty
  • They made themselves more competitive with attractive rewards
  • Starbucks saved on their marketing expenses because their dedicated customer base had their app installed on their personal devices

Loyalty programs for Starbucks represent one of the most successful marketing strategies they implemented. Besides the obvious advantages we’ve listed here, there are countless organizational level advantages that we’ve only stretched the surface. 

Amazon Prime

amazon prime rewards screenshot

Amazon offers some of the best services around that range from online shopping, quick deliveries, and endless content all in one subscription. It is hard to describe what amazon does because it seems to be able to do it all. What’s so special is just how beneficial their Prime subscription is for customers of all and any types. Some things are just too hard to pass up and this is one of them. Amazon truly exceeds expectations and I’m sure many would agree.

additional amazon prime rewards

Amazon Prime is one of the most attractive subscription services around, especially if we compare the sort of services they provide. Amazon has a hand in just about every jar from online shopping to streaming.  When it comes to value, it's perfectly simple why Amazon is holding strong as one of the strongest loyalty programs around.

  • Prime members pay a monthly fee and gains access to the entire Amazon ecosystem in return
  • Their perks range from shopping services to content and much more
  • In comparison Amazon offers some of the most feature packed loyalty programs anywhere
3rd image of amazon prime rewards

Nike Plus

Nike loyalty program

Nike in itself is a cultural icon and their brand is known throughout the world for their influence on sports. Many would agree that Nike stands at the top of the hill and the brand carries ironclad recognition with some of the world's famous athletes representing them. What more can Nike do to enrich their product and services?

nike loyalty program rewards

Who could have known that the nearest logical step for a mega brand like Nike was into lifestyle services that pair with their core product line? One of the most prominent features of Nike Plus is their suite of apps that have everything a sporting enthusiast might want.

Nike loyalty apps
  • They engage their community by offering activities and apps that extend their main product
  • They offer exclusive access to new products and discounts to their Plus members
  • They offer their Plus members extra features for every purchase making their shopping experience easier, quicker, and hassle free
  • Personalization is part of their culture, they give their loyalty members the ability to customize their products

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A word about the future of customer loyalty

Not too long ago all our shopping was done in-person, but nowadays that seems like ancient history. We’ve begun noticing a serious shift towards online shopping that has been substantiated by benefits for both customers and businesses. With such low barriers to entry and new streamlined technologies, some experts have gone as far as to suggest that the future of shopping will be almost entirely online.

Imagining a world fully online is quite daunting, and perhaps that may not be entirely realistic. One thing is certain, that the world to come will have a major online function and customer loyalty will be integral for competitive success. Market competition will be a factor no matter what and as a result, we will be vying for customer attention.

If we look objectively at some of the best examples of loyalty programs we’ll see that many of them are making a turn for more experiential rewards. They are taking it even further with everything getting more personalized, more creative, and more socially conscious.

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Conclusion

The modern e-commerce brand must master the art of both attracting and retaining customers to excel in such a competitive environment. Often our options may seem limited in such a technical industry, but customer loyalty is important and is very simple when understood properly. The value we derive from customers is painfully underestimated, it is through loyalty that we truly see growth and the most value. This customer loyalty guide should give you enough insight to build your highly engaging loyalty program and take advantage of marketing dollars.

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