Have you ever wondered how your small business can keep customers coming back? Sounds like you’re thinking about customer retention.
While it sounds like a term only bigger businesses ought to know, the fact is creating and then keeping loyal customers is one of the most crucial keys to succeed as a small business owner.
Of course, we know how challenging it can be to retain customers, so we’re here to make it easy on you.
Keep reading to discover exactly why you need to focus on customer retention, as well as the different actionable steps you can take to getting more loyal customers for your business.
The importance of customer retention for small businesses
Retaining customers can be difficult—especially when so much competition exists, and everyone is trying to get customers to buy from their own stores.
But if you manage to crack the code on creating and keeping loyal customers, you can be looking at some big returns down the road.
The proof is in the pudding: research done by Frederick Reichheld of Bain & Company shows that even just a 5% increase in customer retention rates can result in a 25%-95% increase in profits over time.
Here’s how this might translate in your own small business.
Say you get an average of 20 new customers a month. Even if you could get just one of those 20 new customers to keep repurchasing month over month, those are repeat customers you didn’t have to spend to acquire.
They’ll keep buying from your business, all the while you attract new ones, boosting your bottom line. Repeat this over a few months, and you’ll definitely see an improvement from when you first launched.
Plus, it’s proven that there is some link between customer loyalty and average order value.
The same study from Bain & Company showed that the top 10% of customers of a business—meaning your top 10% loyal customers—spend up to 3x more per order.
There’s more: the top 1% will spend 5x more; and after being a loyal customer for at least 30 months, customers are likely to spend 67% more than their first purchase.
What this tells us? Loyal customers pay—big time.
For small businesses, investing in customer retention can be cost-effective, especially when you’re spending money to keep customers instead of trying to get new ones.
And it makes sense: when you’re still starting out, building relationships with those first few happy customers can go a long way to referring you to new ones, on top of being returning customers in the long haul.
How do you retain customers as a small business?
Now that you understand the importance of customer loyalty even as a small business, the question now is:
How do you actually retain customers and keep them coming back for more?
There are certainly several different tactics you can use to make customers feel great about your brand. From things like showing them your appreciation down to being consistent in your brand promise, you don’t need a lot of capital or experience to give customers a great experience.
However, if you’re looking to give customers more tangible reasons to keep coming back, you might want to consider launching a loyalty program for your small business.
Types of loyalty programs
To better illustrate just what loyalty programs are, below, we show you the most common types you might have already seen.
Point-Based Loyalty System
Having a point-based system is one of the more common types of loyalty programs.
The point-based loyalty system issues customers points for each purchase they make, usually at a conversion of your choosing.
So the more purchases customers make, the more points they can earn—and later, the points they accumulate can be redeemed for exciting rewards and discounts from your store.
On top of that, aside from just encouraging repeat purchases from customers, having a point-based loyalty program can also give your business valuable data about your customers' purchasing behavior.
By monitoring what your customers are buying and how often, businesses can gain insights into their preferences and adjust their offerings accordingly.
One example of a company that has used point-based loyalty programs successfully is Starbucks.
Starbucks Rewards allows customers to earn points simply by spending money at any storefront. The more you spend, the more quickly you’ll accumulate points—which can then be redeemed for free drinks, food, or other rewards.
Tiered loyalty program
When you have a tiered loyalty program, you normally end up sorting customers into different levels, depending on their purchase history, their engagement, and their actions with your brand.
The more positive actions your customer performs, the higher they rise up the tiers, and the better their rewards.
One of the biggest benefits of a tiered loyalty program is being able to give customers a sense of achievement and status by engaging with your brand.
As customers move through the tiers and earn greater rewards, they feel a sense of accomplishment and exclusivity. That makes them more likely to continue engaging with the business and earning even greater rewards.
An example of a successful tiered loyalty program you can learn from is Sephora's Beauty Insider program.
The program has three tiers: Insider, VIB (Very Important Beauty), and Rouge. Sephora rewards customers at each tier with increasing levels of benefits and rewards.
Customers who successfully meet the criteria for the highest tier Rouge receive excellent perks such as free shipping on all purchases, exclusive access to new products before other Sephora customers, and free makeup services.
This is a form of loyalty program that rewards customers for making repeat purchases, typically by giving them back some of their money in the form of cash or credit.
For example, your small business might offer 10% cashback on all purchases made by a loyalty program member.
After earning a certain amount of cashback, your customers can then redeem them for discounts on future purchases. Unlike point-based or tiered loyalty programs, your customers won’t have to wait for certain thresholds to be met before receiving a reward—they just immediately redeem cashback for their purchases.
For example, Rakuten is a cashback website that offers online shoppers rebates for purchases made through their site. Since they have so many retailers on board, there’s something for everyone's tastes.
Paid loyalty programs
Paid loyalty programs are another type of loyalty program, this time one that requires your customers to pay a fee in order to access exclusive rewards and benefits.
While it doesn’t sound like a true loyalty program because users need to pay for extra incentives, it actually works really well to cater to some exclusivity and make customers feel like royalty with your brand.
This is designed for a specific set of customers. These are people who’d see the value in paying for extra premium services, personalized experiences, and other cool perks.
For example, you might have a paid loyalty program that offers lifetime free shipping, early access to sales, or extra discounts on top of ongoing promotions.
Paid loyalty programs are designed to offer customers a higher level of service and engagement than traditional loyalty programs while enabling businesses to generate recurring revenue.
A very successful example of a paid loyalty program is Amazon Prime. Amazon Prime is a subscription-based program that offers customers free same-day, one-day, and two-day shipping on millions of items.
It also provides access to streaming movies and TV shows on top of other exclusive perks. By charging annual fees for these benefits, Amazon creates recurring revenue and a sense of exclusivity for its customers.
Partnered Loyalty Program
Partnered loyalty programs are a type of loyalty program where you partner with multiple businesses to cross-offer some rewards or deals for a particular kind of customer. These types of programs are designed to incentivize shoppers, encouraging them to buy from several retailers within the same program rather than just one.
Customers can earn points or rewards for purchases made with any of the businesses within a program. They can then use these points to redeem rewards and discounts at any participating business.
Partnered loyalty programs can be more rewarding to customers than single-brand ones because they offer a wider range of rewards and benefits.
An example of a partnered loyalty program is Hilton Honors. Customers can earn points for every stay, which they can later redeem as free nights or other rewards.
Hilton has partnered with brands like airlines and car rental companies to offer customers additional rewards to keep them in the program.
How to create a loyalty program for your small business
Now that you’re convinced you should be doing a loyalty program even as a small business, here are the steps you need to take to create one.
Identify loyal customers
Loyalty programs work best when they target your most loyal customers. Analyze the factors that motivate them to keep coming back, then create rewards or incentives based on those motivations.
To understand your loyal customers, categorize them and divide them into groups.
For example, you could categorize your customers into different groups based on how often they visit. This will help you identify which rewards are most effective at encouraging repeat visits.
Other than that, you could also categorize your customers based on how much they spend. This will help you identify which rewards are most effective at encouraging higher spending.
If your loyal customers tend to spend more money than average, consider offering them a loyalty program that gives them discounts on future orders or free shipping.
Determine structure of rewards and benefits
Use the types of loyalty programs above to help you decide what kind of system will work best for you and your customers.
Of course, you need to also be able to manage this loyalty program with ease, so it has to be simple enough for you to maintain.
For small businesses, we recommend a points-based loyalty system that gets your customers points for every purchase. You can decide whether you want your points system to be 1:1—meaning for every dollar spent, customers earn a point—then having higher-value rewards worth a lot of points.
Alternatively, you can have a conversion metric for points, e.g. 1 point for every $10 spent. This way, your rewards won’t be priced too high and look reasonable for customers to achieve.
If you’re looking for a tool to help you implement this type of loyalty program, try out Cococart, where you can integrate your online ordering system with a loyalty program you can activate in just a few clicks.
You have full control over your points system, together with any rewards you want to issue customers.
Customers are also able to monitor their own points and rewards with ease by checking their balance from your store.
What loyalty program are you launching for your business?
Heed our guide to launching your own loyalty program, even as a small business: figure out what kind of loyalty program works best for you, understand what makes your customers tick, and then implement to watch those loyal customers come in.
And when you’re ready, build your business using Cococart, the platform designed to not only help you take and manage orders for your business but also launch a loyalty program in just a few clicks.