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How To Drive Greater Customer Retention With Loyalty and Reward Programs

Shopping online gives us the availability of choosing from a plethora of vendors.  Great for shoppers – but for eCommerce stores, this means that a first time buyer doesn’t usually translate into becoming a regular customer. And to that end we invest heavily in trying to get them back.

Whether through email marketing, beefing up customer service, or retargeting, there are a lot of options to try to bring them back.  But one area frequently overlooked, despite how easy it could be, is implementing a loyalty and rewards program to get new loyal customers.

With us today is Mike Rossi, CEO & Co-Founder of Sweet Tooth, an awesome company that helps eCommerce stores create and maintain a loyalty and reward programs.  We discuss how effective it is at creating loyal customers, as well as how already loyal customers will become more profitable.

[3:00] – 3 most effective ways to create a loyal customer base

[8:20] – When to start a loyalty rewards program.

[10:39] – 2 reasons customer loyalty is crucial

[14:04] – How to implement your loyalty program.

[18:35] – The critical elements of a successful loyalty program.[27:36] – How the industry has shifted focus to customer retention

LINKS MENTIONED IN THE INTERVIEW

Gongshow Gear loyalty page

Ecommerce Optimization – Interview with Justuno’s Erik Chritiansen

READ THE TRANSCRIPT

Daniel: Hey, everybody. Welcome back to another episode of eCommThinkTank. My name is Daniel Kohn, and today we’re going to be looking at loyalty and reward programs and how to actually drive a greater loyalty with your customers online. Loyalty’s obviously been a very big thing in offline retail for many years, especially in competitive spaces. I’m trying to figure out how to actually keep more customers for longer as opposed to constantly trying to find new customers. So, with us to talk more about loyalty and rewards and just trying to break it down a little bit to actually get a better understanding of how it works and what the benefits are, we’re being joined by Mike Rossi who is the founder and CEO of a really cool loyalty and reward program called Sweet Tooth. So Mike, welcome to the show.

Mike: Yeah, thanks for having me, Daniel.

Daniel: Yeah. So, before we sort of get into the meat and potatoes of it all, maybe just tell us a little bit about Sweet Tooth, how you got started with this company, and what you guys do.

Mike: Yeah, for sure. So, a few years ago there was a couple of us at the University of Waterloo, and we were doing eCommerce consulting projects for online merchants, very similar to what you would imagine an agency does. And what we noticed is more and more Magento sites actually were having trouble retaining their customers and they were asking for some sort of loyalty or rewards program. So, what we built is one of the first, if not the first, loyalty program extension for Magento. And that seemed to be doing quite well, and it did well to the point where we stopped doing our agency projects and we decided to focus exclusively on that Magento extension.And as we’ve seen over the previous few years, other e-commerce platforms have started taking off.

And in that sort of environment, what we decided to do is expand our technology just for Magento to all e-commerce platforms, and now we’re on platforms such as Shopify and Big Commerce. And what we do is we provide white labeled loyalty programs for merchants, so we allow them to run their own brand of loyalty programs to allow their customers to come back and earn points for repeat purchases and different customer actions. So, we’re very passionate about allowing a merchant to bring their customers back to their own store, as opposed to switching to competitors in the future.

Read Full Transcript

Daniel: Right. And so one of the things we were just talking about offline before was the idea of rewards and loyalty might seem to many marketers and e-commerce business owners as one of those nice-to-haves. Maybe you can share with us what some of the benefits are and why they should start considering them as has-to-haves. Has-to-haves?

Mike: Yeah, so. Yeah, need-to-haves. We like to say that, yeah…

Daniel: Need-to-haves. Sorry. But yeah...

Mike: One of the biggest trends we've seen, and so we have worked with merchants on and off for the past 10 years. And one of the big trends we've seen is in 2005 it was enough to just be providing a product with good customer service and reasonable page load times, and that was a competitive advantage. Like, you could be selling T-shirts and be making a very decent profit. Whereas in 2016, it's really hard to be selling T-shirts and just using SEO, and social ads, and paid ads, and with the competitive pressures on margins with more and more T-shirt stores on line every day, it's really tough to make a profit.

So, unless you are shifting your focus from exclusively sort of acquisition marketing or getting a one-time customer, you have to shift your focus more to a focus around repeat purchases. Now that doesn't necessarily have to be with a loyalty program, but it needs to be with some sort of technique around taking the customers who have already purchased with you and getting them back for a repeat purchase. Loyalty programs are one very easy way to implement a strategy like that because it creates switching costs for the customer. It makes it hard for them to abandon a points balance they have at your store and then switch to another store where they have nothing built up.

Another example could be something like a very targeted email campaign based on previous purchases or segmenting your customers into the ones that haven't purchased before, and targeting them specifically, and making sure that you're messaging to them is a little bit more aggressive to get that second purchase. But we're very big advocates of focusing on the percentage of your customers who have never made a second purchase and really increasing the number of customers who make that second purchase and come back to your site over and over.

Daniel: Yeah, wow, and it's interesting because when I look at Google Analytics or any modeling where we can look at the average purchase of a customer, or we start looking at lifetime values, most people really struggle getting them from making that first purchase to that second purchase. But then at the same time, their most valuable customers, like you said, are the ones that just keep buying over and over again.

Mike: Yeah, yeah exactly.

Daniel: So there's just great benefit and value in really honing in on those people that really, probably driving like at least 50, maybe even more, like a massive percentage of your actual revenue.

Mike: Yeah, yeah one stat that was published by Adobe says that 40% of all online revenue at the average store comes from only the top 8% of customers.

Daniel: Wow.

Mike: So it's a massive amount that have skewed towards the most loyal customers. And we see with businesses that have very low customer retention, that their best, their highest wins or the things that they can do immediately to become most successful is get that second purchase.

But if you already have some sort of mass of customers that are making repeat purchases, then your best efforts are spent creating maybe a VIP program for the very top purchasers and making them feel special. If you're familiar with the Starbucks VIP program, that's an example of a very well implemented VIP program targeted at the top spenders at a retail store.

Because they know, I mean the people behind the loyalty program at Starbucks know that most of their revenue comes from repeat purchasers, so they want to make that group happy, make sure they're switching costs are high, and make sure that's there's no chance they're going to go with a competitor.

Daniel: Right. So the people we're really talking about here are the…so it sounds like we've gone from 80/20, to 90/10, to 92/8.

Mike: Yeah, exactly. It really is zoning in on those very profitable customers for you because the ones who purchase with you once a month, you don't want to ever lose them. Because if you do then that's a massive loss. You're not spending much money at all to reacquire those customers. Whereas a new customer from Facebook, or Twitter, or Google, you're paying quite a bit.

Daniel: Yeah, for sure.

Mike: And in general, their average checkout size will be smaller as well.

Daniel: And so we've just been looking at the types of customers that are best suited to these programs. But if we look at the business and when an e-commerce company is evaluating whether or not this is the right time for them, is there a particular type of stage in the business cycle that a company should be looking at loyalty and rewards? Like, should they be relatively established already or should they already be turning over a certain amount of transactions every month? Is there like a sweet spot to really then say "Hey, let's start addressing this particular strategy"?

Mike: Yeah, and we like to look at it as what percentage of your marketing should be focused on acquisition versus retention?

Daniel: Right.

Mike: And eventually it should end up around probably focusing 70% of your efforts on retention and 30% on acquisition. That's when you're a large retailer. But initially when you're starting, you can get away with not focusing on retention at all because there's no customers to retain at that point. So in your first month when you're doing zero sales, you better be focusing most, if not all, of your efforts on customer acquisition. And then it's sort of a gradual switch. Some of the bench marks we've seen is around $10,000 a month in sales. That's when it really, really makes sense to start looking at retention because there's probably a lot of missed revenue that is falling through the cracks, and either just not purchasing again or purchasing with competitors.

And $10,000 is also the level where we see merchants not really able to keep track of every single customer anymore. So that's generally when we recommend some sort of loyalty strategy in place, around the $10,000 a month range. As you get into a little bit larger retailers, around $100,000 a month range, it really becomes a big loss that they're seeing because customers aren't coming back, like it starts becoming quite significant in the $50,000-$100,000 a year range of revenue is defecting to competition or not making a repeat purchase. So, it really becomes significant around the $100,000 a month or $1 million a year approximately range.

Daniel: And to keep up in ad spend, to keep turning over that type of revenue on your single purchasers, is also quite a big burden on the cash flow of the business so it makes even more sense to look at a program like this.

Mike: For sure. And we've seen several merchants, again we've worked with some merchants since the mid-2000s, and we've seen some merchants be very fast growing merchants within what now is a crowded industry. And those merchants really have slowed down their growth, and in some cases, actually shrunk in size because now what is happening is their ad spend is going through the roof to acquire the one time purchasers, and they've never actually made a serious effort on customer retention.

So a lot of their cash flow each month was one time purchasers that they thought they had an equation for. Say, "Okay, yeah. We acquire the customers at this price, and then we sell them on average this much in merchandise, and we have this much in margin." But what they weren't accounting for is two things, the competitive landscape of buying those ads, and then also the competitive pressure on the margins. So they are no longer able to charge $30 for a bar of soap or a T-shirt or something like that because people can…people are smart and they can search for alternatives now very easily. So those two things are starting to really catch up with the high flying, growing e-commerce stores that we saw back in 2009, '10, '11 even '12 and then in the past 4 years, we've seen some of those stores really, really decline.

And it's scary for us to see because we want those businesses to be successful because we know that customers like their brand, but it's just you need to provide a sort of, even if it's a small incentive for customers to come back, or else they really will just forget about it. And if it's a retailer where the purchase is made a little less frequently, for example men's shoes, which are on average purchased maybe once or twice a year, that's a little bit less frequent than dog food, for example. So when the purchase is even less frequent, you need to really stay on top of getting in touch with the customer and saying "Hey, you still have this points balance," or, "Hey, here's some products that are similar to what you purchased in the past," or something along those lines.

Daniel: Right. So I mean obviously then rewards and loyalty are always going to be more beneficial for products that have repeat purchasing behavior, but it sounds like even for products that, or product lines that are a little bit more longer time spans between purchasing, it's still a relevant tool to be using [inaudible 00:13:24].

Mike: That's right, yeah. Yeah, that's right. And we see…I mean the example we use is if you were selling boats online, you're probably not going to want a loyalty program as much as if you were selling pet food, or supplements, or cosmetics. There are some very, very high impact industries that we work with, and they're generally around food and nutrition, fashion, things like that where the purchases do happen quite a bit. Or subscription clubs are actually one that we see quite a bit because if you start creating a loyalty program with a subscription club, then it makes it very tough for the consumer to switch.

Daniel: Right. Okay, cool. So moving along a little bit, as I was researching for the call and I was taking a look through your website, and you've got some really good showcases and case studies of companies that you work with and how they're using rewards. And I started looking at one of them. I'll post the link at the bottom of this interview in this post, but it was a site called gongshowgear.com?

Mike: Yeah, Gongshow Gear.

Daniel: Gongshow, yeah. And I started looking at their loyalty and reward page, and I was like "Wow, there's like quite a bit of stuff going on here." And what I wanted to sort of find out is if someone's listening to this right now, and they're like "Hey, you know this has really got me curious. Maybe we should look at this more." What could you suggest as a starting point? Where does the company start in preparing the pieces for layering in a reward program that's for success? Because it's…

Mike: Yeah, so I think one of the things that we really like about Gongshow is they have a very passionate customer base. So in some senses, it makes it a lot easier for them to know what type of program to implement. But what they started with is they started with researching what their customers really wanted and what types of things they wanted to be able to redeem for, what types of actions they wanted to reward for.

And they really thoroughly understood what their customer wanted, and I think they did that with several customer conversations. And then also what we did is we worked with them to make sure that the program was economically set up well. So throughout this call, we've talked about a few stats such as the percentage of customers who come back for a second purchase, but there's also certain things like purchase frequency, or average number of times a customer purchases per year, average time in between purchases.

Considering all that information is how you come up with a program where you're rewarding the correct amount for different customer actions so that the program ends up being very profitable for you. Also, having your company fully commit to a loyalty program is another thing. Sometimes we see a merchant, they implement a loyalty program, and they don't really do a solid marketing push behind it. And sometimes that can make all the difference. Making a very good sort of homepage banner and a landing page that's linked to that and doing an email campaign is often all you need to really kick off a loyalty program, and then have that as something that really, really makes customers feel appreciated.

And we know with the Gonger Nation, which is a really cool name for their loyalty program as well. Yeah, it's done a really good job of that because they've really committed to advertising this to their customers.

Daniel: Right. And it kind of gamifies the whole thing as well. I'm not a hugely experienced in it, but I just know that people love to engage in that kind of fun, gamey type of level, you know? Like if you buy this, you get this many points. If you sign up for this, you get this many points. If you tweet this, you get more Gonger points or whatever you call it.

Mike: Yeah, yeah. It's…

Daniel: Yeah, people love that, and it comes back to what you were saying in the beginning. It just connects them to you like in a deeper kind of way.

Mike: Yeah it is very interesting how we can actually track the increases in those different customer actions, and it really does work. But, yeah sometimes it's surprising. You're just sort of setting up a program and you're wondering, "All right, is this actually going to work?" and then you see the results, and it's like, "Okay, yeah." People really like these types of programs, especially when they're, we like to call it lukewarm loyal. So like they're somewhat loyal to a brand, like they've shopped there maybe two or three times, but they don't really remember too much about it. Sometimes the loyalty program can just be the kick that they need to really engage with that brand and start doing things like social sharing and referring friends and just various other actions that we want to reward that customer for.

Daniel: Right. So just to sort of summarize if someone's thinking about doing this, from what I can see at Gongshow and what you're saying, it seems like there's the business logic behind it to really just consider what makes sense from a business perspective because obviously a point has a dollar value as well to what you're giving away.

Mike: That's right.

Daniel: And you've got to make sure that at least on the business side, you've got it pretty well thought out of what you can give away and what you're prepared to do on the actual rewarding side. And then there's the actual delivery of just the marketing side, whether it's on site, cross promotion, or whether it's emailing and that constant reminder of making people aware that you've got this particular program instead of it just being another page on your website.

Mike: Yeah, yeah that's right and…

Daniel: I think, yeah…

Mike: Oh, go ahead.

Daniel: No, no I was just going to say I think that's like a really good...because when you look at this, you just go "Whoa. How do you…how's this all going to happen?" but I think if you just break it down into those two kind of areas, I think you could probably…it'd probably a lot more easier to digest than you probably think.

Mike: Yeah, yeah it definitely seems overwhelming when we're dealing with merchants who have never done this before, which is quite a few. It does seem overwhelming at first, but once you sort out the…and we usually start with the business side first. So figure out what the program's actually going to be rewarding for, the different points amount, then it makes it very easy to start doing the marketing. And one other thing with the marketing that we normally recommend is something called a "staged loyalty program launch."

And this is where you start rewarding…you start with a very basic loyalty program. So rewarding for maybe only one or two actions, and then every month or two, you start releasing functionality and saying, "Okay, now you can earn points when it's your birthday," or, "Now you can earn points for social sharing." And what that allows you to do is constantly set a cadence of reminders for your customer base. Whereas if you launch the full program at once, then maybe it wouldn't get as much attention on an ongoing basis as if you did the staged launch. So we normally recommend a staged launch for anyone launching any type of loyalty program.

Daniel: Right. Okay and when we talk about measurement of success, I know when you look at rating and reviews they measure the success, everyone tries to somehow relate it back to revenue at rating and review sites. Anyone who engaged or clicked in a review and they ended up buying something, we attribute that to...

I'm just wondering, how do you guys actually measure the success of your programs? Is it measured against revenue? Is it measured against how many points they're actual giving away? What's the measurement of success for a loyalty program?

Mike: So generally what we do is we look at the repeat customer purchase rate, so the percentage of customers who make a second purchase, and then we look at purchase frequency. And if we hold everything else constant with the brand, we look at the changes in those metrics and the dollar amounts associated because you can safely assume that even if you had, let's say some promotions going on, you wouldn't necessarily increase the repeat customer purchase rate. But if you're running a loyalty program, that's very likely to affect that. So we track the people who have…or we track the increases in those two metrics, and then we track the revenue associated with the people who made those repeat purchases and were also given points.

And so it's not as sort of hand wavy as something where like if you click this link and then you purchase, then we were responsible. It's a little bit more stats based. We try and say, "Okay, we're starting out implementing this loyalty program with these goals in mind. If we increase the repeat customer purchase rate by this amount, then we can safely assume that at least this percentage is due to the loyalty program."

Daniel: Right. So say in the backend of your platform, is there some way to measure that?

Mike: Yeah. We have that available on both our Shopify, and Big Commerce, and our Magento products. So there is a reporting section for sure.

Daniel: Right, right...

Mike: And that is important with any technology. So as you said towards the beginning of the call, there isn't a loyalty program on every site. Not the way there's a payment processor on a free site, so it's not as well understood of sort of an industry. So when it's not as well understood, it's very critical that we're showing sort of, "Yeah, your program is working. Here's how we know it's working, and here are the results that it's providing."

Daniel: Wow, it's actually quite amazing. I mean I'm looking at your website at some of the statistics. Forty percent average increase in customer lifetime value. I mean that's really what everyone wants, but it sounds like the way that you're looking at the reporting of it as well. It's not pie in the sky type stuff. It's not like some smoke and mirror, snake oil kind of trick. It's real and it's very measurable as well.

Mike: Yeah, the cool thing is it's also very profitable for the merchant because these are customers who you're not paying very much at all to retain. Your only increase in cost comes from the points that are redeemed, and generally you see a lot more retention and a lot more positive margin than you do see in terms of points redeemed, especially compared to a discount strategy. Because the interesting thing is when customers consider sort of a $5 discount or a 10% discount, they don't mentally think about that the same way…or mentally envision that the same way as an amount of points giving them a discount. So an amount of points, people generally don't calculate the monetary value of that. They're just saying "Okay, I'm happy I have 1,000 points," or, "I'm happy I have this gold VIP status."

So it makes them feel sort of emotions associated with a discount as opposed to getting customers or a customer base getting trained into expecting like, "All right, I'm waiting for my 30% off fall discount." Which is not a healthy thing for an e-commerce store to have.

Daniel: Yeah. So just to wrap it up, what's next in the loyalty and rewards space and for Sweet Tooth? Where do you see all this heading based on where you've come from?

Mike: Yeah, so what we're seeing, I mean the biggest trend that we're seeing, is merchants wanting to systematically reward their best customers and make sure their best customers never defer to…or sorry, defect to other brands. And so we're seeing a rapid increase in VIP programs and giving extra points to very loyal customers or making very loyal customers appreciated and ensuring that they refer friends. So we're seeing a big, big increase in focusing on the top sort of 10% of your customers and making sure that, not only do you retain them, but you can also move other people into that segment. So I think that's going to be the very central focus of retention marketing over the next few years.

It's going to have to be a focus for any e-commerce business that not only wants to survive but also wants to grow. It's going to be focusing on that very top 10% of your customer base and making sure that they are coming back for repeat purchases over and over again, and you're not spending huge amounts on price with your competitors or spending huge amounts on ads acquiring those one time customers that will never come back. So that's sort of the big overall macro-trend that we see for the industry. Obviously we're a little biased, but we do talk to probably 10 to 20 merchants a day about this type of stuff, so we see this happening a lot, and we see it being sort of a requirement for being in e-commerce going forward.

Daniel: Yeah, yeah. Just a final thought as well, recently I was talking to another platform called Just Uno, and we were talking about the evolution of e-commerce over the last 5, 10 years. And like you were saying in the beginning of the call, five years ago it was just a massive land grab, and people were really just trying to acquire customers. And as the markets and all the product verticals increased in competition, the shift has really moved towards conversion rate optimization and how to actually drive more value out of what you already have. And I guess Sweet Tooth and these loyalty programs is kind of the same thing, just from a different perspective. It's really another approach at looking at what you already have because conversion rate optimization, when you're trying to optimize a page, it's really trying to get better leverage out of someone who's already on your side right now.

And what you're trying to do and what loyalty and reward programs are really based around is, "How can I get more out of my current customer base instead of looking for more?" And I think they're similar ideas. And I think that as every product space evolves and competition gets more fiercer, and like you said, pricing on things and margins gets tighter, you're always going to have to start looking further in than out. And it seems like this is a great way to do that and a really great way to really leverage the best purchases in your business.

So anyone out there, if you're thinking about layering in a rewards program, you should really check out Sweet Tooth. Because they've got some great content on their website as well outside of just what the platform is all about, but also lots of videos, lots of really good case studies. And hopefully this interview and Mike's comments can really help everybody understand a little bit more about what the benefits are, how they work, and if this is the right kind of program for your e-commerce company. So, Mike, thanks so much for your time today. I really appreciate it.

Mike: Yeah, thanks for having me, Daniel. Happy to do this anytime.

Daniel: Yeah, and I look forward to seeing the growth of the platform and see how you guys evolve over the next couple of years.

Mike: Great. Thanks a lot. Talk soon.

Daniel: Okay. Take care.