Articles

Customer Rewards Programs – Why Are They Important?

It does not matter which field you are in – the marketplace is always competitive. With the increasing use of online sales platforms and the rapid growth in the number of stores and companies that are marketing themselves online, it is essential for each and every company that wishes to succeed to have something that makes them distinct and attractive to the customer.

For stores selling products or goods online, this is even more important as in many cases it is not just other online stores that they are competing against – it is shops and stores in the physical world, stores that may have much greater merchandising expenditure, local presence, and pre-existing ties.

Clearly, there are many ways to try and gain advantages in a market and, realistically, a store should try and use as many of them as possible to maximise its chances of success. One of the most successful, though, relates to customer incentive programs, also known as customer reward programs. These are used increasingly by stores that operate online, as well as ones that operate primarily on the high street.

What are they?

But first things first. What is a customer incentive programme? This is a programme that an organisation – in our case, a goods or product store – operates that targets customers and encourages them to undertake repeat purchases and transactions by providing them with an incentive for doing so.

This incentive can come in the form of reward points, the amount earned depending on multiple factors, including behavioural factors (such as earning points for signing up to a newsletter, for reviewing a product or as a birthday gift), by cart (including the quantity of purchases, the total purchase value, or for specific geographical areas in response to a particular campaign), or by catalogue rules (such as earning additional points for buying particular brands or types of product).

The points are associated with the customer’s account and can, for example, be built up over multiple purchases and then redeemed against a future purchase, often in whole or in part.

So How Can This Help Business?

Customer incentive programmes have been shown to be useful for companies. They increase rates of customer retention substantially. They promote loyalty and can help form long-term relationships. It is well known that it is much more cost effective to retain customers than gain new ones. Research from Bain and Co suggests that longer term customers are more efficient users of the products they buy, resulting in lower operational costs for the merchant. They also provide more referrals, and they are less price sensitive than new customers. It can also make customers more resilient to efforts from the competition to attract them, given customer’s resistance to losing rewards they may have accumulated.

With increased customer retention, comes increased profitability – research published in the Harvard Business Review suggests that for a 5% increase in retention rates, profitability can increase by between 25-125% and growth is also highly positively impacted.

Separately, a customer incentive programme can provide valuable insights into customer behaviour and purchasing trends, giving the merchant a greater idea of their customer’s potential response to changes and a sense of what will work regarding future sales and pricing.

The Advantages for Online Companies

When it comes to customer incentive programmes, companies operating online have a substantial advantage. Such programmes can be set up extremely quickly and – unlike programmes that are run by physical ‘bricks and mortar’ stores – they can be operated with a minimum of administrative or financial cost. Online customer’s reward accounts are automatically linked to their online purchases. Unlike in the real world, the customer does not need to remember to bring along a card to show to the cashier – and the merchant does not have the expense of sending out such cards and associated items.

Implementing such a system can be easy, especially for merchants of Magento-based stores, where options to put a Magento reward points system in place can be done quickly and without disruption. Clearly, such a system has to be simple for both the customer and the merchant to use, and here again, online companies have major advantages as customer incentive schemes do not require any significant changes in operating behaviour or retraining of staff. One example that allows this is a reward points extension for Magento 2 designed by Exto.io.

Summary

Customer incentive programmes have proven themselves to be an effective and worthwhile investment. With it being essential for every company to gain every possible advantage in the marketplace, it is critical that companies investigate such customer reward schemes.