How to Create Effective Incentive Programs to Increase Customer Loyalty

With customer loyalty considered one of the most important investments a business can make, here are four critical factors in assessing in development of your program.

Increasing customer advocacy, including developing rewards programs with educated tie-ins, has a strong case for being the most critical investment a business can spend money on. Improving customer retention by a mere 5% can help increase a business's future profits by an eye-popping 25–95% (in fact, up to 80% of future profits are likely to come from just 20% of your most loyal customers).

Multiple studies have shown loyal customers are far more likely to repurchase, be more forgiving, refer clients, and buy new products. And research indicates that while traffic in stores has declined by 57% in the last few years, consumer spending has also increased during this period.

82% of customers seek the internet's opinion about purchases they are about to make in-store. That means your customers are globally available to advocate for you.

On the other hand, acquiring new customers is notoriously expensive and riddled with risk. Customer acquisition cost (CAC) can fluctuate wildly, especially if you're trying to outspend more prominent competitors. I worked for a former partner at Edward Jones.

We started a company together, and customers loved him, and his attitude permeated our business. He used to say, "We put the sign up on the door asking for their business; so, if we don't deliver, someone else will, and we won't ever get the chance again!"

I've both started companies and worked for some of the largest in the world. No matter the business size, all are susceptible to the same mistakes. Making decisions about your business based on what others are doing is a recipe for waste and no guarantee of success. Look at Lyft.

They were sure that Uber's spending would give them a big lead, so they spent too. But, unfortunately, at the time of this writing, they both are in a deep hole, as their businesses decline and their valuations have been cut in half. 

You never know the motivations for spending. If a competitor is a big bureaucratic mess, someone in marketing will likely spend their allotted budget to ensure the budget is more extensively next year. If you're looking for ROI, that wouldn't be a model to follow.

That's why weaponizing customers to be loyal fans of your business is highly valued. The returns offer the potential to extend exponentially beyond an annual budget.

There are a few simple ways to do this, no matter your spending.

1. Providing incentives customers want

There are countless examples of failed incentive and reward programs companies have implemented, resulting in significant profit losses and damage to their reputation. We can place these incentive programs into three basic categories: "confusing," "who-cares," and "highly restricted."

Confusing Programs

First, there's the "confusing" category; these incentive and reward programs might seem as though they would require a doctorate to decipher, rendering them pointless and completely unappealing for 99% of customers…or worse, they could ruin future programs if they come off as inauthentic. 

Think about every checkout process — online or in-person — you're almost certainly going to be offered to join or signup for some ongoing-contact program. Most of us give answers by default. If someone is barely paying attention, do you expect them to comprehend a pitch filled with graphs and charts?

In 2021, Old Navy rolled out a new rewards program that sounded like a good idea but, in execution, proved to be a jumbled mess that customers didn't understand, and many even resented. Moreover, with Old Navy blurring the lines between free membership and credit card holders in this program, the actual big spenders felt they weren't getting any exclusive benefits (even though they were  —  it was just too complicated to understand!). 

The result was a negative experience for Old Navy's most loyal customers, decreasing interest and trust in the company.

"Who-Cares" Programs

Then there's the "who-cares" category, encapsulating incentive programs with little value for most customers. 

How often have you been in a hurry at a grocery store or pharmacy, and someone asked you during checkout, "Are you a rewards member?" You may be like many, including myself, who say "no" to save the extra time. But unfortunately, that's how little perceived value some of these programs have.

Dillard's, a national department store, recently boasted a rewards program that gave customers a $10 voucher for every $750 spent. $10 for every $750 spent? It's a poor, essentially meaningless incentive for almost every customer shopping at the store. Moreover, the reward is inconsistent with the work required to earn it.

Highly-Restricted Programs

Finally, we have the "highly-restricted" rewards program, where there are endless qualifying factors that prevent almost every customer from accessing the rewards. For example, Uber is available across 80 countries worldwide, yet the company only offers rewards programs in six countries.

When over 90% of your user base can't vault through the first qualifying hoop to enjoy rewards, companies may risk more than customer loyalty and their reputations. As Sun Tzu wrote in "The Art of War," "Tactics without strategy is the noise before defeat."

Want an engaged customer base? Create easy-to-understand programs they can use and benefit from and implement incentives that motivate them to stick around. 

Creating this program type will take a long time to research, build, and roll out. But companies that are willing to experiment to find the right rewards program for their brands will reap the benefits. 

2. Make your affiliate program one of the best in your industry 

If you have a good business, there's a good chance there's room in your profits or reinvestments for something that can be positioned so your program will be seen as "taking advantage of you." That's what you want.

Often, the cash amount can seem small, but what about an experience, opportunity, product, service, or something of the same value with more extraordinary thoughtfulness given to the customer's motivations?

When speaking about customer relationships, Jeff Bezos said, "The strategy is fixed, and the details are flexible." Jeff has a good track record of building great customer relationships and incentive programs. He listened to customers. That's where you start.

Why guess what someone wants if they're willing to tell you?

You'll never believe the millions of dollars in advertising that loyal, raving fans can save. Not to mention their role in boosting your brand awareness, creating more social proof, and reaching audiences you were never able to get.

What's more, studies suggest the returns on these loyal customers can be much more prominent as well. 82% of consumers claim they would spend more for better experiences. The best advertising for those seeking the best services or products is by making existing customers billboards.

3. Talk to customers to build trust and loyalty

I shared above how important I think it is actually to talk to customers; I also briefly mentioned how critical it is to start with what they want and to work backward from there. But unfortunately, I can't tell you how many businesses brush these things aside in favor of structuring something that aligns with business objectives but not customer motivations.

The National Basketball Association (NBA) has been around for 75 years, and until recently, this organization was the sole decider for every significant piece of the sport. Yet, despite tens of millions of fans worldwide, only a couple hundred decision-makers had any say in how the game worked and operated.

But a few years ago, the NBA realized they were sitting in a goldmine; their most loyal fans were begging to be more involved. So, the NBA made the first-ever decision in professional sports to let their fans have a significant stake in the voting in the All-Star selection process; 50% of the vote is decided not by sports pundits or billionaire team owners but the fans themselves. 

This past year, millions of fans joined the voting process. It not only helped improve the monotony of each year's voting process (by leading to some surprising, controversial fan-favorites cutting, inspiring more discourse and interest in the NBA) but increased the involvement of the NBA's most loyal fans. To vote, you have to download an app or sign up through the NBA. How would you like millions of new followers and subscribers in predictable, reliable signups for your product each year?

4. You leave money on the table if you ignore negative reviews 

"It's best to review past mistakes before making new ones."  -  Warren Buffet, Chair of The Board, Berkshire Hathaway

According to a 2022 Statista study, "trustworthy reviews" now supersedes brand reputation, search engine results, and even the testimonials of friends and family when making a purchase decision. It's more important than ever to have proof from real people that your company is legit and your product works.

Source: Statista

But as any successful company knows, you'll always have disgruntled customers who leave bad reviews. They might be fake spam; they might even be a joke by a witty customer mad at the quality of your memes on social media…but they'll always be there.

It's natural for companies to fear these reviews, but some do everything in their power to stop them, even suing(!) their critics to silence them. Not a good look and a silly way to avoid areas you can improve. When companies behave in this manner, it demonstrates a fundamental lack of understanding of negative feedback; it's not about trying to avoid this inevitable situation but instead using it to show customers your company truly cares about being better.

Ironically, many companies with horrendous reviews have gained even more influence and income by studying and using these reviews  —  to show genuine human empathy with unsatisfied customers and improve on their company's shortcomings.

A select few brand-name companies have employed similar measures to use negative feedback against genuine issues to highlight that the company is willing to admit fault, own its mistakes, and listen to feedback to provide better services. They understand the power of negative reviews and how to use them as fuel to grow.

Customers, employees, affiliate marketers, social media followers, and even your surrounding community pay more attention to how your company responds to criticism than you think. 

Ask yourself, "Is this negative feedback accurate from any perspective? If not, what led to someone feeling this way about my business?"

How many politicians have committed egregious errors and given into corruption, only to vehemently deny and attack their critics once confronted with the truth? This is inauthentic behavior, and it is an ultimate sin in the digital era.

Denying negative feedback hurts your business and risks breaking trust with future potential customers, making it far more expensive to stay in business.

Show your customers and employees you're willing to not only admit fault but to use it to be better. That's what gets you the kind of customer loyalty money can't buy… and if it could, I can promise the cost would be much higher than the time and resources taken to do it right.

Final thoughts

Growing customer loyalty — and a sense of partnership — is essential to doing good business and can be manifested in countless ways. Although the market and algorithms will always change, companies can always rely on authentic human connections to build trust and goodwill with customers.

Brands that choose to put in this work will be in a much better position to create real incentive programs and relationships that motivate customers and employees to continue returning and supporting their businesses.

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