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How to build an innovative loyalty program

Investing in a loyalty program seems like a logical way to retain customers and spread the word about product. But is it a good approach with shopping apps? How can you make sure a loyalty program doesn't repeat the common mistakes of others?

July 8, 2016

By Iryna Pototska

Let's say you've developed a shopping app. Investing in a loyalty program seems like a logical way to retain your customers and spread the word about your product. According to the 2015 Colloquy Loyalty Census, U.S. consumers hold 3.3 billion memberships in customer loyalty programs — and the number keeps rising. At the same time, most American households actively use only around half of the loyalty programs they're enrolled in.

So what's wrong with loyalty programs for shopping apps? And how can you make sure aloyalty program doesn't repeat the common mistakes of others?

Problem #1:

Traditional loyalty programs frequently offer irrelevant rewards.Traditional loyalty programs don't offer personalized rewards that take the individual customer into account. These programs still target "the customer," not "Jane who lives in Seattle and recently bought a Samsung phone." With traditional loyalty programs, companies spend a big share of their marketing budgets on sending out discount coupons to people who honestly don't care to use them.

Problem #2:

Traditional loyalty programs make customers use offline services.

With traditional loyalty programs, you can't collect points or use discounts if you forget your plastic card at home. Plus, some programs still require you to print out a paper coupon. Honestly, not many people are willing to go through the hassle.

A report by Capgemini Consulting shows a majority of loyalty programs (79 percent) include a mobile app, but that those apps typically don'’t serve much of a purpose. Only around 24 percent of mobile loyalty programs actually let customers redeem bonuses through an app.

Problem #3:

Traditional loyalty programs offer rewards that can only be redeemed by making a purchase.

The more customers buy, the more rewards they get. The problem with these loyalty programs is that they don't incentivize customers to engage with a brand in a more meaningful way. For example, they don't ask customers to take surveys or write reviews, and — most importantly — they don't want to tell other people about the service or advise them to use it.

Now that we've established why old-fashioned loyalty programs fail modern customer's expectations, we've arrived at the key question: What can we do about it? The best approach is to look to emerging tech trends to see how we can incorporate loyalty programs within a shopping app in new and innovative ways.

2016 brought with it two major trends that promise to change the world of loyalty programs.

The first trend is using big data and machine learning to provide customers with personalized, highly relevant offers. Using machine learning helps you create highly personalized programs that are relevant to each customer.

How can you take advantage of machine learning in a shopping app?

You can predict who among your regular customers will be mostly likely to make a purchase if offered a discount. This helps you get the most out of your promotional coupons.
You can learn from customer purchase history and predict what a customer is most interested in. If you offer fewer items, but a tailored selection, then customers will be more likely to make a purchase.
You can learn not only what individual customers prefer, but can also discover what particular demographic groups in particular areas are looking for.

Customers have grown tired of loyalty programs that require both mobile and web apps. You need to offer a loyalty program that works entirely on mobile from beginning to end. From earning points to redeeming coupons, your customer shouldn't have to agonize over web-based account management and printing physical coupons.

How can you create an efficient and user-friendly mobile loyalty program?

Develop a simple app that mimics a discount card.

This way you can run a more traditional bonus-based loyalty program but also include those people who forget their plastic cards at home or aren't willing to stuff their wallet to the thickness of a romance novel. This type of loyalty program requires little initial investment and is great for small businesses that are just getting started. For chains of stores, you can also develop a more complicated solution that allows customers to pay with their cards within your network. his is what Starbucks did. In 2009 when Starbucks launched their mobile card they were really innovative, offering a mobile payment card before PayPal Wallet, Apple Pay, Android Pay, and other similar solutions. The Starbucks card let customers pay by scanning an on-screen barcode at their local coffeeshop. This mobile card program became successful and quickly expanded throughout the U.S.

Launch a loyalty program for several different brands within one mobile app.

LoyalTap is an example of a mobile app designed for several merchants. The app uses iBeacon technology so businesses can monitor every visit, purchase, and even track time spent in a store — as it happens. Perhaps the best thing about LoyalTap is that it requires no technology or hardware integration for merchants.

When should you reward your shopping app users?

Loyalty programs can offer rewards for various actions, including:

Rewards for visiting physical store locations
Rewards for purchasing a certain quantity or value of goods
Rewards for purchasing items from a seasonal catalog.

A type of reward will directly depend on the type of the app.

What's the best rewards structure for your loyalty program? It all depends on your aim. The most common aims of loyalty programs are to increase retention rate, improve conversion and get more referrals.

If you want your customers to visit your store more often, then aim for limited-time offers or personalized coupons.
If you want your customers to buy more each time they shop, then develop a tier-based loyalty program where collecting more points moves you to a new "level" and gives you access to more special offers. The most common type of tier loyalty programs give customers silver, gold, or platinum cards depending on how much they'’ve spent or how often they’ve shopped with you. Tier-based loyalty programs are also loved by shoppers because they cultivate a sense of exclusivity — just like platinum credit cards.
If you want to get more new customers, go for a referral-based loyalty program. This type of loyalty program encourages people to invite their friends to visit your physical store or your website. Customers get bonus rewards for each friend who is invited or who completes some action.

How much can loyalty programs increase your profit?

Let's consider how much a loyalty program might increase your company's profit.

Forbes offers some intriguing numbers in an article about the value of customer retention : a 5 percent increase in customer retention can increase a company's profitability by 75 percent. At the same time, attracting new customers is five times more expensive than keeping an existing customer. Focusing on retaining users can be quite profitable. Starbucks stated that in 2013 alone their loyalty program boosted their profits by 26 percent.

Another way to monetize your loyalty program is to take advantage of machine learning and big data mining. For example, Tesco relies on a customer science company called dunnhumby to kill two birds with one stone: give personalized offers to customers while developing new marketing strategies based on anonymize retail transaction data. This model has proven popular, and dunnhumby generates annual aggregate gross billings of $500 million globally.

Some loyalty programs boost retention rates while increasing profits. CVS Caremark's ExtraCare loyalty program currently has about 70 million active subscribers, accounting for 84 percent of total front store sales. Their loyalty program has helped CVS maintain a high customer retention rate while also attracting new customers.

Loyalty programs can help shopping apps with customer retention and conversion. But in order to be efficient, loyalty programs must keep pace with the requirements of the modern consumer by providing customers with mobile-first — and highly personalized — offers.

Iryna Pototska is a tech journalist at Yalantis, a mobile development company. She writes about mobile app development, industry trends, app marketing and app monetization strategies.