Can Small, Service-Based Businesses Capitalize on a Loyalty Program?

August 31, 2016


My husband loves Starbucks coffee. And not because he’s a coffee connoisseur. Until recently, he was content to brew his own at home. But Starbucks gives him something none of the alternatives offer: the loyalty program, Starbucks Rewards.

As a member, he gets perks like free in-store refills, access to win prizes like Starbucks for life and other vague offers that make him feel like he’s getting more than just coffee every time he spends money there. He’s working his way up to Gold status with every (increasingly frequent) purchase. He can’t explain what, exactly, will happen when he gets there, but he’s sure it’ll be great.

I can’t judge. I go out of my way to do our family’s grocery shopping because I have a points card that translates into free groceries every month. The same goes for my preferred choice of movie theatre, cosmetics store and drugstore, where I earn points with every purchase. Even my neighborhood esthetician has a stamp card that will, eventually, earn me a free service.

As consumers go, my husband and I aren’t hung up on brand names or high-prestige items. But if a business is going to give us legitimate discounts or perks for being loyal to them, we’ll adjust our spending habits.

This is called a switching cost: “When customers perceive that they’re losing out on a bonus or benefit if they shop somewhere else,” says Mike Rossi, CEO of Sweet Tooth, a company that’s produced points and rewards modules for more than 10,000 eCommerce stores.

Rewards and loyalty programs add up to big business for savvy retailers and service-based businesses alike. Eighty per cent of shoppers would switch stores or brands when offered a compelling promotion; 60 per cent of mobile coupon users say they will ‘gladly switch brands to use a coupon.’

Rossi says there’s real potential for small, service-based businesses to implement simple rewards and loyalty programs that could make an impact on their bottom line. We picked his brain to learn about the anatomy of loyalty programs and how to start one.



Three Key Rewards / Loyalty Programs

There are three types of rewards / loyalty programs to consider, each with its own objectives and benefits.

1. Referral-based Reward Program

Some of your best leads come from satisfied customers, so it’s a logical leap to reward those clients who passed on your name—as well as the people that come to you for the first time based on a referral.

“Almost all service-based businesses could benefit from a referral program,” said Rossi. “It’s really important in markets where there are a lot of different options. A referral program provides an acquisition differentiator, which is critical.”

Rossi says a referral rewards program could be as simple as handing your business card to clients when they’re at the peak of their satisfaction with your work. “Capitalize on that moment of happiness and ask them if they’d mind referring you to their friends or associates.”

“Tell them that if a referral of theirs hands them the card, you’ll give them $20 off their next purchase and $20 off the first purchase of the referred friend.”

If you want to digitize your referral program, there are multiple apps for that. Rossi says the best ones integrate with social networks and allow you to email customers thanking them for their business and providing a link to refer others.

2. Rewarding Customers for Repeat Business

How do you get those one-off customers to come back for more? A points-based loyalty program might do the job. These are your typical ‘buy 10, get one free’ programs or ‘$1 spent=1 point’ which can be redeemed for discounts or rewards.

“These types of programs are generally best when someone found a reason to purchase from you once, but it’s very easy to find alternatives to you after the fact,” said Rossi. “A good example is someone who does house cleaning—if you offer a bonus like the 10th cleaning is free it can be very effective.”

The most basic way of implementing a points-based loyalty program is to issue punch or stamp cards. All your customers need to do is present the card each time they use your service and they’re on their way to a reward.

There are a number of apps that will help you build a robust loyalty reward program when you’re ready but Rossi recommends starting out simple and launching in stages.



3. Rewarding VIP Customers

A loyal customer is someone who will shop with you anyway. You’re not worried about losing them, but you do want them to feel valued and remain long-term customers. How do you show them how much you appreciate them? Reward them.

“A VIP program offers reward bonuses for hitting a threshold of spending with you during a certain period of time, above and beyond what they normally would do. This might be something like, ‘If you spend $1,000 with us this year, we’ll give you a free t-shirt, sweater, meal at a restaurant, etc.,” said Rossi.

“You’re taking your top-tier customers and making sure they feel appreciated with an exclusive offer. Usually you’re encouraging them to spend 20 to 30 per cent more than they normally would to reach the threshold.”

A low-tech version of this type of program would be an email or hand-out to those qualified customers, with occasional reminders throughout the year. “If you’re able to track it, which you should do through your accounting system, you should also let them know their progress toward that goal.”

Rossi says the little things really do add up. A VIP program often creates a differentiator for your business and could feed back into a referral program. There is software to help you launch this type of program, but, just like the others, Rossi recommends starting simply and automating later on.

Are Rewards and Loyalty Programs Cost Effective?

This depends on your margins. “If you’re a low-margin business, you have to be careful and put restrictions on your programs. But a referral program can be a loss leader that helps you get new customers who you can then make aware of your loyalty program.”

For example, a house cleaning service might use the referral program to give a new client $20 off and their first stamp on the loyalty card the first time they use the service. These are both compelling reasons to stay with the business—they’ve been rewarded once and there are more on the way.

Being aware of your margins is also important when determining your referral bonuses. You’ll need to be sure your bonus is worthwhile. Rossi says a 5 per cent discount may not be compelling enough for your clients to make the effort. “You may need to take a loss to take on a new customer.”

Keep Your Finger on the Pulse: Like FreshBooks on Facebook

Do Rewards and Loyalty Programs Work with B2B Customers?

Loyalty and rewards programs for small and medium-sized businesses work best when they perform like a consumer program.

“If you have the option of going with two web development agencies and one offers a cash-back program if you spend a certain amount and the other doesn’t, you’ll probably lean toward the first if there’s nothing else different about them,” says Rossi.

Larger companies may not care as much about discounts or freebies, but the person in charge of contracting your business might be swayed by bonuses based on volume purchases. “Loyalty or VIP rewards programs that offer t-shirts or coupons to restaurants for the person bringing you on could be a reason to continue doing business with your company. We’ve seen it be quite effective.”

‘Small, Consistent Effort’ and ‘Long-term Approach” Key to Success

“A lot of people think [loyalty programs] work with a set it and forget it kind of approach, but it takes small, consistent effort to see benefits,” said Rossi.

That means remembering to ask for the punch card, send out the referral email and track the VIP spend. “You need to make sure your customer is exposed to the program as much as possible. After the customer approves a job, when you’re sending over an invoice, putting out a newsletter or email… anytime you interact with a customer is a time to remind them about the program.”

He cautions businesses to take a long-term view of a rewards or loyalty program and not expect drastic, immediate results. “Over the long-term, this could be a game changer for a small business. It could be the thing that 2Xs it over the next 12 to 24 months and drives growth.”

“It might not show immediate returns like an ad campaign but it can be very profitable and worthwhile.”


about the author

Freelance Contributor Heather Hudson is an accomplished freelance writer and journalist based in Toronto. She writes for a number of publishing, corporate and agency clients who depend on her to deliver high-quality, on-brand content and journalism with a fresh perspective. Learn more about her work at heatherhudson.ca.