Are gift and loyalty programs worth it?

Why should I offer a gift card or loyalty program to my customers?

Customer reward programs can benefit your business by expanding your marketing reach and distinguishing your business from its competitors. Customers who sign up for a loyalty program are expecting the arrangement to pay off; therefore, they are more likely to monitor your business for upcoming deals or spending opportunities in order to maximize their loyalty points. In addition, the sophistication of modern sales analytics has made the ability to track your customers’ spending habits more valuable than ever.

A good gift card or rewards program can also set your company apart from similar competitors. Gift cards were the most commonly requested holiday present in 2013, and an aggressively promoted gift card program can help you compete for stocking space with major retailers like Wal-Mart, Target, or Home Depot. Even a buy-five-get-one-free deal for everyday products like coffee or baked goods can help make your store a preferred daily destination rather than just one option among many.

Why shouldn’t I offer a gift or loyalty program to my customers?

Rewards programs aren’t without their costs and potential drawbacks. For one thing, you’ll need to ensure that the fundamental deal doesn’t put you at a complete disadvantage. If you’re offering a buy-five-get-one-free deal on coffee, you don’t want the cost of that one free coffee to negate the profits you made on the first five coffees. That would be a self-defeating initiative.

There are also processing and materials expenses to consider. According to CostOwl.com, physical gift cards can cost between $0.50 and $1.00 per card. Loyalty program software can run as high as $400 per location through PC-based terminals and $50 to $75 per location through traditional credit card terminals. There may also be transaction fees between $0.10 and $0.75 per activated account, plus monthly maintenance costs of $20 to $40 with long-term agreements between one and three years. With the advent of mobile-integrated, cloud-based POS systems, these costs may be higher or lower depending on the processor you are using.

You also might not have the profit margins or sales volume to sustain an effective loyalty campaign. For example, some membership programs save members 1% on all transactions, but if you run at a razor-thin average profit margin of only 5% per item, then you’re costing yourself a huge portion of your net earnings. Similarly, if you offer a free item for every five that a customer purchases, then you should be sure that you’re selling enough items to absorb the loss of every sixth sale.

What do I need to do to ensure that my gift card or loyalty program is successful?

Here are some tips and guidelines for launching a successful gift card or loyalty program.

Gift card programs

• Drum up demand for your gift cards—you need to move these things if you’re going to recover the initial cost of the program
  • One great way to do this is by tying them to a seasonal promotion (“Makes a great stocking stuffer!”)
• Encourage customers to load up their gift cards with large balances to help you get the most out of your activation fee for each card
• Pay attention to the card’s design—it’s like a small billboard for your business that your customers will be carrying around everywhere
• If you also sell your products online, be sure to include clear instructions on how customers can spend their cards at your online storefront

Loyalty programs

• Identify the habits of your loyal, long-term customers and build your loyalty program around their needs
  • How frequently do they shop at your business?
  • What do you give them that your competitors don’t?
  • Which of your products are they most interested in?
  • Why do they keep coming back to you?
• Make the signup process as simple as possible
• Look for a marketing system that can provide targeted deals according to the customer’s spending profile
  • This is a win-win: you’ll be offering discounts on items that are more likely to convert, and the customer will feel a more direct benefit from the program
• Put your newly acquired customer data to use with advanced sales analytics and personalized email campaigns (don’t overdo these or you might get flagged as a spammer)
• Understand what kinds of programs your competitors are offering
  • Should you do what they do but offer a better deal?
  • Or should you offer an entirely different kind of value with your program?
• Be prepared to stick with it for a reasonable amount of time
  • Especially in punch card-style programs, customers will react negatively if you pull the program quickly or change the rewards they’re entitled to

How is your business’s gift or loyalty program working out? Leave your advice for other business owners in the comment section below: