Should Your Small Business Invest in a Loyalty Program?

In an ever-changing retail landscape that has seen widespread store closures and waves of digital disruption, building and leveraging customer loyalty has become more important than ever. So it’s no surprise that a spate of companies has upped investments in providing one-of-a-kind experiences for shoppers, particularly by overhauling their existing loyalty programs or creating new ones.

So far this year, major big-box names and department store chains including Target, DSW, Macy’s, Nordstrom and Kohl’s have thrown money behind loyalty programs, which can help not only win over first-time guests and drive sales, but also build long-term connections with consumers as they continue to feel the pressure of higher shopper expectations.

While larger corporations are more likely to have the capital, both human and financial, to invest in and grow stronger loyalty programs, for some smaller players, getting in on the loyalty game can be a challenge. Reinventing, let alone debuting, a loyalty program is no cheap affair: For many small to midsize retailers, costs of personalization — a core tenet of rewards-based marketing services — can make it difficult to provide such offerings without seeing a dent in profits. According to management consulting firm McKinsey & Company, American companies spend roughly $50 billion a year on loyalty programs — and that figure keeps growing.

“We’re entering the programmatic era of retail,” said Rob McGovern, founder and CEO of retail data startup PreciseTarget. “[Retailers should] embrace digital, as this is a trend, not a fad. Consumers now expect personal experiences, whether its in-store, online or in email.”

To survive in the age of e-commerce, experts say today’s retailers — regardless of size — need to incorporate some form of digital personalization, whether through a targeted campaign or promotional emails. But according to Kathleen Ruiz, founder and CEO of New York-based marketing agency KRW Consulting, a digital-centric strategy — if not properly executed — could sometimes backfire for smaller retailers.

The rise of omnichannel loyalty programs has posed a conundrum for small-scale retailers with limited financial wiggle room: Investing too little would put them at risk of falling behind more innovative peers, but going overboard at the expense of other investments, such as employee training or store enhancements, could lead them to waste resources.

Instead, Ruiz suggested that such companies focus on “physical incentives, such as curated events, private shopping experiences and even community-based rewards [that] can not only increase loyalty but also generate positive press for a brand.” Smaller retailers can also provide offerings outside of their own products or services; for instance, an activewear business can join forces with a local smoothie joint to create discounts or other perks.

“This not only provides an inexpensive incentive that is tailored to your customer base, but by partnering with another brand, you are gaining access to their client base as well through cross-promotion,” Ruiz added.

Smaller retailers also face competition with loyalty programs — and not only within their relevant business verticals. Nikki Baird, software company Aptos VP of retail innovation, said local gas stations, car wash services and grocery stores are also competing for a slice of customers’ wallets, which may already house dozens of loyalty cards or mobile phone apps.

“[Consumers] only tend to use five to seven of them on a regular basis, so [retailers] need to match their loyalty program expectations against the frequency [with] which their customers shop,” she said. “If they’re getting customers who shop twice per year, a loyalty program probably isn’t the right place to invest. If they’re getting consumers once a month and want to increase that to 1.25 [times], for example, a loyalty program makes sense, but they’ll still have to invest something to keep that program top of mind.”

When it comes to nailing down whether an investment in a loyalty program is worthwhile, smaller retailers should keep in mind that they may already have a head start. Since they are oftentimes able to maintain closer, more personal connections to their customers, these firms may already have a competitive advantage over big-box retailers. What’s more, large-scale retailers boast larger assortments, Baird added, making it almost necessary to incorporate personalization to stay relevant, whereas small to midsize retailers tend to be more curated from the outset.

“Small retailers should have faith in their ability to curate an assortment and that customers are engaging with them because they’re invested in the personalization they provide at that level, rather than at a discount level,” she added. “Offering unique experiences to loyalty members can often generate the kind of ferocious loyalty big retailers only dream of and ultimately cost less to deliver because small retailers don’t have to make them scale.”

Want more?

How Brands Can Build Better Customer Loyalty — It’s No Longer About ‘Perks’ and ‘Points’

Loyalty Programs Are a Great Way to Reward Your Top Customers — Here’s How Things Can Get Complicated

Access exclusive content