How to Run a Loyalty Rewards Program

NEW YORK ( MainStreet) -- Loyalty reward programs are a great way to get repeat customers, but how do you get the most bang for your buck when creating one?

We spoke with Tom Kelley, principal at Access Point Media Group, on suggestions for best practices when creating a loyalty program. Kelley specializes in brand building for small businesses and start-ups, mainly in the restaurant and hospitality industry.
Loyalty rewards are a great way to get repeat customers, but there are right ways and wrong ways to do them.

Are loyalty programs necessary for small businesses?

Kelley: It really does have to be one of the critical components of your marketing program. It can't really stand alone. What happens a lot of times with small businesses, companies rely on one type of marketing -- advertising or word of mouth or social media only or loyalty programs only. We find they need a broad brush of strategic marketing program that includes all of those things.

Loyalty programs are supercritical these days because so many operators are taking the real easy way out of discounting with coupons and daily deals. We find that the loyalty program is a perfect substitute and should be considered above and beyond any of those things. Coupons and daily deals tend to discount their potential brand or their potential equity in the brand.

Do loyalty programs really work?

Kelley: They increase the amount of interaction you have with your guests and you're able to communicate extra value, which is critical, especially in times like this. There's always ability to reach out and offer somebody who is not necessarily buying right now to buy with some kind of additional promotion. At the end of the day it's really just a database ... to communicate with your customers and to hopefully lure new customers into opting in to offers and promotions and rewards that make their life easier and create that value element.

How does a business decide what type of program is best for them?

Kelley: It really depends to a large degree on who your audience is and at what level you're operating. For example, you can have a corner coffeeshop location and they're still using old-fashioned punch cards giving customers a free cup after 10 purchases. There's nothing wrong with that, but there is also Morton's Steakhouse where their clientele demands things like preferred seating, preferred valet parking, free after-dinner drinks. So there are different levels within loyalty. It really depends who your audience is and what their expectations are.

It really does get back to before you open your doors to your operation, you do need to have a marketing strategy plan, and part of that is are you going to have a loyalty program. But a loyalty program tends to come generally after some of those other marketing elements and tend to be more with the mature businesses. And now with social media it opens up a whole new opportunity to build loyalty or a whole new following without a punch card. The paradigm really has shifted from an actual card to online social interaction, such as Twitter.

How does a business make sure it doesn't lose money on its loyalty program?

Kelley: It shouldn't be structured where you lose money. It should be structured to where you build business. If it's constructed the right way, it's bound to bring you more business.

If you're offering a punch card for every two sandwiches and you get the third one free, you might want to rethink that to maybe every 10 sandwiches. Look at your margins and then look at that cost of that eventual reward and see if that number is higher or lower. That number is basically the cost of that loyalty program. It's most likely worth it the longer you stretch it, and that's why Subway and a number of fast-casual restaurants implemented that kind of thing. They're able to recoup within those nine visits a much better return on investment.

Loyalty programs work really well especially with small businesses that can really track and set an actual dollar amount to it, as opposed to random 20% off sales or 50% sales that really eat away at their margins.

-- Written by Laurie Kulikowski in New York.

To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

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