The Value, Psychology, and Mechanics Behind Profitable Ecommerce Loyalty Programs

The Value, Psychology, and Mechanics Behind Profitable Ecommerce Loyalty Programs

“I think we both have enough work on our plates right now. There’s no way we could even consider taking on a loyalty program.”

You walk away, not surprised by the reaction. 

For one thing, you know your company’s priority is advertising. But you’re not as familiar with loyalty and retention.

Standing behind an idea that’s outside the product roadmap and the company’s strengths is risky. It’s only innovative if it works.

But you can’t get the idea out of your head.

It started when you bought workout supplements from GNC a few months ago. The way they pitched you their loyalty membership made you wonder why your company didn’t implement something similar. When you dug into it, you saw that GNC’s loyalty program was crucial to bolstering its revenue by 30%.

You put the thought out of your mind. GNC simply had cash and technology infrastructure that your company didn’t. No way.

Then Evy's Tree, an ecommerce company around your company's size, rolled out their loyalty program, Who’s Hoo, and it snapped. If they could launch something like that, so could you.

How on earth are you going to explain your vision to your team?

If only you could build a system to retain the same people you’d already sold to, you know you can perform like a top company, increase customer lifetime value, decrease acquisition costs, and build a true growth asset.

But where do you start?

Answer this: “Why Should Someone Join My Loyalty Program?”

Before considering your ecommerce loyalty program and your membership tiers, you must consider why someone would join it in the first place.

A few questions to ask yourself:

  • What’s the benefit?
  • What emotions are you stimulating?
  • What motivates people to sign up?
  • How much effort will signing up for your commerce loyalty program take?

This requires a bit of digging and knowing your customers; specifically knowing what motivates them.

Stanford professor BJ Fogg highlights this in his now-famous behavioral model:

Customer Loyalty Programs Should Have Rewards That Match Their Complexity to Join

Image via: BJ Fogg

The model’s thesis is relatively straightforward.

If something is easy to do, even with low motivation, it doesn’t take much for someone to take action.

Most grocery store programs only require the cashier to scan a key-tag to allocate points for customer purchases operate this way.

On the other hand, more difficult tasks require higher motivation for someone to complete. The harder the task (filling out a multi-question survey), the higher the motivation necessary to complete it (birthday rewards, personalized offers, reasonable loyalty points and rewards). That’s why it’s crucial to tap into the essence of why someone would even want to participate.

When he’d started selling suits in 1954, Harry Rosen used to write each customer’s “sizes, preferences, and interests," on their own index card. Customers were happy to participate because Harry would call them whenever an item from their favorite designer, or in their preferred style came into the store and was available for sale.

Yet, with all the technology advancement six decades later, research finds that 69% of shoppers close down accounts and subscriptions because of irrelevant marketing, and poor communication.

Harry Rosen knew his customers were motivated by feeling good about themselves and being stylish; the core of his loyalty program reflected that.

Why do your customers choose you over everyone else? How do you make it easier for them to chose you more often?

Keeping Track of Customer Preferences at Scale to Design a Loyalty Program They’ll Adore

Rosen understood 60 years ago that the secret to customer loyalty was fairly straight forward:

  1. Keep detailed records on your customers.
  2. Take action on what you know about them.

With Shopify’s Customer Accounts, you keep your own “notecards” — an individual record of each customer — along with their:

  • Shipping preferences
  • Phone Number
  • Birthday
  • Lifetime value
  • Order history
  • Sizes
  • Designers

Along with any other bits of information, you can think to tag a customer with.

Understanding the commonalities between your most frequent and highest spending customers will prove to a valuable source of information to help shape your ecommerce loyalty program.

For instance, loyal customers may be buying products as soon as they arrive, or choosing specific shipping options, or from a specific designer, or adding gift wrapping — indicating they’re buying for a loved one.

Early access to products, free two-day shipping, double rewards or exclusives from a designer, or refer-a-friend bonuses are all great value-propositions. The best ones for your business will come directly from your customer’s data and explain why someone would join your loyalty program.

Fortunately, building custom reports to surface this information is pretty straightforward on Shopify Plus.

Shopify's Customers Report Makes it Easy to Target Loyalty Program Prospects

Check out the documentation for more on Advanced Reporting

Mine this customer data to brainstorm what you’ll offer in your loyalty program. It will aid you in developing a stronger offer, as well as determine how you’ll position it, which product pages to feature it more heavily on, and the customer segments that will be most likely to respond when you launch.

Of course, much of this rich data depends on customers signing up for an account. Unfortunately, many customer experiences lack significant incentive for beyond the very mild convenience of storing shipping information.

However, with a strong loyalty offer in place, you can easily incentivize more customer account sign-ups, and send invitations to previous guest checkouts in bulk. In fact, here are the specific steps on how to send account invitations to previous guest checkouts with Shopify.

How to Build Your Own Amazon Prime-Like Membership Program

Amazon’s Prime membership has changed customer loyalty and the way people think of ecommerce, forever.

“Fast, Free Shipping” on thousands of products for $99/year along with exclusive early access to flash sales and select product lines … that’s a pretty compelling offer.

Amazon’s demonstration of “rewards far outweighing the cost” is the perfect demonstration of the Fogg model in action.

But here’s what most conversations about Prime miss…

The $99 price tag of a Prime membership is almost inconsequential.

Prime members generated 57% of Amazon’s North American revenue according to estimates from research firm ITG in February 2016. Additionally, research firm Millward Brown suggests that Prime members spend more than double than those not paying for the privilege to be enrolled in Amazon’s loyalty program.

Mark Mahaney “What our data suggests is that Prime Members are materially more loyal (more spend, more purchases, more satisfaction, more intent to spend) than non-Prime customers… What is more, our analysis suggests that as Prime Members mature (Year 1, Year 2, Year 3, etc.), they also become materially more loyal (more spend, more purchases, more satisfaction, more intent to spend).”

Mark Mahaney, Managing Director at RBC

If you’re concerned that implementing your own “Free, fast, shipping” program will eat into profitability in the short-term, it is worth evaluating the data on your most loyal customers to determine if those shipping costs will be offset by more frequent purchases that will add to the lifetime value of each customer willing to pay for the membership.

There are also plenty of ways to optimize your shipping costs — like being more thoughtful about your packaging — a method that has been proven to increase gross profit up to 97% simply by shipping in more space efficient containers. 

But seeing the value doesn’t really solve the Prime problem. How can you set your store up to automatically apply free, fast, shipping?

Step 1: Set Up a Digital Product as Membership to Your Loyalty Program

This product is your rewards membership.

Using an app like Customer Tagger or Flow (currently in Beta), you can ensure a tag (VIP for example) will be automatically added to the customer’s profile when they buy the membership to your loyalty program.

Use Customer Tagger to Automatically Tag Customers Who Buy Your Digital Loyalty Program Product

Because membership to the loyalty program doesn’t require any shipping information, you can allow your customer to checkout without filling out their address, by easily disabling the shipping information by unchecking the box in the shipping section of the product’s page.

Digital Only Products serve as the loyalty subscription product.

Note: if you want to send a “welcome” letter through the mail, keep the box checked, and collect their address as normal.

Step 2: Configure Shipping Scripts to Set “Free Shipping” Rules for Customers with “VIP” Tag

Stephen Pankratz-Brown Merchant Success Front End Design, Shopify Plus“Free shipping is a straight-forward way to reward your most valuable customers, and encourage them to keep coming back to your store instead of going somewhere else for a similar product.”

Stephen Pankratz-Brown, Merchant Success FED at Shopify Plus

A Solid Ecommerce Loyalty Program Creates Pretext for Building Genuine Brand Connections

“This still sounds like a lot of effort, without a promise of immediate return.”

That’s what your bosses might say, and you can’t blame them for thinking it. But consider this…

“According to a Bain & Company study, 60-80% of customers who describe themselves as satisfied do not go back to do more business with the company that initially satisfied them,” writes author Larry Mylar in this piece on Forbes.

How many perfectly satisfied one-time buyers have you sold to, but never reached break-even on their acquisition cost, because they didn’t buy a second time?

Why is that?

Mylar continues, “Often it’s due to a lack of connection. Customer satisfaction and loyalty mean nothing if you can’t remember exactly who it was that did that phenomenal job of cleaning your carpets two years ago, or where that little jewelry shop is that did such a great job of resetting your diamond when it was loose last year.”

“Disconnection is the reason why so many one-time sales that are completely satisfying (silver) never translate into lifetime customer value (gold).”

This could also be why “most companies lose 45% to 50% of their customers every five years.”

While a loyalty program, by itself, doesn’t solve the disconnection problem, it does provide some pretext for new buyers to create an account, come back and spend more.

As always, execution is key, which is why many rewards programs will borrow elements from game design to transition the focus of communications from “percentage off”, points and sign-up bonuses for new customers, to more experiential rewards like interest-aligned gifts, surprise upgrades, or exclusivity once they reach select milestones.

Related: 7 Customer Loyalty Programs That Actually Add Value

As a result, a well-executed rewards program will retain a significant percentage of lost customers, and even increase profitability per customer over time, as it’s not uncommon for loyalty programs to have higher transaction values per customer year over year.

Why wouldn’t you want more customers like that?

Jeff Berry, a senior research director for LoyaltyOne, says it best:

“Fire your worst customers. Give them to your competitors. They’re costing you more to keep them than they’re giving you.”

While Jeff didn’t mean it in this context, by building a loyalty program, you can also retrain your new customer acquisition efforts to target Lookalike audiences on Facebook and Similar Audiences on Google and find prospects who share interests with your absolute best customers.

According to Google, using Similar Audiences in conjunction with remarketing results in an average of:

  • 60% More Impressions
  • 48% More Clicks
  • 41% More Conversions

Likewise, Facebook’s case studies on Lookalike audiences boast claims of 4x ROI, and customer acquisition costs at ⅓ of other marketing channels.

So, effort? Yes. Immediate returns? Absolutely.

Crucial Loyalty Fundamentals: Points, Referrals, and Segmentation

Getting back to fundamentals, if your business has a decent mix of products at various price points, and you have a high-repurchase rate — fashion, beauty brands and consumer electronics especially — you may discover that a “loyalty points” system will resonate with your customers.

I’ll assume you already know the fundamentals of how a points program works - spend a dollar, get a point - and skip right to some of the under-discussed benefits of a loyalty points program:

1. Bonus Points Events

Many businesses will move merchandise during slower sales cycles by holding exclusive “members only” double or triple points days.

Nordsrom Bonus Points Days Gives Customers a Reason To Get Excited

Shopify Plus Partner’s Smile.io wrote a comprehensive loyalty case study on Nordstrom that’s worth reading.


These marketing events can generate a lot of buzz, while encouraging more sales and loyal customer registrations in the process.

Smile.io details how Sephora runs their bonus points week and shows how members of the different tiers of their loyalty program are able to earn points at an accelerated rate.

Sephora Bonus Points Days Offer Different Multipliers for Customers at Different Tiers in Their Loyalty Program

This is a perfect demonstration of the Fogg model in action, as it makes it very easy for Sephora’s customers to understand how they can

  1. Move into the next tier of the program
  2. Get more points for redemption on smaller items later
  3. Build points for even better exclusive rewards

Sephora offers major rewards for customers who rack up the most points in their loyalty program

The reversal of this is also true for Double Points events, and can help your business claim some outstanding expenses. With Sephora’s bonus points week, members are able to spend their points on products that couldn’t be claimed before, available for just that week.

Alex on the Smilio.io blog says this:

“Unspent points represent a liability on your books. They are an expense that has yet to be incurred and for big companies like Sephora that liability can become very large if shoppers are not spending their points.”

“[T]his extra points event gives Sephora a great opportunity to clear outstanding point balances with special gifts.”

Win-Win!

2. Double Point Items

Similar to a double point day, double point items can be selected to move specific inventory.

Offer Double Points on Select Items to Incentivize Buyer Behavior

While Double Point items may ultimately serve the same goal as Double Points events, functionally they may be used with more agility, to delight browsers, push timid customers into buying, and drive early product adoption.

From the customer’s perspective, this may look like:

  1. Random discovery through browsing
  2. Prompt to buy a frequently viewed yet never purchased item
  3. Double Points on pre-order items

What you’re really doing in these first two examples, however, is adding extra incentive to high-traffic/low-conversion items and personalizing the experience for customers who haven’t committed to the purchase. Perhaps you can start with top abandoned cart items?

In the case of the pre-order, while you’re encouraging customers to buy-in early, you’re also securing funds, and gauging interest in the product itself. This will help you adjust everything from inventory planning to your marketing plans for when the product is ready for release.

3. Referral Bonuses

When loyal customers are really into your brand, there’s a strong likelihood they’ve already talked about you with the people closest to them.

There’s also a chance they’re willing to sell their friends out for extra points.

Extra Rewards Points Can Be Given Out For Referring Friends

What’s better though, according to this report by Nielson, is 92% of consumers trust referrals by people they know, and are 4 times more likely to buy when referred by a friend.

Josh Enzer, CEO at Swell Rewards“Look to email to drive incremental referrals. We typically recommend segmenting your customer base to find your top 10% of customers for the prior 3 months — either by spend or the number of purchases — and send them a personalized email which includes their referral link. The less friction between them receiving their referral link and sharing it, the more successful the program is going to be.”

Josh Enzer, Co-founder at Swell Rewards

Likewise, new buyers who are excited about your brand may also be prime candidates for referring new business.

For that group, Josh says, ”Consider a popup immediately after a customer completes the checkout process encouraging them to specifically tell their friends about the store — if they feel strongly enough to have purchased something, there's a higher chance that the positive energy will carry forward into them telling friends about it.”

Like many areas of commerce, it’s all about momentum.

The team at Swell shares more interesting strategies for discovering behaviors that lead to increased loyalty here.

4. Gamify The Customer Experience

“92% of consumers described their loyalty participation as either ‘fun,’ or ‘economical,’” according to Jeff Berry’s LoyaltyOne research.

Maybe that’s because the best-designed points based loyalty program draws heavily upon game design mechanics to make buying and interacting with the brand fun.

  • Buy a product - earn points
  • Leave a review - earn points
  • Create an account - earn points
  • Read content - earn points
  • Follow on a social channel - earn points

Earn a certain amount of points … level up, gain access to new tiers, rewards, and abilities.

While “Gamify” has become an abused term over the years, the concept as it applies to loyalty programs specifically is pretty straightforward.

Make it easy to get started and understand the rules and mechanics of the program, and show signs of progress early on. Then, as the customer progresses, increase the challenge of reaching the next level, just don’t make it too impossible.

Sephora’s VIB Rouge program is a perfect example of this, with three tiers that make spending more a progressively more pampered experience.

Sephora Makes Their Rewards Program Easy To Understand

Like the Harry Rosen example from earlier, Sephora knows their customers want is to feel pampered, luxurious and beautiful. Their top of funnel marketing and positioning creates the illusion this is possible when you buy from their brand, but their loyalty program makes it a reality.

Their positioning is so strong, many Sephora customers will tell you, spending $350 is not difficult. Reaching the middle tier of the program is pretty easy.

What’s brilliant about the middle tier is that it gives you just a taste of what’s at the next level with one free custom makeover, a touch more personalization, and the desire for more.

The leap from the middle tier ($350) to the top tier ($1,000) is challenging - but not impossible. 

This is where the game mechanics come in.

Image via Smile.io

In video-game design, it’s not uncommon for the game to reward players with better multipliers, gear, or power-ups just before facing a difficult boss.

At Level 2 of Sephora’s loyalty program:

  • Power-ups come = Newly unlocked exclusive seasonal savings
  • Gear = Points only Rewards Bazaar
  • Multipliers = Double Points events

Sephora offers exclusive items that are available to loyalty customers only
Each of these aspects of the program are designed to keep you engaged and spending more, but having fun while you do it.

In your own loyalty program, you might also incent earning extra points by encouraging customers to buy gifts or refer friends just so you can have some variety in your messaging.

One final note: Additional points can be done secretly. Josh from Swell says, “Our merchants tend to run bonus points campaigns on a more discrete basis; rather than certain products always getting 2x points, they'll do 2x points for a weekend to increase scarcity.

Use this idea of discrete campaigns by targeting loyalty segments who are stagnating, but are one or two good carts away from the next tier, and you can start moving more customers into the higher-spending segments of your customer base.  

Make Your Loyalty Program Easy To Understand

Tiers, points, rewards… None of that makes a lick of difference if the offers are irrelevant, it takes too much effort to earn points, or nobody understands how the program works.

Acquisition Efforts vs Retention Efforts

Remember Jeff Berry from LoyaltyOne?

His research, shown above, boils down to say that over ¾ of people stay in a loyalty program because they “get” the program, and the program “gets” them.

Whereas more than half say they left because essentially “rewards were too hard to earn, and the rewards stunk anyways.”

Just consult your own wallet for real life examples of this in action.

In my experience, complications in program design stem from companies:

  • Building the program without consulting their loyal customer data first
  • Are concerned about “giving too much away too quickly”

This isn’t always intentional. It’s usually a byproduct of design by committee where the loyalty program’s champion is forced to compromise their vision to win members who are more focused only on short-term, top of funnel gains.

However, if that champion came to the meeting equipped with proof that top performing companies were driving repeat purchases from new customers immediately, a list of which customers to target first, and an idea of what to give them… they stand a better chance at avoiding launching a program where customers have to do too much to get too little.

If the program design itself is straightforward, this article on the Smile.io blog provides a solid breakdown what’s necessary to communicate the value of your program:

Some highlights are:

  • Quickly answer “what’s in it for me”
  • Demonstrate how easy it is to earn points
  • Use a dedicated page to explain how to program works

Philip Kingsley Makes Their Loyalty Program Easy to Understand

The Ecommerce Loyalty Technology And Partnership Stack

Of course, if you need help designing your program, Shopify Plus partners with a number of loyalty and referral program software providers, many of whom are happy to collaborate and help you design a successful program.

Here’s a quick list of who we recommend:

General loyalty

Referral marketing

Reviews

Interested in finding out about Shopify Plus?

With a dedicated Merchant Success Manager and ecommerce’s largest ecosystem of Technology Partners and apps, we make implementing loyalty programs and growth-boosting strategies easy.


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Final Thoughts

You run into your most vocal “new customers only” colleague at lunch.

As you chat, you expand on how you can set up a loyalty program, completely in line with customer motivation, setting up the free, fast, shipping program, and the specific apps you would use.

You even get a bit into segmentation and data, and how you can use both to better sell customers. They’re still concerned about the amount of work this will take, but she’s intrigued. It seems so achievable.

“Let’s see what the team thinks,” they say.

You open up Gmail, click “Compose,” and type an email that might change the trajectory of your store forever …

About the Author

Herbert Lui is the creative director of Wonder Shuttle. He was a staff writer for Lifehacker, and his writing has appeared in The Globe and Mail, the New York Observer, and Fast Company.