Mercator Blog

What Works and What Doesn’t Work in Merchants’ Customer Loyalty Programs
Date: May 23, 2019
Raymond Pucci
Director, Merchant Services
Merchants of all sizes often emphasize customer loyalty and how they value their best steady customers. After all, customer retention is one of the most basic business principles. Getting shoppers to keep coming back is critical for both brick-and-mortar stores and e-commerce in the retail world. Physical store closings are a response to declining shopper visits evidenced by empty storefronts on main streets and in malls. E-commerce too relies on repeat business. While most merchants have customer retention initiatives in place, not all merchant loyalty programs are effective enough to keep customers coming back.

Business owners and operators know intuitively that the cost of acquiring new customers is higher than the cost of retaining and selling to existing customers. This belief is supported by many studies, which typically find that it costs at least 5 times more to land a new customer than to keep one. This 5x ratio is probably low given that most businesses’ labor costs have risen across the board from sales and marketing to IT systems. Consumers now have increased power to shop around with the click of a mouse or smartphone keyboard. In addition to customer acquisition costs, merchants wrestle with customer churn rate, an often overlooked but similarly important metric. According to a Bain study, a 5% increase in customer retention can mean a 20–25% increase in profits. This Mercator Advisory Group research report looks at customer retention methods for different retail categories and identifies what works and what doesn’t work in customer loyalty programs.

Why do merchants find themselves vulnerable to high churn rate, which necessitates a costly hunt for new customers? A simple but common reason is the lack of an effective customer loyalty program. It sounds routine to devise a system that identifies, acknowledges, and rewards steady customers. But doing so is not easy. There is a high bar of excellence in merchant loyalty systems, and many merchants fall short. They fail to engage customers and keep them coming back.

The research report, Gamification and Other Strategies for Merchants to Enhance Customer Loyalty, identifies success factors that increase customer engagement for merchants.