Loyalty programs are a time-tested way to increase customer retention rates. Find out how they can help build a loyal customer base
As the cannabis market booms, new cannabis storefronts are opening nearly daily. The retail scene is crowded with a multitude of new brands launching, old brands expanding, and new customers emerging. In the chaos of a new industry, dispensaries need a strong strategy for both new customer acquisition and retention in order to stand out. However, it’s no longer enough to simply sell cannabis. In such a competitive climate, dispensaries also need to provide a great customer experience to take home with their product.
At this point in time, cannabis storefronts tend to follow the “leaky bucket” method of customer acquisition: spend money to get new customers, retain a small percentage of those customers, and then repeat to find more new customers. However, this focus on new customers is a lot of time and resources spent for little return. On average, cannabis retailers retain 40% of their customers. Furthermore, it costs a business up to 25 times more to sell to a new customer than to a returning customer.
A small 5% increase in customer retention rate can increase profits from 25% to as high as 95%.
Marketing efforts to retain customers and build a loyal customer base are long-term investments. There are two key ingredients: a solid loyalty program and effective communication with your customers or patients. Since we’re focusing on loyalty programs here, you can read about effective communication in our next post.
How do loyalty programs work?
Loyalty programs are a time-tested way to increase customer retention and generate revenue. Following the ”Pareto Principle” - a.k.a. the 80/20 rule - roughly 20% of your customers account for 80% of revenue. Attracting new customers is great for growth; however, retaining customers to build a solid, loyal following can reap greater returns. A small 5% increase in customer retention rate can increase profits from 25% to as high as 95%.
Loyalty is an emotion we feel. It’s important to remember that positive experiences build loyalty.
Nevertheless, loyalty is an emotion we feel. Customers feel loyal to a brand, not because of the points they’ve collected, but because of the great experiences they get in your store. Of course the ultimate goal is for customers to remain loyal regardless of a loyalty program. However, implementing a loyalty program is a good first step to attract and turn customers into a loyal following, as loyalty programs serve as a tangible reason for the customer to return and can start paving the way to feeling genuine loyalty.
Attract new customers
Although the main focus of this article is retention rate, an added benefit of loyalty programs is attracting new customers, as not all shops will offer discounts and rewards with regular purchases. A digital loyalty program with a simple sign-up process is an easy way to get customers hooked. By receiving points upon sign-up, the customer feels an instant gratification. These positive emotions they experience are their first steps to becoming a loyal customer.
Reward your returning customers
By rewarding your returning customers with more redeemable points, two things happen:
- your budtenders have more chances to create positive experiences that evolve into customer loyalty, and
- accumulating points make customers more inclined to stay and spend.
Remember: loyalty is an emotion. Any interaction your budtenders have with customers can increase their loyalty. Every positive experience they have with your brand, any satisfaction they feel from smoking a reward they received - it all builds customer loyalty and increases their chances of returning to your shop.
Every positive experience your customers have with your brand builds their customer loyalty.
In addition to shopping and product interactions, the points accumulating in customers’ accounts may invoke emotional reactions. As points accumulate, customers are more likely to act according to the “Sunken Cost Fallacy”: they’re emotionally attached to the points they’ve earned and are more likely to spend the extra $20 to redeem a reward; they’re less likely to shop at another store since, in their view, shopping at your shopfront is investing in more points and future rewards.
Build lasting relationships with loyal customers
In summary, we established that loyalty is ultimately a human emotion rooted in great shopping experiences. However, loyalty programs greatly help create the foundation for customer loyalty and higher retention rates by:
- Serving as a tangible reason for the customer to come back
- Evoking positive emotions with point accumulation and redeeming points for goodies
- Placing a negative cost (fewer points!) in the customer’s mind for shopping elsewhere
In the end, loyalty programs are just a tool to help with higher customer retention rates and greater customer loyalty. Though this tool is easy to start and maintain, and can be the hook you need to draw in more customers into your loyal customer base.