Using Segmentation to Create Stronger Loyalty Programs | Yotpo

Last updated on August 21, 2023

Travis McCan
Senior Relationship Marketing Strategist @ DEG
May 12th, 2021 | 6 minutes read

The case for treating loyalty customers differently, especially within segments. 

Table Of Contents

As a Senior Relationship Marketing Strategist at DEG, Travis McCan works with brands across industries to enhance their digital messaging strategies, with an emphasis on retention and customer loyalty. Rachel Harbaugh is an Associate Relationship Marketing and Loyalty Strategist.

Marketing thrives at an individual level, yet many brands make their loyalty programs too universal. The truth is that when you design a loyalty program that provides the same experience for everyone — the punch-card approach of Buy 10, Get 1 Free — you end up with a program that doesn’t provide value for anyone.

Loyalty programs should be strategic efforts to keep customers engaged and excited, while also preventing customer churn. It can’t just be a box that is checked on a marketing to-do list; it must add to the brand experience.

In this article, we’ll discuss how to develop a segmented loyalty program that meets customers’ needs and expectations. But first, let’s dive a bit deeper into where so many brands go wrong with their programs.

Why many loyalty programs struggle

There are three main areas where the majority of customer loyalty programs run into challenges:

  1. They treat all customers the same
  2. They become stale
  3. They’re created without enough regard to cost

      Brands will often reward shoppers the same way even though they engage differently. And when you have customers with different needs and expectations for your brand, one approach isn’t going to cut it.

      That singular approach also can’t only be about a monetary discount. Offering 5 or 10% off doesn’t resonate as much as it once did. With so many brand options available, your loyalty program must create a customer experience that differentiates you from a competitor.

      Now that you know the pitfalls to avoid, the next question is: How do you create a program that keeps customers happy and coming back for more?

      Creating a customer-centric loyalty program

      We’ve established that your loyalty program should not be one-size-fits-all, so how do you create a program that generates loyalty? It starts with narrowing your focus and spend on customers who are, or have the potential to be, the most profitable to the brand. You want to engage with customers who have the potential to spend a lot of money with your brand and are either already engaging this way or show a likelihood to become more loyal.

      Customer segmentation is a key strategy for creating stronger loyalty programs. It’s how you identify groups of customers with similar characteristics and behaviors, so you can better serve them.

      The best metric for identifying these customers is customer lifetime value (CLTV). CLTV is based on the recency and frequency of customer engagements, so not only do you know who is spending more money and time with you, but also who may be new to the brand and who has been a lifelong fan. This customer data can be the basis for your audience segmentation.

      How to segment your audiences

      There is no maximum number of segmented groups that your program can have, but you better be ready to support strategic and varied experiences for each one. We recommend working with three or four groups. With Yotpo’s Loyalty and Referrals solution, you can build VIP tiers that correspond, and effectively target, each group based on their CLTV.

      Typically, your segments will be based on customer behavior. Behavioral data helps you understand how customers act when they are interacting with your business. This includes things like how often they visit your site and what kind of content they engage with, but also their demographic information, psychographic information (what interests them), and transactional data (what products or services they purchase).

      Your top customer segment contains your most loyal customers who frequently engage no matter what you do. The next group consists of customers with the most potential. They may have bigger, more infrequent purchases, or they shop regularly but across many brands.

      Finally, you have your low-value, low-potential customers. This group has little need for your products or is already loyal to a competitor — for example, customers who purchase items as gifts during the holidays.

      Behavioral segmentation lets you create experiences that properly motivate shoppers based on where they’re at in their customer journey your brand, and where they have the potential to go.

      Developing the programs

      While it’s great to provide loyalty offerings to each of your segments, one of the program’s main objectives should be to move those in the second group — customers with high potential — into the top group. This will in turn increase customer lifetime value. This is where you will spend the majority of your loyalty budget, but also where you’ll drive the most revenue.

      To ensure this shift happens, you need varied experiences. Your most loyal customers don’t need a $10 discount to convince them to shop. Instead, offer VIP experiences that make them feel special and recognize their loyalty to the brand, like express checkout or early access to new products.

      For shoppers in that key middle group, the strategies should focus on leveraging their potential. Find ways to get them to engage more often and/or increase their average order value (AOV). Offer special perks like free shipping or gift items when they spend a certain amount.

      Lower priority members require a less involved approach. While they shouldn’t receive premiere benefits from the loyalty program, they should still be a marketing target. Craft personalized campaigns that keep the brand in consideration on rare occasions when they need your services. The profits from this group fund the programs that are converting the high-potential customers and providing the unique experience for your loyal customers.

      Once your program has been developed, continue to evolve your strategies. Even the best programs become stale. Mix in a variety of new program benefits to keep customers engaged.

      Conclusion: Focus on your best customers

      Customer segmentation allows you to tailor your loyalty program to different customer types, which can help you increase customer satisfaction and engagement. But, this is most important for customers that have the potential to return.

      We have all heard the saying that 20% of customers make up 80% of a brand’s profits. While your loyalty program should serve more than just 20% of your customer base, it is important to understand which customers are valuable and how they behave. That way, you can keep your best customers loyal and move the needle with those who have the potential to be your best customers.