Why Loyalty is a Secret Weapon During a Downturn
Customer retention is far cheaper than acquisition
Image Source: Augurian
It’s no secret that the business world is in flux right now. On the macro side, there’s inflation, rising interest rates, and geopolitical tensions, all leading to rising economic uncertainty. On a marketing level, there are changes to iOS privacy and Google’s cookie tracking policies, making it harder to efficiently acquire new customers.
Put bluntly, there’s a lot of uncertainty. Will there be a recession? Are we already in one? What should brands do?
We’re not here to decide what is and what isn’t a recession, but here are some trends to prepare for.
A potential financial downturn means a few things:
Consumers decrease their overall spending
Brands cut budgets, particularly in paid marketing
Declines in paid marketing budgets means fewer new customers acquired
Fortunately, not all hope is lost. Less of an emphasis on new customer acquisition is an opportunity to focus on increasing the value of your existing customer base through retention and repeat purchases. Brands with a solid customer retention plan in place will not only survive through a financial downturn, but thrive coming out of it.
According to Ben Franklin, “by failing to prepare, you prepare to fail.”
We’re here to help you prepare.
1) Consumers decrease their overall spending
Let’s start with problem #1 of a financial downturn — a drop in consumer spending. As layoffs proliferate and people are generally more wary to spend money on discretionary items, convincing a consumer to buy a product they haven’t before becomes more difficult.
However, during a financial downturn, consumers tend to stick to the brands & products they already know and trust. A strong loyalty program that provides real value to customers can give them the necessary justification needed to make an incremental purchase they may have otherwise not made.
Or, put differently, if someone is on the fence about making a purchase, being rewarded for making that purchase could be the deciding factor.
The key is that the customer must find the rewards valuable, relevant, and authentic.
2) Brands cut budgets, particularly in paid marketing
The second problem most brands face during an economic downturn is a reduction in their paid marketing budgets. Typically, paid marketing is the largest expense line item of any brand’s marketing budget — it’s also the first to go during a recession.
When brands can no longer afford to rely on the nicotine of Facebook and Google Ads for growth, they need to get creative. Fortunately, loyalty is a cost-effective marketing strategy that can still provide incremental growth through more repeat purchases and lower customer churn.
And that’s just the transactional value of those customers. With a thoughtfully designed loyalty program, customers can also provide value for brands in ways that are non-transactional. Similarly, brands can provide non-transactional value to customers. Think about all of the possible actions customers can take that a brand would find valuable. Beyond just spending more money, customers can refer friends, engage with a brand on social media, provide feedback through surveys & reviews, and more.
The value of having customers who are willing to take actions on behalf of your brand that would have otherwise cost you money is that those savings can be reinvested into better rewards, which can indirectly make the program more valuable to the customers — a symbiotic relationship that is nearly impossible with traditional advertising strategies.
The best loyalty programs align a customer’s incentives with the brand and turn customers into advocates & stakeholders — a customer with brand relationship, rather than customer versus brand. When customers feel part of a brand, the impact of marketing budget cuts will be muted, even if it’s harder to acquire new customers.
3) Declines in paid marketing budgets means fewer new customers acquired through paid ads
Which leads us to problem #3 — less new customers acquired through paid ads.
As we mentioned in a previous post, customers who are actively engaged in a loyalty program are less likely to churn and more likely to make interacting with your brand a habit. A customer who goes inactive must be re-bought, and when acquisition spend is limited, brands can’t afford to let customers go inactive.
With personalization and gamification elements that make a brand’s physical and digital experiences more exciting, customers are more likely to stay engaged with a brand, consume its content, and keep the brand top of mind, even if they aren’t necessarily spending more money immediately. When personalization is done well, it creates a 6.4x lift in member satisfaction with the loyalty program.
When brands establish an authentic relationship with a customer, that customer will not only stay loyal, but will likely tell their friends about the brand as well.
While a brand may need to decrease paid marketing budgets, that doesn’t mean they’re out of options to acquire new customers and build value. Focusing on current customers can improve their LTV and create a new avenue of customer acquisition through word of mouth.
There’s a famous investing concept by Warren Buffet.
This concept works in investing because of the power of compounding. While Buffett never seems to hit it big in one single year, he almost always performs better than his peers in the worst years — he doesn’t lose money.
Well, the power of compounding holds true for customer lifetime value as well.
In a financial downturn, when consumer spending drops and acquisition marketing budgets are cut, it’s more important than ever to focus on customer retention, sentiment, and LTV.
At Hang, we took a page out of Buffet’s playbook and applied it to brands.
Brands who prepare for future headwinds with thoughtfully designed loyalty programs will both survive and emerge stronger.
Hang makes it easy for anyone to build a loyalty program, and our expert team will work closely with you to design the right version for your brand. Get started today.