Rewarding Loyal CustomersBuild your own customer rewards program by following these five tips from a marketing expert.

With the skyrocketing cost of customer acquisitions these days, programs designed to retain or up-sell current customers can deliver a strong return on investment. Most Americans are members of at least one customer rewards program, thanks to those offered by a broad base of major retailers, from drugstores and clothing chains to home and garden superstores. And a wide range of small businesses operate these programs to keep customers coming back for more.

There's a reason customer rewards programs are often called "loyalty" programs. They not only offer customers an incentive to buy additional products and services, effective loyalty programs also reinforce and cement customer relations. This kind of positive reinforcement can prevent customers from switching to your competitors--even when your competition makes lower-price offers.

If you're ready to set up your own customer rewards program, here are five tips to get you started:

1. Build your database.Begin with your existing customer database or e-mail list. Then add to your list by capturing vital information from customers when they enroll in your program. If you sell online, you can obtain this information when customers are completing the purchase process by giving them a "checkbox" option to join your rewards program. If you're a brick-and-mortar retailer, you can enroll customers during the checkout process. Does your current database contain a large number of inactive customers? You might be able to bring them back by offering an instant reward when they make their next purchase.

2. Provide customers an incentive to sign up.Which would you be more likely to participate in, a program that promised future rewards but didn't spell them out, or one that told you exactly what you'd earn as you made repeat purchases? Customers need to understand exactly how your rewards program works in order to feel compelled to participate. Rewards must not only be desirable but also be clear and well promoted. Don't surprise customers with their rewards or try to build suspense or mystery surrounding them. If you do, you'll run the risk of failing to motivate participants to attain the next level of rewards.

3. Boost high-ticket sales.A program that offers graduated rewards can actually stimulate customers to try higher-priced products and services that they might otherwise believe are out of reach. You'll get maximum participation in your program by making rewards easy to obtain and having customers step up to larger rewards for bigger purchases. By offering graduated rewards, you avoid problems inherent in programs that primarily reward when a customer enrolls. These tend to attract low-value "price switchers" who go from one program to another to take advantage of first-time buyer rewards.

4. Offer in-kind rewards.Choosing just the right rewards to offer can be a stumbling block for small-business owners. It's best to reward customers by offering special value on products or services you regularly provide. One of the chief goals of a successful customer loyalty program is to enhance the customer experience and forge a strong relationship between your customer and your company. To achieve that goal, customers must be brought back to your business, its store or its website to gain their rewards. Don't make the mistake of offering unrelated rewards, such as gift certificates for movie tickets, because these rewards are less effective when it comes to reinforcing a positive customer experience. After all, you want customers to have a successful interaction with you, not some unrelated company.

5. Make effective use of data.There's an added bonus to a successful loyalty program. The data you gain will allow you to tailor your future offers--and even marketing messages--according to your best customers' purchase histories and preferences. You'll be able to track exactly which offers yield the best results and determine which segments of your customer base respond to them. In addition, this data will be invaluable for shaping external marketing communication programs to acquire new customers, because you'll be able to match your target audience profile and their purchase habits and preferences with those of your best repeat customers.

An effective loyalty program will stimulate your best customers to return time and again, and provide the insight you need to target and win new customers. The bottom line is, whether you operate a service business or sell products, a good reward program that offers graduated, in-kind rewards will enable you to up-sell and resell current and lapsed customers for a maximum return on investment.