Rewards programs offer a great way for small businesses to build a loyal client base. Through these initiatives, you can spur growth and gather important information that will fuel your next round of innovation.

However, these systems come with risks. You give up some potential profitability and create promises that can become a hassle to fulfill. In the worst-case scenario, an ill-advised rewards structure can actually threaten your startup's cash position.

As such, it's important to consider your program carefully. You need to monitor your investment carefully and make sure your giveaways lead to a sufficient return. At the same time, you should install the necessary safeguards to protect against a potential run on the rewards bank.

The Benefits of Rewards Programs

As a customer, you know the value of a rewards program. The occasional free Starbucks coffee or a 3% return on your credit card gives you the incentive you need to stay loyal to a particular brand, even in the face of stiff competition.

This can provide a crucial brand development strategy for your startup. Reward programs incentivize customers to return to your business. They can also keep you competitive in a crowded market.

Reward programs incentivize customers to return to your business. They can also keep you competitive in a crowded market.

The numbers bear this out. One study showed that a loyal customer can deliver revenue at a multiple of 10-to-1 compared to the value of their first purchase. At the same time, acquiring new customers costs six to seven times more than making a sale to an existing one.

Here are some of the benefits of a rewards program:

Improve Retention: They are called "loyalty programs" for a reason. A good rewards offering can help you keep your customers for the long haul.

Learn about Your Customers: Reward programs let you gather data about your clients. Use those insights to guide your marketing and R&D efforts.

Enhance Your Marketing Platform: Want to introduce a new product? A rewards program gives you an excellent platform.

Structuring Your Rewards Program

Rewards programs come in a variety of sizes and structures. As you develop your system, consider what you want to include.

First, think about the types of rewards you want to offer. Here are a few options to consider:

• Free Stuff from You
• Discounts on Future Purchases
• Enhanced Service
• Third-Party Rewards

Of course, you can mix and match these types of rewards as needed.

The type of rewards is just the start. You also have some decisions to make in terms of the way your rewards system is organized. Here are a few strategies to keep in mind:

• Points Programs
• Cash Back/Rebates
• Coalition Programs (Partnerships/Joint Programs with Other Companies)
• Tiered Loyalty Programs
• Premium Programs

Potential Downsides to Rewards Programs

Yes, rewards programs can generate a lot of value. However, it is important to understand how these offerings create liabilities as well. There are risks to consider. Here are a few items to keep in mind:

Cut into Profitability: Like any marketing expense, rewards programs cost money. This can eat into your margins.

Hard to Unwind: There's a risk to success. A well-received program might be hard to get rid of down the line.

Data Management: You won't learn much about your customers if you don't have a system in place to collect and analyze data. That takes an additional investment.

The Hidden Threat from Rewards Programs

You can accept a near-term dip in profitability. That's part of the trade-off you make when you offer a rewards program. However, there's a more dire consequence you can face, especially as a small business.

The rewards you offer represent a liability. You owe something to your customers. You need to be prepared for these redemptions. Otherwise, these loyalty bonuses can become a drain on your resources, especially during times of crisis.

Many companies faced this challenge during the pandemic, forcing them to curtail their loyalty programs. Companies like Hertz, Best Western and multiple airlines all ran into this crunch under pressure from COVID shutdowns.

How to Minimize Liabilities

It's one thing to realize that a rewards program comes with risks. It's another to take the necessary steps to get those threats under control. With that in mind, here are some steps you can take to minimize your liabilities:

Start Small

As you launch your program, experiment with offers before making them widely available. You can gather data and track customer habits. This will let you maximize the value you offer while minimizing your overall risk.

Set Deadlines/Expiration Dates

Don't make your rewards last forever. Otherwise, you can face surprise redemptions well into the future. Instead, create deadlines or expiration dates to prevent long-term liabilities.

Keep an Eye on Rewards Program Performance

Use data to understand your risk. Track statistics like redemption rates to discover how your rewards plan is performing. Make tweaks as necessary to sidestep problems before they can materialize. At the same time, you can leverage these insights to make your program more effective.

Maintain Good Cash Flow Habits

You can support your rewards program by having strong cash flow habits generally. Many of the horror stories in this area come about during times of emergency. These tips can minimize the chances that you'll enter crisis mode:

1. Track Cash Flow Constantly
2. Plan Ahead
3. Routinely Review Your Cash Flow Plan
4. Keep an Emergency Fund
5. Have Financing Options

Weighing the Risks and Rewards of Your Program

Rewards programs are a great way to keep customers coming back. They let your small business rise above the competition and jumpstart your growth.

However, these systems can also create unforeseen challenges. In extreme cases, they can cause cash flow problems, as happened with many airlines and hotels during the pandemic.

That's why it's important to know how to handle your rewards program. Minimize your liabilities and manage your risks. Meanwhile, integrate these considerations into your overall cash flow controls. That way, you'll know how to handle your cash flow in times of crisis.