With the skyrocketing cost of customer acquisition, it makes sense to focus on retaining and up-selling current customers. It can cost as much as five times more to win a new customer than to keep an old one. Yet many entrepreneurs remain fixated on prospecting—at the expense of programs for existing customers that would build sales more cost-effectively.

Customer loyalty programs (aka reward programs) have become essential in price-sensitive arenas and where there are similar products or services. About half of all Americans belong to at least one. Drugstore chain CVS Corp., for instance, has 32 million "ExtraCare" card members. And Regal Entertainment Group rewards frequent moviegoers with free concession food and discounts.

Loyalty programs make sense for growing businesses, too. Entrepreneurs with successful customer reward programs enjoy increased sales, have lower marketing costs and amass invaluable information. The bulk of the data is gathered when customers sign up. Later, information is collected through surveys and during transactions.

By tracking current customer data, you can discover opportunities, better segment your customer base and identify the needs of different groups. If you're a retailer, you can use this information to accurately stock your store. And once you uncover your best customers' preferences, you can develop marketing campaigns that target prospects who share similar characteristics.

Eyes on the Prize

Here are a few things to keep in mind when creating a reward program:

Choose the right rewards. In-kind rewards are less costly and are clearly associated with your business. Say you owned an ice cream shop and wanted to reward customers who had purchased five cones. Providing the sixth cone free would be better than offering a discount on a movie ticket because it would cost less and customers could relate it to your business. It would also convey a real cash value—while the free cone might cost you 25 cents, customers would perceive it as a $2.25 gift.

• Entice your customers. Tell customers what to expect. This entices them to make purchases toward their goals. You can also use your program to encourage customers to try other products and services. Let's say your ice cream shop rewards customers with a double-decker sundae following a dozen purchases. Tasting the reward will introduce customers to higher-priced items, thus encouraging more customers to buy them.

• Reward your best customers. Offering graduated awards with increasing cash value is a great way to motivate your best customers. This turns low-value customers into high-value ones, and it avoids the pitfalls of other types of reward programs, which attract less-profitable price switchers.

• Reward at enrollment. Programs that provide immediate rewards encourage customers to register. One method is to offer a bonus at enrollment. And some retailers engage customers before they ever leave the store by making an additional offer at checkout or by printing a message on the sales receipt.

• Measure performance. Set goals for your program, and continually monitor your results. Measure the increase in use of your products or services, the number of transactions involving loyalty program ID numbers, and the growth of your enrolled customer base. Then you can fine-tune your program and build on what works.

Contact marketing expert Kim T. Gordon, the author of Bringing Home the Business, at www.smallbusinessnow.com.