The only guide you’ll need to build a customer loyalty program
Deep dive into the world of loyalty programs, and discover nine types of programs that have brought businesses closer to their customers, as well as how to make your brand stand out.
Can you think of a few brands that you would consider yourself loyal to? Maybe it’s your neighborhood coffee shop or a big box store that sells in bulk. Now ask yourself why? What is it about these brands that makes you return to them every time?
If loyalty programs made your list of reasons why, it wasn’t accidental.
Businesses across the globe have recognized the importance of fostering a relationship with their customers through customer loyalty programs.
But what exactly are customer loyalty programs, and why are they so essential?
In this guide, we’ll take a walk through the world of customer loyalty programs. We’ll explore their benefits, examine successful examples from various industries, and give tips on how to create your own program to strengthen the bond with your customers.
What is customer loyalty?
Let’s start with the basics; what is customer loyalty and how do we measure it?
Customer loyalty develops from the relationship you create and nurture between your brand and a satisfied customer. Their willingness to engage with your brand and repeat purchases helps you measure customer loyalty.
Every interaction influences a customer’s loyalty – it’s something that brands need to continuously work on.
How do I measure customer loyalty?
It’s one thing to guess or assume customers are loyal, but to make improvements and strategically plan how to communicate with customers, we need measurable goals and metrics.
Some key metrics brands should keep track of are:
- Customer retention rate: Measures how many customers you keep vs. lose over time
- Customer lifetime value: The total revenue a business can expect from a customer throughout their relationship.
- Customer satisfaction score: measures how satisfied customers are with a brand
- Engagement rate: average number of social media interactions per customer
- Repeat purchase rate: the percentage of customers who purchases multiple times from a brand
- Referral rate: percentage of customers who were referred to a brand by an existing customer
What is a customer loyalty program?
A customer loyalty program is an initiative brands offer to reward customers who make repeat purchases, send referrals, and engage with them.
Depending on the brand and industry, there are many ways you can reward customers for their loyalty. Free products, exclusive offers, member status, and cashback points are some of the more popular ways brands thank their loyal customers.
Some brands or small businesses might argue that loyalty programs are too expensive to invest in but offering customers a reward can go a long way toward keeping them satisfied and loyal. Not to mention that acquiring new customers costs much more than retaining your loyal shoppers – anywhere between 5-25x more.
But how do brands choose what kind of loyalty program to offer – and what are the options?
Well, you can get as creative as you like to stand out or go with a tried-and-true loyalty system. Let’s cover nine types of loyalty programs that have helped brands improve satisfaction and yield great results.
9 types of loyalty programs with examples
// Paid loyalty programs
Paid loyalty programs have grown in popularity over the last few years. Essentially, customers pay a fee to get perks and higher-value products and offers with their loyalty status.
Pros: It’s guaranteed revenue. Customers will have to pay a fee to participate in this loyalty program and get access to its great benefits
Cons: Competitors might offer free programs, so it’s important to measure the value you offer and ensure it’s worth the monthly fee.
Example: Barnes and Noble
The book-selling moguls have a very popular loyalty program in place. First, they offer a free loyalty program, where customers collect stamps ($10 = 1 stamp, 10 stamps = $5 reward). But they also offer a paid program – customers pay a yearly fee and get a long list of perks including free shipping, 10% discount on their web shop, one free eBook a month and much more.
// Points program
A points-based loyalty program allows customers to collect points with every purchase, and they can redeem their points for discounts, free products, or other perks.
Pros: Points programs encourage repeat purchases. Customers are more likely to continuously shop with one brand if it means they can eventually get a free product or a discount.
Cons: Points programs can become expensive. Free samples, or requiring a large number of points to be collected to get a full-sized product could help mitigate the risk of paying too much in reward prizes.
Example: Starbucks
The Starbucks rewards program is immensely popular among their customers. Customers earn one “star” with every dollar of their purchase and can use their stars for free products. Depending on how many stars they collect, they can get anything from a free coffee (25 stars) to Starbucks merchandise (400 stars).
To encourage the use of their app, Starbucks offers double the stars if you use their rewards program through their app.
// Cashback programs
Cashback loyalty programs allow customers to get a percentage of their purchase back in cash, or in a cash equivalent like store credit. The more you spend, the more you can save on a future purchase, encouraging loyalty to a brand.
Pros: Cashback rewards offer customers a financial benefit of store credit or cash back in their accounts. Customers are encouraged to repeat purchases from the same brand to claim cash-back rewards, lowering the chances of churn.
Cons: Cash back is risky because they can use that money to shop with your competitors. Store credit cashback is a more reliable way to offer customers a financial reward while ensuring their return is used with your brand again in the future.
Example: American Express
Cashback rewards is most popular with credit card providers, like American Express. With a cashback card, customers earn a percentage on every dollar they spend on eligible purchases with their American Express card and can use their cashback rewards to pay their American Express bill every month.
// Tiered loyalty program
A tiered program ranks customers based on their loyalty. The more engagement or purchases a customer makes, the higher their status with your brand. Customers can access different perks based on their status.
Pros: Tiered programs encourage higher lifetime value as customers will spend more to rank higher and get better benefits from your brand, like discounts, freebies, and special gifts.
Cons: Each tier has different rewards, returns and cancelled orders can affect the status of a customer and it can sometimes get complicated for customers to understand the fine print.
Example: Sephora
Sephora’s Beauty Insider is a great example of a successful tiered loyalty program. Customers collect points on purchases and can redeem rewards like samples or even full-sized products. There are 3 tiers (Insider, VIB, and Rouge), and all three have great perks to start like free shipping and birthday gifts, but the rewards get better the higher you climb.
Sephora’s Beauty Insider program is extremely popular among shoppers. The program boosted cross-sell leads by 22% and 13-51% increase in upsell revenue. Sephora is continuously making changes and improvements to their loyalty program to engage better with their customers, and offer better rewards and prizes as they grow.
// Referral program
A referral loyalty program encourages your customers to invite new customers to try your products and services. The existing customer gets some sort of reward for their referral, and you’ve gained a new user.
Pros: Referral programs are a great way to retain your customers while gaining new ones without having to find them yourself. Existing customers are happy with their referral rewards and are likely to continue to spread the word for their benefit.
Cons: Customers can refer your brand to friends and family, they can create an account, but it doesn’t guarantee they will make a purchase from you, and the risk of collecting a ton of low-value or dormant customers runs high if you don’t plan out your program efficiently.
Example: Revolut
Revolut is a fintech brand that has been quite successful with their referral program. Customers recommend Revolut to their friends and family and only after the new customer has completed a certain number of actions does the existing customer get their reward. This encourages customers to recommend serious referrals and not dead-end ones just to get a reward.
// Game-based loyalty programs
Gamified loyalty programs add a fun element to your loyalty program and encourage greater engagement than other types of programs. Brands can create a game, unlock new levels with purchases, complete quizzes, and much more with a gamified approach to a loyalty program.
Pros: Game-based programs encourage greater engagement and increased loyalty because of the exciting element of earning points and winning prizes, helping your brand stand out.
Cons: From planning, branding, developing, and launching the loyalty program, it can take away a lot of internal resources. It might be worth outsourcing our game-based loyalty program to a third party.
Example: Tim Horton’s
Canada’s favorite coffee shop, Tim Horton’s, has been using “Roll-Up the Rim” for 35 years. Up until 2020, customers would by a Tim’s drink and roll up the rim of their cup to reveal a prize. Prizes could be anything from a free coffee or donut, cash, or even a new car! Tim Horton’s had to shift to a digital version of the game, where customers can still win prizes by buying Tim’s products, but the reveal is on the Tim Horton’s app.
Customers used to strategize where to buy Tim’s products based on locations where customers won big prizes, and now they theorize the best chance to win big is playing at odd hours when most people are offline.
This game-based loyalty program adds a much more exciting element to drinking your morning coffee, with the anticipation that one cup could bring you big wins.
// Value-based programs
Value-based programs don’t directly impact the customers, but rather the brand donates a percentage of the purchase or pledges to contribute in some way to a social or economic issue.
Pros: Value-based loyalty programs encourage customers who feel strongly about making a positive social impact, to align themselves with brands that have the same morals and values as their own, lowering your chances of churn.
Cons: This model could become costly, and lead to your brand having to make tough decisions about the amount you can donate, which puts you at risk of building a bad reputation as the brand that stopped giving to charity.
Example: Warby Parker
The popular eyewear brand partnered up with vision-care specialists who work in third-world countries to help bring people in poverty vision care and glasses. For every pair of glasses purchased at Warby Parker, a pair of glasses is given to someone in need. They’ve even set up a program of donating used or old glasses which are sent to an eye-wear recycling center.
By purchasing at Warby Parker, customers feel they have made a greater impact through their purchase or even by donating their old glasses. Eye wear is a must-have necessity for many people, why not help another person out when you make your annual purchase?
// Partnership loyalty program
A partnership loyalty program involves two businesses partnering up and providing each other’s customers with shared benefits. This could be cross-industry partnerships, like between a retailer and an airline. Customers spend with one brand and can reap rewards from another – and vice versa.
Pros: Through a partnership program, brands can offer their customers a more diverse range of rewards. Customers can collect points while shopping and use them for a special treat like discounts at the cinema or on flights and hotels.
Cons: It could be difficult to create a loyalty program that rewards both brands equally. That’s why it is important to select the right partner and ensure your brand doesn’t fall into a deficient while the partner thrives from a joint loyalty program.
Example: PayPal and Spotify
Spotify and PayPal offered new customers a great deal, where if they use PayPal to sign up for a Spotify Premium account, they get the first three months of Spotify Premium for free.
This was a great lead generation offer for both brands, as they both secured a sign up, and the customers were encouraged to keep their subscription after three months with the incentive of collecting credit card points if they paid for their subscription through PayPal.
The benefits of having a customer loyalty program
Boost revenue
Reduce churn
Personalize experiences
Deeper connections
Boost revenue
Loyalty program members generate about 12-18% more revenue growth per year than non-members.
Probably the most obvious benefit of a loyalty program is the high number of repeat purchases. Encouraging customers to keep spending with your brand to earn points and get rewards is a great way to keep them loyal – helping your brand boost its revenue year after year.
Reduce churn
84% of customers say they are more likely to stick with a brand if they offer a loyalty program.
If your loyalty program is well planned and beneficial to your customers, you significantly lower the risk of your customers churning. You’re offering them rewards unique to your brand, plus if they churn, they lose all the points they’ve earned – it’s a good incentive to stay.
Personalized experiences
80% of customers would rather do business with brands that offer personalized experiences.
A loyalty program gives your brand a great opportunity to personalize interactions with customers, sending them relevant promotional messages that are tailored to their spending habits, and rewards that apply to their favorite products. Customers are less likely to engage with your loyalty program if the rewards are for products or services that don’t interest them.
Form deeper connections with customers
60% of consumers that are part of a loyalty program believe their relationship with the brand goes beyond a transactional one.
Through a strong loyalty program, along with personalized experiences and offers, brands can form much deeper relationships with customers, proving that they understand their needs and are ready to reward their loyalty to your brand.
Tips to launching a successful customer loyalty program
1. Use customer data to your advantage
Your first- and zero-party data hold a lot of potential in helping you personalize your interactions with customers and tailor their loyalty program to their interests.
Using a customer data platform can help you collect and organize customer data. When you collect data from various sources and remove data silos, you can view the full image of who your customer is and how they want to interact with your brand.
A customer data platform enables you to unify the data about a customer gathered from various interactions.
Show them you know more than just their first name through personalized campaigns and messaging. Personalized customer experiences increase revenue and loyalty. The best way to start is by optimizing how you use customer data so that you can invest in creating loyal relationships.
2. Automate messages
Automating loyalty messages can take a huge strain off your employees and will offer customers better overall experiences with your brand.
Take advantage of an omnichannel customer engagement solution that tracks the behavior and engagement of every customer. It is essential to analyze their behavior and send relevant information through their favorite channels about their loyalty program, encouraging them to stay up to date and engaged. Some popular use cases that can be automated for a loyalty program are:
- Vouchers for their wish list items
- Promotional offers on special dates, such as birthdays or anniversaries
- Messages when their favorite products are back in stock
- Notifications when they’re reached a new level in the loyalty program
3. Segment your audience
Simply having a loyalty program is not enough. When 90% of businesses have loyalty programs but 71% of customers say it has no effect on their loyalty, something’s got to give. The trick is to understand how to increase customer engagement in loyalty programs to make them more valuable.
You can optimize your loyalty program by segmenting your audience. Take what you already know about your customers and make sure they get messages about rewards and promotions that are relevant to them and their status within the program.
By segmenting your audience, you can send personalized loyalty offers.
Petpetgo is a top pet supply e-commerce company that used our solutions to segment customers based on purchase behavior and preferences. Customers received promotional offers based on loyalty status and preferences which doubled Petpetgo’s purchasing frequency.
4. Collect and act on feedback
Getting feedback from your customers about your loyalty program can go a long way toward helping you optimize the entire program to ensure both your business and customers are satisfied.
You can use channels like WhatsApp to gather feedback from loyal customers.
5. Be responsive and reliable
Customers can have a lot of questions about your loyalty program – which could end up slowing down your customer service and adding more work to your live agents if you have a call center.
Consider launching a simple chatbot that focuses on your loyalty program, where customers can interact with your brand, get answers to their questions 24/7, browse prizes and rewards all within one chat app.
6. Re-engage dormant customers
A lost customer doesn’t need to be lost forever. It is your job to engage and re-engage your customers to nourish loyal relationships. You already know them well. You understand their habits, favorite communication channels, and their purchasing history. Use this to your advantage to reduce your overall churn.
Push notifications are a great way to re-engage. After a few weeks of inactivity on your app, send a relevant notification via their favorite channel to entice them to revisit your offers. This notification could be anything, like a ‘we miss you’ message to a 10% voucher just for them.
Build loyalty through conversations
With a well-crafted customer loyalty program in place, you’ll not only retain more customers and drive increased revenue, but you’ll also create a loyal community of brand advocates who will champion your business far and wide.
But even a well-planned program can fail if the messaging and conversations with customers miss the mark. Keeping all your interactions conversational, using always-on chatbots, automated marketing messages and reminders, and easy access to customer support all play a major role in keeping loyalty up.
All in all, designing the right kind of loyalty program, paired with a well-crafted communication strategy will help your brand reach higher levels of loyalty, which means consistent revenue growth and lower churn over.
Bring conversational experiences to life
Pair your loyalty program with a strong conversational strategy.
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