Customer Loyalty Programs – How to Make One That Works

Customer loyalty programs help businesses achieve the ultimate goal of procuring and maintaining a large group of loyal and returning customers who endorse their products and brand. Customer loyalty programs are therefore commonly used as a way to entice consumers to become returning customers and brand advocates.

In fact, it’s much easier and more cost effective to generate sales from customers who are already familiar with your company and brand than it is to market and sell to new markets customers.

Attracting new customers will always be essential for a successful business, however focusing on establishing loyal, repeat customers is also important.

According to Invesp Consulting, it can cost up to 5 times as much to gain a new customer than to keep an old one!

By focusing on developing a successful customer loyalty program, you can greatly increase your return on investment when it comes to marketing efforts and potentially build brand advocates for life. 

In the article we’ll discuss:

  • What is a Customer Loyalty Program?
  • What Are The Benefits of Having Customer Loyalty Programs?
  • How do You Create a Customer Loyalty Program?
  • Key Takeaways

What Are Customer Loyalty Programs?

customer loyalty programs definition

Customer loyalty programs are programs that are offered by a company as a way to encourage current customers to become loyal, repeat customers. 

Most often customer loyalty programs come in the form of rewards programs, offering free products or services, discounts, perks and even exclusive insider information and access to new products and services.

Often a company will have different levels to their rewards program – meaning the more you buy or spend the higher you get and the more rewards you reap. The goal of this is to incentivize repeat purchases and, hopefully, encourage customers to become brand advocates and to share their positive experiences with others.

Customer loyalty programs also use customer information, such as purchase history, to offer customers personalized offers and suggestions. This has been shown to improve customer experience, as well as increase sales.

Regardless of what is offered to consumers as a reward for being loyal, it doesn’t need to break the bank. Even a small thank you, like a free gift with purchase, can be enough to turn a one-time customer into a repeat buyer.

No matter how much is spent on customer loyalty, the return on this investment will always be worth your while.

Reciprocity is an example of a Marketing Psychology technique. Learn more about reciprocity and 4 other tried-and-true techniques in 5 Marketing Psychology Techniques to Improve Your Conversions.”

What Are The Benefits of Having Customer Loyalty Programs?

There are many benefits to offering customer loyalty programs – for both the company itself and its customers. With so many companies offering such programs, it’s not hard to recognize the value in developing a loyalty program of your own.

Some of the most valuable benefits to creating such a program include:

1. Customer retention

In addition to a brand’s voice and shared morals and values, consumers in today’s marketplace highly value the experience they have with a company. Therefore, successful customer loyalty programs can greatly contribute to customer retention by offering a positive experience and demonstrating the values that a company has in common with its customers.

For example, a company may donate a portion of the profit from a customers’ purchase to a local charity, demonstrating their commitment to improving their community.

2. Word-of-mouth and referrals

If a customer or client has a great experience with your company and enjoys the perks they are receiving from your customer loyalty programs, they are much more likely to share this experience with their friends and family. This results in referrals and word-of-mouth advertising at no extra cost to your business.

3. Increasing sales at a lower cost

It has been shown that it costs much less to retain a customer than to gain a new one. Therefore, with the help of a customer loyalty program you can increase sales while spending much less than you would on the advertising required to attract a new customer.

4. Building trust with customers

By creating a strong relationship with customers and communicating with them on a regular basis through the use of a loyalty program, you can build trust. Trust between a company and its customers is essential in today’s marketplace and can greatly benefit your business and its bottom line, not to mention the experience of your loyal customers.

5. User-generated content

Successful customer loyalty programs encourage customers to post reviews and share content online. Social media and review sites like Yelp are great places for consumers to post their experiences and, at the same time, create user-generated content that helps spread the word about your business. In a way, these customers become brand ambassadors.

With all of these amazing benefits, it’s no wonder so many companies have started developing and using customer loyalty programs.

If you’re ready to begin developing a loyalty program for your brand but aren’t sure how to begin, here are some tips to help you get started.

How to Create Successful Customer Loyalty Programs in 7 Steps

The decision whether or not to create a customer loyalty program for your brand is simple however, actually developing a successful loyalty program – not so easy.

These steps will help you develop a successful program that will benefit your company, as well as your customers and their experience with you.

1. Get to know your customers

The more you know about your customers the better your program will be. What do your customers like, what do they value, what is the best way to communicate with them? These are some important questions that you should take the time to answer before beginning. The answers to these questions will help you decide what type of program you should offer and how you should go about delivering your loyalty program.

In addition to these initial questions, when developing reward tiers and selecting the perks you will offer, consider how much your customers spend, what kinds of products they most often purchase, what other products they might be interested in and how much profit is made from their purchases. This will guide you in the right direction when trying to select perks and rewards that are valuable to your customers. It will also give you insight into how to promote additional sales on high-margin products.

2. Consider which customers should be offered rewards

Take into consideration everything you know about your customers when deciding who will be offered rewards. How many purchases should they have made to receive a reward? Are they interested in and able to purchase additional products?

Don’t offer your perks and rewards to just any customer – recipients should be happy, repeat customers who are willing and able to purchase additional products and who are profitable for your business.

3. Evaluate your ability to create a successful program

Before putting a customer loyalty program in place, you’ll need to ensure that you have happy customers and that you have employees who will be perfect for delivering this kind of program.

Have your customers been satisfied with their experiences with your brand thus far? Unhappy customers will not be interested in a loyalty program. In order to make your loyalty program successful, you’ll need a group of happy customers to get you started.

Do you have employees who are great at working directly with consumers? Make sure you put together a team that will be able to work with loyal customers and provide them with a positive experience through your program.

4. Outline your goals and expectations

One of the most important aspects of planning a new customer loyalty program is establishing goals and expectations. With these goals in mind, you can select the right loyalty program type and have a way to measure the return on your investment.

Once you have your goals outlined, be sure to establish the ways in which you will measure these goals. What measurables does the platform on which you’re delivering your rewards program offer? Is this enough information to determine whether the program is a success and what can be improved? These measurables will be important for determining whether your new program is providing a good return on investment.

5. Decide on a budget

Set aside and outline a budget for your new loyalty program. Make sure to keep this budget separate from your marketing budget for acquiring new customers.

Keep in mind your goals and expectations for this program when setting a budget. Is the budget you’ve put aside enough to provide the things you’ll need in order to achieve your desired outcomes?

6. Choose a program type

Based on your goals and budget, select which type of loyalty program you’ll offer and start developing it!

Keep in mind what you know about your customers. What type of program would they most enjoy and value? On what type of platform should it be delivered?

Some common loyalty program types include:

Point-based systems
Starbucks provides a fun and easy way to have customers coming back for their second, third and fourth cup of brew. (https://www.starbucks-stars.ca/)

With this type of program, customers collect points with every purchase which they can then use to gain free rewards like products or services. Point-based systems are most common among retailers that sell small, relatively inexpensive items. 

If you are going to offer a point-based rewards program, make sure the rewards are attainable and that it is easy for customers to understand how points translate into rewards. A great example of a point-based rewards system is Starbucks’ Star Rewards program. When a customer makes a purchase through their Starbucks app they collect a certain number of points. 

These points can be used to get free drinks, food, merchandise and upgrades to an order.

Tier systems
Marriott Bonvoy's multi-tiered system incentivizes guests to spend more to earn more. (https://www.marriott.com/loyalty.mi)

Loyalty with a tier-based system is rewarded when a customer completes an initial purchase. Customers are then encouraged to make additional purchases in order to reach a higher tier which offers greater rewards. 

This type of rewards program is common among businesses that sell more expensive products or services. Airlines, hotels and casinos, for example, commonly use tier-based reward programs. Marriott Bonvoy is a great example of a tier system. 

Each time a customer stays a night at a Marriott Hotel they are rewarded with points. The more points they earn, the higher the tier they gain access to, the ultimate goal being Elite status. Different tiers offer varying rewards including free nights at their various hotel brands, discounted rates, free WIFI, access to exclusive events and more.

Fee-based systems

With a fee-based rewards system, customers pay a fee in order to gain access to special offers, rewards and VIP status.

Amazon Prime is an example of a fee-based loyalty program. By paying a monthly subscription fee, Amazon Prime members gain access to VIP benefits like free shipping, faster shipping, etc.

Non-monetary incentives
CSR social change
TOMS has built their mission around improving the socioeconomic conditions of their manufacturers around the world. (https://www.toms.ca/)

Loyalty rewards don’t necessarily need to have a monetary value. If you are familiar with your customers’ values and the causes that appeal to them, you might consider offering a non-monetary bonus when a purchase is made. 

A donation made in their name for every purchase they make. Consumers are much more willing to support and make purchases from companies that share their beliefs and values. This strategy can therefore be very successful in gaining loyal customers, especially if your ideal consumer is known to be altruistic. 

TOMS, for example, donates a pair of shoes to someone in need for every pair of shoes that is sold. This appeals to their target market’s philanthropic nature and encourages repeat purchasing.

Partnerships

Forming a partnership with a related business and offering rewards that combine your offering with theirs can be extremely effective and rewarding for customers. If the customer is also familiar with your partner company and supports them as well then this strategy can be equally beneficial for all parties. 

Consider which companies could provide rewards that your loyal customers would value and look to build a relationship with them. Offering rewards from other relevant companies shows your customers that you value them and understand their needs and preferences, helping to build trust and loyalty.

Key Rewards is a great example of partnership rewards. Customers can collect and use reward points at any of the stores included in the Key Rewards brand family, including Pottery Barn, West Elm, Williams Sonoma, etc.

Gamification

Gamification is another great way to engage your customers and encourage purchasing and loyalty. Within their points-based reward program, Starbucks also utilizes gamification – the Starbucks app offers games and challenges to promote purchases. 

For example, every few months Starbucks releases a new game. Customers gain plays by making purchases (although a purchase is not required to play) and can win prizes like gift cards, free drinks, merchandise and more!

Contest marketing is another form of gamification that has the potential to offer a huge return on investment. Learn more about this technique in Why Contest Marketing – What is it And How Can it Work For Your Brand.”

7. Decide on the rewards you’ll offer

Along with your program type, you’ll need to decide what rewards to offer your loyal customers. Be sure to consider the value of these rewards and the cost to your company. Will the return on your investment be enough to sustain a successful program?

Some common rewards include:

  • VIP service
  • Insider information
  • Access to exclusive offers
  • Access to new products before they are released
  • Discounts
  • Free products or services

With these steps in mind, you’re ready to start creating your own customer loyalty program! Remember to keep your customers in mind every step of the way – what would they like to receive as loyal customers and what will keep them coming back for more?

Key Takeaways On Customer Loyalty Programs

Retaining customers and making repeat sales is much easier and more cost effective than gaining new customers. As a result, many companies, both large and small, have developed simple, yet effective, customer loyalty programs.

These programs incentivize loyalty to a brand by offering rewards, often in the form of free products or services and VIP access to events, information and special offers.

When developing a rewards program for your brand or business, follow these 7 simple steps:

  1.   Get to know your customers, what they value, what platform is best to use for your rewards program (e.g. through an app, email subscription, etc.) and what their buying habits are.
  2.   Consider which customers should receive rewards. Who are your best and most profitable customers?
  3. Evaluate your resources and ability to create a successful program. Do you have the right employees and customers to develop an effective and sustainable program?
  4. Outline your goals and expectations so that you can measure success.
  5.   Establish a budget. Keep in mind your goals and expectations and whether or not your budget will allow you to reach these goals.
  6.   Choose a program type. Which type of program you choose may be based on the types of product or service you offer. Common reward program types include:
  • Point-based systems
  • Tier systems
  • Fee-based systems
  • Non-monetary incentives like charitable donations
  • Partnerships with related companies
  • Gamification
  1. Decide on the types of rewards you’ll offer your loyal customers. Some of the most common rewards include:
  • VIP services
  • Insider information
  • Exclusive offers
  • Access to new products
  • Discounts and coupons
  • Free products or services

Loyalty programs can be very cost efficient and offer a great return on investment however, it’s important not to forget to dedicate resources to acquiring new customers as well.

With new customer acquisition marketing and a loyalty program in place, you’re company is sure to thrive!

Thea Christie

Written By Thea Christie

Thea is the Content Marketing Lead at Advesa and possesses a strange love of grammar, syntax and punctuation. In the past, she’s worked as a content specialist for publications in the startup, SME and tech space. When she’s not storytelling, she’s busy being a travel junkie. @theachristie