What is a customer loyalty program?
Loyalty programs, often implemented by retailers and various businesses, provide rewards, discounts and exclusive incentives to attract and retain customers. These programs are designed to encourage repeat business by offering rewards for continued patronage and brand loyalty.
For example, a popular retail chain might offer a loyalty card where customers earn points for every purchase. Once they accumulate enough points, they can redeem them for free merchandise or other perks.
What is the purpose of a loyalty program?
When customers feel valued, they’re more likely to stay with a brand and make additional purchases. The points mentioned below would help you understand the purpose of a loyalty program:
💓 Fostering customer connection: The core purpose of a customer loyalty program is to help brands foster customer connection. Loyalty programs tap into the human need for rewards and recognition. This emotional connection encourages customers to choose a brand over its competitors, reinforcing long-term loyalty.
📈Enhancing customer retention: Customers who see value in your loyalty program will likely stay with your brand longer. In fact, a 2022 survey revealed that 79% of US consumers are more likely to continue business with a brand due to its loyalty program. Therefore, customer loyalty programs enhance customer retention, boosting satisfaction and encouraging repeat business.
🔢Gaining valuable customer data: In this connected world, data is everything. When your customers sign up for a loyalty program, you gain insights about them — what products do they like? What age groups do they belong to? This demographic data can help you improve your products and services.
💰Encouraging higher order value: Customer loyalty programs are designed to incentivize customers to spend more on each transaction, raising the average order value and encouraging customers to spend more to gain points.
In essence, a well-structured loyalty program rewards customers and strengthens the brand’s relationship with them. Now, let’s find out how a loyalty program actually works.
How does a loyalty program work?
Today, loyalty programs are often incorporated much earlier in the customer journey, starting at the awareness stage. Businesses use targeted ads and special offers for loyalty program sign-ups to accelerate customers through the funnel. By showcasing loyalty program perks during initial customer interactions, companies pique interest and encourage potential customers to move toward purchase faster.
Once customers make their first purchase, loyalty programs keep them engaged by offering points, rewards or perks for repeat purchases, reviews or referrals. The concept is straightforward — customers are incentivized to return, make additional purchases and stay loyal to the brand.
Types of customer loyalty programs with examples
A customer loyalty program offers incentives such as discounts, special sales or early access. Let's dive into some of the common types of loyalty programs:
1. Points-based loyalty programs
Points-based programs are among the most widely used customer loyalty initiatives due to their simplicity and effectiveness. These programs allow customers to earn points that can be redeemed for future purchases, discounted services or special giveaways.
Marriott's popular loyalty program, Marriott Bonvoy, exemplifies a successful points-based system. Travelers can use their points to book free hotel stays, dining and other experiences.
2. Tier-based programs
A tiered loyalty program starts with a points system that allows customers to earn rewards with each purchase. Think of it like a video game — as customers reach spending milestones, they unlock new levels that offer more valuable benefits and perks.
These tiered programs can also be integrated into your brand marketing strategy. For instance, you might introduce an exclusive "Diamond Level" tier where customers receive discounts on your premium products and services. This exclusivity motivates customers in lower tiers to increase their spending to reach the next level.
Take DSW, for example. In 2019, the popular shoe retailer introduced a VIP customer loyalty program for Canadian customers. This program included rewards such as free shipping and extra points for donating unwanted shoes.
3. Mission-driven loyalty programs
Not all loyalty programs revolve around tiered rewards and discount codes. If your company has a solid social objective, consider implementing a mission-driven customer loyalty program that aligns with your values.
Connecting your loyalty program with a meaningful cause can boost customer engagement. For example, through its loyalty program, Ben & Jerry’s encourages support for various charities focused on animals, the environment and social initiatives.
4. Community programs
These programs focus on fostering a sense of community and belonging among customers. They promote shared experiences and a connection to the brand's values or mission.
Sephora's Beauty Insider program offers customers a points-based rewards system with the added benefit of an exclusive online community. The program allows beauty enthusiasts and newcomers to connect, ask questions, share their looks and exchange tips. This deepens customers' connection with the brand, enhancing overall loyalty.
5. Paid programs
Paid programs are also known as subscription-based loyalty programs. Customers pay a fee for exclusive benefits or experiences; the upfront cost encourages commitment and repeat purchases.
Amazon Prime is an excellent example of a paid loyalty program. For an annual fee, Prime members enjoy benefits such as free shipping and access to services such as Prime Video and Prime Music.
Benefits of customer loyalty program
The potential benefits of implementing a loyalty program can be significant for your business. Take a look.
🫂 Builds a customer community
Loyalty programs create a sense of exclusivity and belonging, which enhances brand engagement. These programs help form a community around your brand, where customers feel rewarded for their loyalty.
💸 Reduces marketing costs
Repeat business adds long-term value without the extensive marketing and outreach costs associated with gaining new customers. Take the example of Starbucks. With its Starbucks Rewards program, the brand motivates customers to keep coming back by offering points for every purchase, which leads to discounts on future items. The program drives frequent visits, ensuring customers spend more overtime while lowering overall marketing costs.
📝 Expands customer base
Customer loyalty programs can encourage customers to spread the word, acting as brand advocates. When customers have positive experiences, they are more likely to leave reviews, recommend your business or share their purchases on social media. Their reviews work as an organic promotion to help build trust with potential customers, expanding your audience without significant advertising costs.
Take Amazon’s Vine Program, which invites select customers to review products. Their honest feedback helps build credibility and brand awareness, influencing others to make purchasing decisions.
🛍️ Improves sales
Loyalty programs often provide added conveniences, such as easier returns, early check-ins and late check-outs at hotels or the ability to reserve products. These enhancements make the shopping or service experience more seamless for members, increasing sales.
In fact, according to a study by McKinsey, customers who are members of a brand’s paid loyalty program are 62% more likely to spend more. So, a loyalty program can generate significant revenue for any brand.
How to create a customer loyalty program
Creating a successful customer loyalty program requires careful planning and execution. Here are a few steps to get you started:
1. Understand your customer base
To design an effective customer loyalty program, you must understand your customer base. Here is how you can understand customers better.
📊Conduct customer surveys: Collect direct customer feedback to understand their preferences and motivations via customer surveys. After a customer reaches a milestone, for example, a particular number of purchases, send them a short survey asking what rewards they find most appealing. This helps tailor the program to their preferences.
🛒Analyze purchasing history: Dig into your transactional data to uncover what motivates repeat purchases. Is it product quality, effective marketing or pricing that resonates with your customer base? For instance, if you are a skincare brand and you notice that customers buying your sunscreen repeat their purchases every three months, it might be because your product delivers consistent results. You can use this data to structure your loyalty program around similar products.
👫Use demographic information: Segment your customer base according to demographic data. For example, younger customers prefer discounts on trendy items, while older customers prefer premium, high-value rewards. You can personalize promotions and benefits based on their age group preferences.
💌Monitor social media: Track social media channels to gain insights into customer sentiment. If customers are raving about a particular product or experience, incorporate that feedback into your loyalty program. For instance, if a certain product generates a strong, positive buzz among its user base, you might offer double loyalty points for purchasing that item or create special rewards related to it.
🛃Collaborate with sales and customer service teams: Engage with your sales and support teams to understand common customer queries. During the demo or purchase consideration stage, customers often ask specific questions about service privileges and pricing flexibility or compare options between monthly and annual subscriptions. For example, if customers frequently ask about the availability of flexible payment plans or discounts for long-term commitments, you can incorporate these elements directly into your loyalty offerings.
2. Set clear goals
Defining clear goals gives your customer loyalty program direction and purpose. These goals may include increasing repeat purchases or enhancing your customer's lifetime value.
Consider a local coffee shop with a vision to expand into a chain of outlets soon. It looks to enhance customer engagement first and increase sales through a customer loyalty program. To ensure the program's success, it uses the SMART framework:
✅ Specific: The primary objective is to boost customer retention by 30% within the first year of launching the loyalty program. This can be achieved by implementing a points-based system where customers earn points for every purchase, which can be redeemable for discounts or free items.
✅ Measurable: The coffee shop tracks the effectiveness of the loyalty program by measuring the percentage of repeat customers over time. It also monitors sales data, aiming to see a 15% increase in average order value by analyzing customer purchasing habits.
✅ Attainable: Management believes a 30% retention increase is realistic. They have budgeted for marketing campaigns and employee training to promote the program effectively and ensure they can support and manage customer expectations.
✅ Relevant: This goal aligns with the shop's broader business objectives of increasing overall sales and expansion.
✅ Time-bound: The coffee shop has set a one-year deadline to achieve these goals. To create urgency and accountability, the program's performance must be evaluated quarterly and adjusted as necessary.
️3. Choose the right type of loyalty program
Selecting the ideal loyalty program requires aligning it with your business goals and understanding what best engages your customers. Based on the type of businesses, brands can choose a suitable customer loyalty program. Here are a few common examples:
Types of loyalty programs | Consider if | Ideal for |
Points-based loyalty program | You want to encourage repeat purchases. You sell lower-priced items and need a system to incentivize frequent transactions. You have a diverse product line, allowing customers to accumulate points across categories. | Retail, e-commerce, or coffee shops |
Tiered loyalty program | You want to reward your best customers with exclusive perks. You sell high-ticket items or offer premium services. You aim to create long-term relationships with high-value customers by incentivizing loyalty over time. | Luxury goods, airlines or subscription services |
Paid membership or subscription programs | You offer high-value perks that justify the membership fee. Your customer base is already loyal and you can provide ongoing benefits like free shipping, exclusive products or premium offerings. You want to establish predictable revenue streams through membership fees. | E-commerce platforms or fitness apps |
Value-based loyalty program | Your customers align with a cause and value giving back. You want to build strong emotional loyalty rather than focusing on financial rewards. You aim to enhance your brand’s ethical image. | Organic products, eco-friendly goods or businesses that target socially conscious consumers. |
Referral-based loyalty program | You have an engaged customer base willing to recommend your product or service. Your business model benefits from customer advocacy and you can provide value to both the referrer and the referred. You’re looking to grow your customer base cost-effectively. | Subscription services, SaaS, or community-based businesses |
Hybrid loyalty program | You need to cater to different customer segments (e.g., casual shoppers vs. loyal, high-spending customers). You want to blend the strengths of different loyalty models for a more personalized experience. Your product range and customer behaviors are diverse. | Retail, hospitality or large corporations. |
4. Reward a variety of customer actions
Recognize and reward actions beyond purchases. Incentivize interactions to strengthen customers’ connection with your business. This can be achieved by:
☑️ Rewarding customers for watching product videos: This helps boost awareness while encouraging deeper engagement. Customers who watch videos understand your products better, which can lead to increased trust.
☑️ Offering incentives for engaging with your mobile app: Mobile apps are widely used by existing and emerging companies alike to provide personalized customer experiences and boost digital customer service. For instance, if you are a utility service provider, you may persuade users to pay on your app for a 5% discount on monthly bills.
☑️ Recognizing and rewarding social media content sharing: User-generated content serves as organic marketing these days. Rewarding these actions encourages customers to become brand advocates.
For instance, BarkBox effectively uses product videos featuring UGC to boost engagement. The brand often showcases videos of happy dogs interacting with BarkBox toys, which creates a sense of authenticity and builds trust.
☑️ Providing benefits for subscribing to your blog: Subscribers are more likely to engage with your brand and stay informed about your offerings. Rewarding subscribers with personalized gift items increases your readership and strengthens their relationship with your brand. See how Condé Nast does it.
5. Integrate technology and platforms
Choosing the right software to manage your program’s operations ensures smooth implementation and effective management. Consider the following factors:
✅ Ease of use: Ensure your loyalty program management platform is user-friendly and intuitive for your team and customers. For instance, customers should be able to quickly check their points balance and redeem rewards through a simple, visually appealing dashboard.
✅ Customization options: Look for specific features, such as personalized email templates or SMS marketing, that allow you to tailor the program to meet your specific needs and goals.
✅ Compatibility with existing systems: Verify that the platform integrates seamlessly with your current systems, such as CRM, helpdesk software, live chat support, customer support ticketing systems and operational processes like inventory management and order fulfillment.
💡 Expert advice
Ensure your loyalty program seamlessly integrates with your existing sales and marketing tools. For example, if you run a retail store, consider linking your loyalty rewards program to your point of sale (POS) system. This allows for automatic tracking of customer purchases, streamlining the process and enhancing the overall customer experience.
6. Market your loyalty program
To ensure that both existing and potential customers know the benefits of your customer loyalty program, communicate the perks proactively. Here are a few tips to market your loyalty program:
📧Use email marketing: Send targeted emails highlighting your loyalty program's benefits. Include exclusive offers or incentives to encourage sign-ups.
💻Leverage social media: Utilize your social media platforms to raise awareness about the program. Share engaging content, customer testimonials and previews of upcoming rewards.
🛒Maximize in-store signage: Implement physical signage to promote the program in your stores. Use banners, posters and tabletop signs to capture customers' attention as they shop.
7. Measure success and adjust
Monitoring key performance indicators (KPIs) is crucial to the success of your loyalty program. By tracking these KPIs, you can gain a deeper understanding of your program's effectiveness and make informed decisions about its future.
🤝 Participation rates: Tracking how many customers actively engage with your loyalty program provides a sense of security and reassurance. It keeps you informed about the level of customer involvement, helping you make decisions with confidence.
📨 Redemption rates: Measure how many customers are using the rewards offered.
😊 Customer satisfaction: Assess how well the program aligns with and meets customer expectations.
💰 Two cents from Sprinklr
Knowing how well your customers respond to your loyalty program is essential for its ongoing success. Gaining insights into their preferences helps you understand what works and what doesn't, guiding any necessary changes. To effectively gather this customer feedback data, consider investing in survey software that provides a 360° view of customer opinions regarding your loyalty program.
The tool combines survey responses with data from social and digital channels, review sites and service interactions and offers actionable insights that can drive significant improvements.
Additionally, generating and editing survey questionnaires is effortless, requiring you to use simple commands in plain language. With AI-powered suggestions based on survey best practices, you'll build better surveys rapidly and effectively.
Best practices to improve customer loyalty program
A successful customer loyalty program requires continuous evaluation. By implementing these best practices, you can enhance your program's effectiveness:
Follow a structured approach
When exploring the concept of a loyalty program, brands often jump straight to implementing the rewards they want to provide or the gamification features they intend to incorporate. While these aspects are important, several essential components must first be established in your loyalty program implementation plan. Identify which behaviors you want to encourage (e.g., repeat purchases, referrals) from which section of your customers and tailor your program structure to align with these goals. This foundational step will ensure that your loyalty program resonates with your customers and becomes an effective marketing strategy over time.
Outline member journeys
First impressions are vital. Members with a positive experience with your loyalty program will likely recommend it to others. When designing your loyalty program, thoroughly outline the member journey from start to finish. Focus on the two critical phases: enrollment and opt-out processes. Ensure that the enrollment experience is smooth and engaging. Likewise, make the opt-out process clear and user-friendly.
Choose the right rewards
Rewards are the centerpiece of any loyalty program, providing benefits or tangible items to members based on their engagement and achievements. Selecting the right incentives that align with your brand and resonate with your target audience is essential for the success of your loyalty program. Whether you offer gifts, coupons or other perks, these incentives must be distinctive and appealing. While the outcome remains subjective, strategically planning your reward system is vital to ensuring it effectively motivates and retains customers.
Analyze customer data
When planning a loyalty program, it's crucial to establish how you will measure its results and key performance indicators (KPIs). Your reporting strategy must be defined during implementation, not just after the program launches. By not incorporating reporting capabilities from the start, you risk missing out on vital data that can inform your loyalty program's success from day one.
A loyalty program is a longstanding strategy businesses have effectively utilized for years. Remarkably, this concept retains its significance in the contemporary landscape dominated by AI and digital innovation, playing a crucial role in customer retention and business expansion.
However, a loyalty program's successful development and ongoing management demand a high level of technological expertise. Since customer experience is paramount to its effectiveness, investing in advanced customer service software like Sprinklr Service is prudent.
Sprinklr Service offers a comprehensive approach to customer service, encompassing omnichannel support and streamlined management of customer feedback across both traditional and digital platforms. As a result, it enables you to understand customer sentiments, preferences and purchasing behaviors holistically. Armed with these insights, you can strategize and implement a data-driven customer loyalty program that stands out vividly in a competitive marketplace.
To explore Sprinklr Service's capabilities further, schedule a live demo of the platform today.
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