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Customer loyalty programs: Types, tips, and examples

13 min read
A customer loyalty program encourages people to keep coming back by offering them a reward for their repeat business.


What is a customer loyalty program?

Whether it involves collecting points, swiping a card or just spending a certain amount of money with you, a loyalty incentive scheme is an up-front deal with the customer: buy from us, and we’ll give you something extra in return. Incentives could include vouchers and discount codes, exclusive products and member-only prices, free delivery or even free merchandise.

A customer loyalty program is a subset of the customer retention program idea, and it’s a well-established way to retain customers and build loyalty. According to research by Nielsen, 84% of consumers said they’d be more likely to stick with a brand with a loyalty program.

Although the basic idea of a loyalty program is simple, it’s not always easy to get right once you get down into the details. Here you’ll find tips and best practices for making your customer loyalty program a success, plus a run-down of the options to consider and how to get started building your program.

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What are the benefits of a customer loyalty program?

Customer loyalty programs offer advantages in several ways.

  • Greater revenue
    Data from Accenture shows that US customers who are part of a loyalty program create 12-18% more revenue than those who are not.
  • Customer retention
    If they have an incentive to keep shopping with you, a customer is more likely to choose you over a competitor. And given that the cost of retaining a customer is at least 5x lower than the cost of acquiring a new one, that means financial savings and better CLV (Customer Lifetime Value).
  • Easier conversions
    When a customer has committed to a loyalty program, they’ll have a sense of commitment to your brand and will be more inclined to convert compared to a new customer.
  • Competitive advantage
    If someone is a member of your loyalty program, they’ll have one more reason to choose you over your competitors. This advantage could be significant if there’s not much between you and the competition, in terms of value, service and convenience.
  • Customer relationship
    Loyalty programs help you get to know your customers better. They give you personal information about the customer and allow you to observe their shopping habits and preferences.
  • A better customer experience
    Loyalty programs can help make customers feel closer to your brand. They will feel recognized and appreciated for their continued business.

What are the different types of customer loyalty programs?

Points-based

Customers collect points each time they shop with you. When the pointsbuild up, customers can exchange them for benefits like a discount coupon, a free item or free shipping. This is a well-established model that has served many businesses well, and as a result your customer is likely to be comfortable with it and know what to expect.

While the classic implementation is points-per-spend, you can also attach points-based rewards to actions like social media likes, writing a review, signing up for an account and other behaviors that benefit your brand.

If you opt for this kind of loyalty program, make sure the relationship between points and real-world rewards is clear, e.g. 100 points = $1 to spend. Otherwise the proposition is less appealing for the customer and they may lose interest or miss out on their benefits.

Tiered and threshold-spend

The more loyal a customer is, the more they’re rewarded This is a form of gamification which encourages customers to get to the next level and unlock more benefits. It can have a competitive element too, with high-tier customers feeling proud of their status and lower-tier ones feeling motivated to achieve the same level of prestige. This is a common program in the airline industry; the more you fly, the higher you move through the tiers, and the better the reward.

To get the most out of a tiered program, make sure all the levels available are shown clearly in your marketing, and that the pathway to getting to a higher tier is clearly explained. You can encourage high-tier customers to spread the word about the program by giving them profile badges or icons to use on your website or on social media.

With this model, you have the option of using permanent tiers – based on lifetime spend – or threshold-based tiers, where customers must spend a certain amount within a limited time-frame. If they don’t keep their spending levels up, they fall down the tiers again. Which one you choose will depend on the nature of your business. A threshold model makes sense for fast-moving goods and frequent purchase businesses like clothing or food. Permanent tiers may work better for things like optical care or air travel, where purchases are infrequent (in comparison) and you can reasonably expect a customer to stay with you for life.

Fee-paying

We’ve recently seen the traditional loyalty program evolve into something more like a subscription, with customers paying a monthly fee in return for a VIP experience with a business. This could be unlimited free priority shipping, after the example of Amazon Prime, or additional perks and features, as with premium packaged bank accounts like HSBC Premier.

It might seem counter-intuitive, but charging a fee isn’t a deal-breaker for many customers, provided the perceived value of the reward is substantially higher than the payment. It can actually be viewed as a way to save money, particularly if the customer would be shopping regularly with you anyway. They might prefer to pay $10 a month up front rather than multiple shipping fees of $3.99.

Punch-card

Punch-cards, whether physical or digital, are marked or stamped each time a customer makes a purchase. When the card is full, the customer can redeem their reward. Usually this is “buy 9 get the 10th free” but you could also use the punch-card to offer discounts or other kinds of reward.

This is one of the simplest customer rewards systems. It’s straightforward and self-contained, which is why this is a favored option for many small businesses. The customer holds the card and is responsible for keeping track of it and presenting it each time they shop. It’s self-evident when a reward is due, too.

Punch-cards do come with a set-back – they’re prone to fraud, especially if the mark or stamp is simple and easy to replicate. They also don’t provide any opportunity to collect customer relationship data. One way around this is to offer a punch-card system via a smartphone app, which is more secure and requires the customer to download it and sign in with their credentials.

5 steps to get your customer loyalty program started

  1. Do some user research
    What program would most appeal to your customers? Is there anything in the industry that’s setting expectations?What kind of rewards would make them want to join up? You can find out the answers to these questions by gathering feedback from a survey panel of existing customers.
  2. Set your goals
    Decide on the objectives for your loyalty program. Do you want to increase customer retention? Revenue? Brand reputation? Use measurable scales to put a number on your goals and set a time-frame for achieving them.
  3. Choose your model
    With your customer insights in hand, you can select what kind of loyalty program you want – be it a points system, tiered rewards, punch-cards or a hybrid approach.
  4. Choose your rewards
    Select the products and perks you’ll offer your most loyal customers. Think about recognition as well as rewards – some customers will respond well to exclusive content, experiences and membership identity markers like social media badges, as well as products and discounts.
  5. Market your program
    Spread the word about your loyalty program through a marketing campaign aimed at new and existing customers. Use consistent branding and a unique name to make your program more memorable and appealing. Consider kicking things off with a promotion, such as double points or extra rewards during an initial period.

Customer loyalty program ideas and tips

Focus on ease

If you want customers to keep coming back, you need to make sure it’s simple and easy for them to do so. Once they’ve bought into your loyalty program and are committed to it, you need to reinforce that commitment by making their transactions as effortless as possible – especially when it comes to collecting and redeeming rewards. That way, purchasing from you becomes a habit that’s hard to break. If they’re faced with a clunky or unreliable system, or the rules for getting rewards are full of caveats and conditions, they won’t stay around for long.

A Customer Effort Score (CES) survey can be helpful for gauging the ease of an existing loyalty program, or of your customer experience in general.

Offer flexibility

Giving your customers a choice of rewards can be very appealing, and it broadens the range of people who will be tempted by your loyalty scheme. Understanding your customer segments and their preferences and priorities can be instrumental here.

For example, if you know that your customers are located worldwide and predominantly shop online, you’ll want to include rewards that appeal to them specifically, such as free international shipping. If your customer feedback shows that limited edition or special one-off products are highly popular, issue a reward freebie that is exclusive to your loyalty program members.

Personalize rewards for greater engagement

Make it easier for customers to earn rewards by tailoring loyalty offers around their typical purchases. For example, if you’re a supermarket and you know your customer always buys a lot of fresh fruit, give them a personalized offer that gives them extra loyalty points when they shop in the fresh produce aisle in the next 30 days. If they were going to buy the items anyway, your offer gives them an extra nudge to go to your store before it expires.

Look to the long-term

Loyalty programs can take months or even years to really come into their own and start producing significant benefits. Expect to see a steady improvement in loyalty, rather than an overnight change in your results. And make sure you’re constantly looking to improve the experience, because that’s key to seeing good results.

Customer loyalty program best-practice examples

Sephora

Sephora’s Beauty Insider loyalty program uses a hybrid model that offers members a wide range of choices. As well as the points system – which is clean and clear: 1 point = $1 spend – there are tiered benefits based on threshold spend. We especially like how Sephora provides different kinds of perks and benefits for customers to choose between, from early access to product launches to birthday gifts and Meet and Greet events.

Kohl’s

Department store giant Kohl’s recently overhauled its Kohl’s Rewards loyalty program for 2020, tying together the Yes2You rewards program, Kohl’s Cash and the branded credit card with built-in loyalty earnings. We love the simplicity and ease of the model, which removes the need to collect points and instead periodically rewards customers with a $5 Kohl’s Cash reward for every $100 they spend. The program also includes personalized earning opportunities and a birthday gift for members.

Target

Like Kohl’s, Target recently unified and simplified its loyalty offering. Target Circle is a points system with a difference. As well as offering 1% rewards, exclusive offers and a birthday bonus, the Circle program uses member feedback to choose how its charity budget is allocated to non-profit organizations in the community. Members get 1 vote for every transaction they make. By linking loyalty membership with a chance to influence charitable giving, Target does more than just reward its customers – it gives them a sense of ownership and belonging.

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