It’s one thing to get your customers buying your products; it’s another to get them to continue shopping with your brand time and time again. But why would you want your customers to be loyal to your brand? There’s plenty of fish in the sea, right?

When your business is competing in such a saturated market with many customers being able to easily switch between brands, it is vital to give them a reason to choose your brand. This is where loyalty programs become helpful in influencing customers’ purchasing decisions.

Loyalty programs build trust and establish strong relationships with your customers which ultimately increases their lifetime value.

Companies like Sephora, United Airlines, and Starbucks have seen significant benefits of using loyalty programs. E-commerce platforms saw an increase in average order quantity by 319% since introducing a loyalty program.

It costs significantly more to acquire new customers than to retain existing customers, so it’s no surprise to see more and more businesses focusing on building customer loyalty and customer retention strategies.

If you’re looking for ways to generate more revenue for your business, making the most of your existing customers and turn them into brand advocates is an excellent place to start.

What is a loyalty program?

A loyalty program is a way for businesses to provide their customers with an incentive to continue to shop with them. It helps businesses attract and retain customers. These programs often provide rewards or discounts to customers for purchasing a product or service.

The theory behind the effectiveness of loyalty programs is the psychological system in which customers are positively reinforced through rewards to continue purchasing products from your brand. Over time, this also then reinforces their loyalty to your brand.

Loyalty programs usually have three main components:

Objectives
Actions
Rewards

Objectives

You want to consider your business objectives when creating a loyalty program. Ask yourself: what are you trying to achieve by running a loyalty program? Here are some examples of key objectives that loyalty programs can help you achieve:

Attract new customers
Increase the customer lifetime value
Retain existing customers
Improve brand credibility

Actions

Now that you have your objectives in mind, what do you need your customers to do to help you achieve these objectives? What customer behaviors do you want to reinforce in order to help you achieve your business objectives?

When deciding on the actions for your loyalty program, you want to be strategic and intentional in rewarding customer behaviors without asking too much from your customers, whilst creating a mutually beneficial exchange rather than one-sided gift-giving.

Most loyalty programs incentivize customers purchasing behaviors such as purchasing over a certain dollar amount. However, you can also reward customers for sharing content on social media, leaving reviews, or referring a friend.

Rewards

The rewards customers receive from your loyalty program are the driving force behind encouraging certain customer purchasing behaviors. They act as positive reinforcement for customers who engage with your business and motivate them to continue to do so.

The type of rewards you offer is vital in creating an effective loyalty program. You want to offer something your customers want and value, whilst balancing your budget to see what your business is able to offer. Simply giving away rewards for the sake of it is not an effective way to build an effective loyalty program.

A loyalty program is not a way to bribe customers into engaging with your business. Rather, it is a mutually beneficial and rewarding exchange between your business and your customers.

Are loyalty programs effective?

The essence of how loyalty programs work makes them very useful to businesses and brands in their effort to increase their customers’ lifetime value.

Loyalty programs provide two key functions:

For the customer, they get rewarded for shopping with the business.
For the business, they learn about their customers to build more effective marketing and overall business strategies.

Loyalty programs are not a new concept and it’s no surprise so many businesses use them. Building customer loyalty allows businesses to establish a relationship with their customers and consequently foster a strong sense of trust in their brand and products. This sense of trust is what encourages customers to frequently come back and make repeat purchases. When done correctly, businesses can yield a great return on their investment in a loyalty program.

1. Proven increase in revenue and sales

Loyal customers have already established trust in your brand so they are more likely to spend more and continue shopping with your brand over a longer period of time compared to those who are new to your business.

Mature brands with established loyalty programs have seen 85% of their growth coming from their most loyal customers. After all, if you’re consuming products from the brands that you love, you are more likely to also consume new products from that same brand.

2. It costs less to retain existing customers

The idea of setting up a loyalty program from scratch can seem daunting at first. However, it is well worth the effort considering acquiring new customers can cost up to 5 times more than retaining existing ones.

Customers nowadays have so many options making it hard for businesses to stand out from the crowd and attract new customers.

Any investment in retaining the customers you worked hard to get in the first place is considered highly strategic and effective customer retention strategies, such as loyalty programs, are great to capitalize on your relationship with your existing customers and reward them for their continued loyalty.

“No business can make money on customers who are chronic switchers.”

— Harvard Business Review

3. Use data to inform your marketing

In today’s world of marketing, data can provide so much value to a business as it acts as the driving force of many strategic business decisions. By understanding how your customers engage with your brand and the way they behave, you can produce targeted marketing campaigns and create personalized customer experiences that are 20% more effective than general spray and pray kind of campaigns.

4. Loyalty programs help increase the Customer Lifetime Value

As you gain more insights into your customer’s purchasing behavior, you can better understand how to meet their needs. A study conducted by KPMG demonstrated that 74% of customers will actually go out of their way to shop at stores with loyalty programs where they’re able to earn points. As customers continually engage with your business, it will increase their lifetime value over time.

How do you create a loyalty program?

At this point, you can see how beneficial loyalty programs can be and how much value they can bring to your business. So you are probably wondering how do you go about creating an effective loyalty program that can deliver a great return on investment?

1. Foundation and Key Elements

Before you jump in and start building your loyalty program, you need to lay some groundwork to set yourself up for success. Consider these questions as a foundation that will drive the way you create your loyalty program.

a) What type of loyalty program should you use?

The type of loyalty program you choose to build varies depending on your business and the industry in which you operate. Here are some of the most common types of programs used by businesses in the market today.

Points: Every time a customer spends a certain amount, it equates to points that accumulate and can then be redeemed as rewards.
- For example, North Face’s VIPEAK rewards program employs a points system where customers can earn 8 points for every dollar they spend online and in-stores. Customers can then use these points for future purchases.

Cashback: Similar to the points programs, when customers shop with a brand, they are rewarded a certain amount back from their purchase, usually in the form of coupons or “cash”.

For example, Kohl’s cashback rewards program allows their customers to receive a $10 coupon for every $50 spent.

Tiered: The more customers spend, the higher the ‘tier’ they can enter whereby the higher tiers offer more rewards and benefits. This type of program employs an element of gamification which encourages customers to spend more over time in order to achieve a certain status. It allows customers to feel more valuable as they attain a higher tier and have access to rewards not necessarily available to everyone.
- For example, Sephora’s Beauty Insider program is a well-implemented loyalty program that uses a tier system. As customers spend more, they are able to enter higher tiers which provide more benefits that are exclusive to customers in that tier. It creates an incentive for customers to spend more money and often members in the higher tiers are less likely to cancel their membership, therefore increasing customer loyalty.

Premium (fee-based): Customers pay a premium to gain access to rewards. This program relies on the concept of instant gratification, whereby customers can immediately obtain the rewards once they have paid the upfront fee.
- For example, A well-known premium-based loyalty program is Amazon Prime. By paying a monthly premium, customers get immediate access to a variety of benefits ranging from free one-day shipping, exclusive sales, along with access to other Amazon products such as their music and video streaming service. This type of loyalty program is very centralized on the customer as they are able to gain a lot of value out throughout their daily lives. You might think that premium-based programs would create high barriers to entry, however, Amazon has been able to strategically charge a relatively low premium in which customers are able to justify the cost in order to obtain the benefits.

The type of loyalty program is a choice unique to each business, and many factors play a role in that choice. Some businesses employ a hybrid approach and take elements from various types of programs to create an engaging program suitable for their business to entice their customers.

Learn more: 8 Best Practices For Your Loyalty & Rewards Program

b) What customer behavior do you want to reward?

When building your loyalty program one of the most important elements you must consider is the customer behavior you want to incentivize and reward. You want to think about the interactions between your brand and your customers that will add value to your business. Consider these action-oriented rewards you may want to use as part of your loyalty program:

Purchase: probably the most important thing to reward and the one with the biggest impact on your program’s ROI. You can incentivize and reward:
- Purchases over a certain dollar amount
- Purchase of a certain product
- Purchase of a certain combination of products
Engagement: brands need to do more than just get customers to purchase their products. Maintaining customer loyalty is essential and can be done through customer engagement.
- Reward customers for engaging with your brand on social media
- Reward customers for participating in Facebook groups
- Reward customers for liking, commenting and sharing social media posts
Referral: word of mouth is one of the most effective ways of attracting new customers. People are more likely to use a particular product if it’s been introduced by a friend as opposed to brand advertisements.
- Reward customers for referring new customers
Feedback: the best way to see how your program is tracking with your customers is to get feedback directly from them. This way, you are able to see what is working and what isn’t, and adjust your strategy accordingly.
- Reward customers for providing feedback on your product or service
- Reward customers for providing testimonials

c) What rewards do your customers actually want?

It is important to ensure that you are offering your customers a meaningful reward. This way, they are able to gain greater satisfaction and consequently continue to engage with your brand for a longer period of time. Research into your customer database will be helpful in deciding the type of rewards that you will offer.

Tips on understanding your customers

Track customer behavior. As you get to know what your customers want, you can anticipate their needs and provide them with a loyalty program that will satisfy them.
Categorize customer personal traits and preferences. Through understanding different customers’ personal preferences, you are able to better tailor and personalize the program to suit them.
Social media engagement. This is a great way to gain feedback on your products and services directly from your customers, which you can then use to guide future product development and improve your services.

2. Launch and Promotion

Once you have created your loyalty program, you can now start preparing for the launch. Upon launch, you need to have someone managing it to ensure that the program is running smoothly, issues are addressed, and can provide customer support.

For example, Universal Pictures has partnered with 3 tier logic to take advantage of their loyalty and promotions platform to help execute and manage their rewards program, Universal All-Access Rewards. There is a dedicated customer service team provided through 3 tier logic that manages all customer inquiries and deals with program troubleshooting.

You want your customers to not only stay loyal to your brand but also stay engaged. In order to do so, you need to provide customers with the proper support - from answering their questions to helping them navigate the program. It is vital that there is a way for customer issues and inquiries to be addressed in your loyalty program as it helps build their loyalty and trust with your brand.

During the promotion stage, you want to clearly communicate the benefits of the program to your targeted audience and encourage them to sign up. Some widely used promotional techniques include:

In-store display advertisements
Train employees to promote the program at the point of sale
Promotional posts on social media
Email newsletters to an existing customer database
Post loyalty program information on your website

3. Evaluation

One of the most important steps in setting up a loyalty program is tracking and evaluating its performance as it affects your bottom line. Whether it is through Google Analytics or a data analytics program incorporated in your customer loyalty software, it is vital to have a way to monitor and track the progress of your program. You can consider the following metrics for your loyalty program:

Customer retention rate: look at how effective your program is at retaining existing customers
Loyalty member engagement: measure how your customers are engaging with your brand
Loyalty-driven revenue: determine the ROI from your loyalty program
Customer satisfaction survey score: quantify how satisfied your customers are with your brand and products whilst obtaining valuable customer feedback

Executing a Loyalty Program

So you have all the building blocks in place and you are ready to roll out your loyalty program. There is one more key question you need to address; what is the technology you are going to use as the backbone of your program? Every approach will have its advantages and disadvantages that you need to consider.

Your Own Technology (DIY): This might be the first option on the table, after all, it’s the one that offers the most flexibility and control, especially if your team has the technical skill, time, and resources.
- Advantages:
  - Control: You control every element of the program from design to development, launch, promotion, and management.
  - Customization: With control comes customization and tailoring to your exact needs.
  - Measured Progression: You can start with rolling out a few elements of the program and then scale it up as you need and as your market demands.
- Disadvantages:
  - Increased Risk: you may think that with control comes less risk, when in fact it’s likely the opposite since your team is unlikely to be battle-tested by building and running similar programs before.
  - Decreased Focus: While you may have resources to build a program at the moment when the team moves on to the next project you are left with the day-to-day maintenance and management which requires a dedicated team.
Use Your Agency: The second option is to work with your agency. They have been your partner when you launched promotions and rolled out marketing campaigns before, so they can certainly help you. Go through an agency. You can definitely create effective loyalty programs with the help of agencies as they guide you through the process from the beginning and assist with marketing communications. However, it often comes at a significant cost.
Use customer loyalty software. For a more cost-effective option, more brands are starting to use customer loyalty software. These software companies have a dedicated team of developers to create and run the loyalty program for you and provide additional features that can help guide future interactions with your customers. This is their area of expertise so they can provide you with loyalty program best practices that you may not get from alternative options.

Examples of loyalty programs

Toro: The One Landscape Contractor Loyalty Program

The Toro Company manufactures equipment for outdoor environments including turf maintenance, snow and ice management, landscape, construction equipment, irrigation, and outdoor lighting solutions. Toro used a point-based loyalty program where customers can earn points for the purchase of qualifying products and social media engagement. These points can then be redeemed for gift cards from participating retailers.

Central Garden & Pet: Horse Care Loyalty Rewards Program

Central Garden & Pet manufactures pet, lawn, and garden products, and is marketed under over 60 brands. Their Horse Care Loyalty Rewards program involved customers purchasing 5 Farnam horse products to receive the next one free.

Universal Pictures: Universal All-Access Rewards

America’s leading film production and distribution studio, Universal Pictures, has employed an interactive tier system loyalty program where movie purchases can earn customers points that can be redeemed for rewards such as free movies. In addition, there are a variety of activities that customers can participate in to earn more points such as sharing content on social media or partaking in member-exclusive sweepstakes.

Launch your loyalty program with PLATFORM³

Using customer loyalty software is a great cost-effective option for businesses to run a successful loyalty program from start to finish. At 3 tier logic, we’ll create the microsites for your loyalty programs and can advise on best practices for design and reward systems. Having worked with a variety of well-known brands, loyalty programs amongst others, have become our area of expertise and can therefore help guide you through creating an effective loyalty program.

With PLATFORM³, you are able to track your customers’ purchasing behavior through receipt validation and develop reports to keep track of this invaluable information. PLATFORM³ can help you set up and manage an effective loyalty program that incorporates gamification techniques that help with ongoing customer engagement, as well as provides advanced data analytics so you can track the progress of the program to better inform your strategic business decisions. Once your program is launched, we provide loyalty program management to answer customer queries and troubleshoot any issues that may arise.

Complete Guide to Loyalty Programs (Examples included)