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How to Create an Effective Loyalty Program

Recently, I was at a shopping mall at Winston Salem, North Carolina and to my delight, I found that with every purchase of a Bath and Body Works product, I was able to get another product absolutely free! I


Vishakha Sen

4 Min Read

March 08, 2018

What is a loyalty program?


Recently, I was at a shopping mall at Winston Salem, North Carolina and to my delight, I found that with every purchase of a Bath and Body Works product, I was able to get another product absolutely free!  I came away feeling delighted that I had got a good bargain and the broad smile that I gave to the saleswoman was matched with one of her own, having made a good sale.  This was a clever way of getting me, a new customer, back to the store, retaining old ones and an extremely attractive form of a robust loyalty program.  Customers are always pleased with toys in Happy Meals, buy- one-get-one-free offers and coupons with a purchase or credit card points.


Keeping the customer happy and making them advocate for your brand involves more than great service.  How will you ensure that this customer keeps coming back to buy your brand in the future?  One great way to ensure returning customers is to have a powerful customer loyalty program.  Customers like them and 76% of those interviewed think that this is a great way to form a relationship with brands.  A customer loyalty program is a marketing technique to retain loyal customers and to attract new ones.  It is a reward program that rewards customers who frequently conduct business with a company.


Here are some interesting stats about customer loyalty programs:


  • There are over 3.3 billion programs in the US currently
  • The cost of acquiring a new customer is 6 to 7 times more expensive than retaining an existing one
  • 75% of US companies with a loyalty program generate a Return On Investment (ROI)
  • Increased profits show an upward trend of up to 95%
  • 83% of customers agree on the fact that loyalty programs are likely to make them continue to do business with certain brands
  • Existing customers spend 67% more than new ones

Types of customer loyalty programs


77% of customer loyalty programs fail in the first two years.  The primary reason is the lack of sync between customer perception and the company objective.  73% of customers feel that the company should be loyal to them and 66% of marketing executives from the company feel that customers should be loyal to them.  Only 25% of loyalty programs reward customers for some form of engagement with them.  85% of companies are always in search of ways to reward customers beyond promotions and discounts.  Take the case of Amazon Prime.  For a yearly subscription, customers can get access to free shipping, exclusive content and more.


Let us look at loyalty programs that are successful in bringing back customers time after time.  Looking beyond complex and bland reward systems, it is time to look at ideas that will build a loyalty program which would actually work for you.  Some examples of loyalty programs that have been very successful are :


  • Swarm Perks
  • American Express Plenti
  • REI Co-op
  • TOMS One for One
  • Amazon Prime
  • Virgin Atlantic Flying Club and
  • Sephora Beauty Insider and VIB


What makes these brand loyalty programs so successful? Let’s dive in and find out!


  • Use of a simple points system


Though this is a simple and commonly used loyalty program, it seems to be very successful.  There is no rocket science attached to this system.  Customers are rewarded with points for every purchase that they make.  It could be in the form of a discount, a free product or a special customer treatment.  Companies that build on this model make their processes confusing and complex and this is where they falter and fail.  The connection between points and tangible rewards is not easy for the customer to understand.  For example, when a company sets out to say “15 points is equal to 1 Dollar and 30 Dollars offers you a 50% discount on your next purchase”, they are setting themselves up for disaster.  This is not a reward but a headache for customers.


Make the loyalty program easy to understand, so that customers can make understand the terms of redemption on their own, without any help from the sales and in-house teams.  There is a note of caution though.  This type of reward does not apply to every form of business.  It works best for a business that encourages frequent and short-term purchases like Sephora.


The cosmetics giant is known for a great customer loyalty program.  They have a simple point-based system that rewards their customers for every dollar that they spend.  Customers swipe their Beauty Insider Card at every purchase and the card keeps a track of every purchase made.  Every dollar spent earns customers a point.  Shoppers can then redeem their points for products at the store’s check-out counters.  The company speaks in the language of its customers with points, dollars and cosmetic items.


A great incentive to continue shopping at Sephora is the scaling up of the rewards, according to how much the customer spends.  This helps customers to reach a certain threshold on their spending ways.  For example, they offer a free birthday gift through their online shopping or stores and free beauty classes.


  • Tier system


There is a thin line between attainable and desirable rewards and this is one of the biggest challenges for businesses, while they design their customer reward programs.  Using a tier system that rewards initial loyalty and encourages more purchases is the best way to implement this system.


Offering small rewards is a part of a hook to be a part of the program and then scaling up the rewards or by increasing the value of the rewards, in order to become involved in the loyalty ladder is a good way to implement a tiered system.  This helps customers in not forgetting about their points and not redeeming them at all because there is a huge gap between gaining points and finding gratification from them.


A big difference between the points system and the tiered system is that the former is a short-term value and the latter offers long-term value.  Tiered programs work well with higher commitment from customers like the airline industry, the hospitality business or insurance companies.


The Virgin Atlantic Flying Club not only offers frequent flying points to its customers, but it also inducts them into the Club Red, the Club Silver and the Club Gold, in order to enable them to earn tier points.  Club Red not only helps its members to earn points on miles, but it also offers discounts on airport parking, rental cars, hotels and holiday flights.


Club Silver members earn 50% more points on flights and also enjoy the benefits of expedited check-ins and stand-by seating on priority.  Club Gold members get double mile points, access to areas where they can grab a drink or get a free massage before their flight and priority boarding.  As the journey of a customer moves from Red to Silver to Gold, they are helped in this process by a benefits table, so that they can understand this journey easily.  In the early stages of a customer engagement program, they are offered benefits that are very cool and help them to keep coming back over and over again.  They are also made to realize that a gold status is not unattainable and there are some awesome benefits that can be taken advantage of.


  • Charging a fee for VIP benefits from the start


Charging customers a one-time fee or an annual fee could work out very beneficial for both the business and its customers.  Customers can bypass common purchase barriers and a loyalty program can address specific obstacles.


This kind of a loyalty program is applicable to businesses that are frequent and involve repeat purchases.  It was found that a huge number of customers abandon their cart purchases after they find out the cost of their purchases, after taxes and shipping costs have been applied.  Amazon found a way to tackle this issue by charging an upfront fee that would be applicable to all future purchases.  Prime customers get a two-day free shipping on millions of products, without a minimum purchase, along with other benefits.  The company also offered a 2-hour free delivery of grocery to its members in certain areas, along with other discounts.


  • Creating a value program around beliefs


Customers are loyal to beliefs and values, rather than to a company.  A connection with customers can be created around non-monetary or discounted rewards, much more than dollars and cents.  Any business can offer promotional coupons and codes.  But the value that they can offer to their customers, other than these can increase loyalty to their brands.


Toms Shoes is dedicated to improving the lives of their customers by promising that for every purchase made; they would help a person in need.  This initiative has grown huge and is now helping with clean water access, improving maternal health care and supporting many other organizations.


  • Fruitful partnerships


Coalition programs or partnering with other companies for customer loyalty is extremely effective in retaining customers and growing your business.  Understanding customers’ daily needs, lives and their purchase processes would help you to decide which companies to partner with best.  For example, if you are a food company for dogs, it might be a good idea to partner with a veterinary clinic or a pet grooming facility to offer co-branded deals that would be beneficial to your customers and create a win-win situation for all.


American Express, in its Plenti program has partnered with companies like Macy’s, AT&T, Rite Aid, Hulu and more and offer their customers points for shopping at any of these stores and linking their existing loyalty card to their Plenti accounts.


  • Gamification


Everybody loves playing a good game.  Your loyalty program can be converted into a game to help encourage repeat customers and prepare a robust brand image for your business.  It is important to make your customers feel valued and that you are not duping them of their rewards.  Ensure that the purchase requirements to play this game is attainable and that your legal department is on the same page as you regarding these gaming programs, before it is announced and launched.


Swarm Perks is an incentive that is offered by Swarm, which is a check-in app.  It encourages its users to check-in from different locations and share what they are up to with their friends.  Discounts are offered at various locations, like a 20% discount at Best Buy.  Dream vacations, spa days and shopping trips are also won through draws.


Benefits of a customer loyalty program

  • The perks that are offered to customers could be the best way to acquire new customers
  • It is a great way to initiate a lifelong brand-consumer relationship
  • If customers are given opportunities to maximize their loyalty rewards and receive communication, based on their milestones, needs and preferences, they are likely to support the company not only with their money, but also with referrals, repeat purchases and exposure on the social media, thus bringing in new customers

Latest trends in loyalty programs


Some of the biggest and latest trends in customer loyalty programs are :


  • Customers look forward to personalized rewards
  • Omnichannel and multichannel programs are replacing traditional ones
  • There is an increase in brand partnerships
  • A sense of social responsibility is expected from brands
  • Premium loyalty programs are an attractive option
  • Customers look forward to a sense of emotional loyalty
  • AI and chatbots are being used for customer engagement

How to start a customer loyalty program?


Here are some tips to get started on a loyalty program.


  • One of the simplest and easiest ways is to have a loyalty punch card
  • Begin with an opt-in program
  • Put some thought behind a Premium Loyalty Program
  • Give your customers a branded loyalty membership card
  • Use a digital component in your program
  • Invest in incentives that work for you
  • Have a regular communication with your members
Vishakha Sen

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Vishakha Sen

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How to Create an Effective Loyalty Program

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