What is a Loyalty Program?

Your Complete Loyalty Program Definition

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What is a loyalty program?

If you’re looking for an effective way to earn your customer’s commitment and build better relationships with your clients, a loyalty program could be one of the most important tools in your arsenal. These solutions are built to improve the way your customers think and feel about your brand.

On average, it costs around five times more for a company to acquire a new customer than it does to retain a client they already have. At the same time, your existing customers are more comfortable experimenting with what they purchase from your store. Existing customers are about 50% more likely to try a new product when you branch out, and they spend anywhere up to 31% more than your new customers too.

The idea behind a loyalty program is to turn one-off purchases from your customers into long-term commitment. If you can build an effective loyalty program, you can reward customers every time they visit your store, making it far more likely that they’ll keep interacting with you.

Here’s your loyalty program definition.

Loyalty Program Definition: What is Customer Loyalty?

To understand a loyalty program, you first need to understand what customer loyalty means. In simple terms, customer loyalty is defined as any customer’s willingness to return to a store repeatedly to conduct more business with the same brand.

One of the main reasons to create a loyalty program is that it allows you to continue getting conversions from existing customers, rather than spending all your money on new clients. The customers who commit to your loyalty program are more likely to advocate for your brand, spend more money, and help your organization grow.

Loyalty is important because it improves your earning potential and gives your organization a source of repeat income. The whole point of building a profitable company is to attract not only new customers but keep your existing customers happy. The more customers you have, both new and old, the more revenue you can earn.

Building loyalty with customers also means developing a relationship with them. This relationship helps your customer to trust your brand, and this means they’re more likely to advocate on your behalf. In other words, loyal customers tell their friends and loved ones about you, which improves your chances of reaching new customers.

Customer loyalty also makes your business look more reputable. When new customers are looking for brands to work with, they search for evidence of happy existing customers. If you’re willing to invest in the loyalty of your customers, you can potentially get new customers off the fence.

Some of the biggest benefits of loyal customers include:

  • Increased revenue from repeat clients
  • Lower costs in acquiring customers
  • Better customer lifetime value (how much customers buy)
  • Improved brand reputation and credibility
  • Advocacy or word of mouth marketing
  • Enhanced brand reach and recognition

What Does a Company Need to Do to Create Loyal Customers?

There are thousands of businesses out there offering similar products and services these days. This means it’s extremely difficult for any company to maintain loyal customers just by offering the right selection of features. Instead, you need to work on showing your audience that a long-term relationship with your company is a win for them.

For instance, from an outside perspective, a loyalty program can often appear as a scheme to get customers to spend more money. That’s why it’s important to be generous with what you offer. If your loyalty program only gives rewards to people who spend the most money, it’s not going to interest people who are just beginning to get to know your brand.

A good loyalty program needs to come from a company that can be generous, gracious, and mindful of their target audience. To connect with your customers, you’ll need to:

  • Show gratitude to all customers: Don’t just reward the people who spend the most, remember that everyone who buys something from your organization is having an impact on your revenue and bottom line. Show your gratitude by allowing everyone to earn points towards their next purchase and remember to interact with customers regularly to show them you care. For instance, you can send holiday cards, or discounts for your client’s birthday.
  • Consider program options: Loyalty programs come in a range of shapes and sizes depending on your brand and customers. For instance, some companies will offer clients points every time they make a purchase. Usually, those points will eventually add up to vouchers, discounts, or other benefits – like free shipping. Alternatively, you could use a loyalty program that involves giving people a reward every time they refer a friend.
  • Build a community: A good loyalty program isn’t just about “paying your customer back” when they buy from you. Your aim should be to build a community where people can develop a real relationship with your brand. Make sure you provide your customers with plenty of valuable content through your blog, knowledge base, and even a community forum. Keep people talking by sharing user-generated content on social media and reach out to your VIPs to ask for feedback on how you can improve your business performance. Listening to your audience and keeping the conversation going about your brand will help to expand your company’s reach, while also giving you an opportunity to learn more about what your audience wants and needs from you.

The Different Kinds of Loyalty Program

As mentioned above, loyalty programs aren’t a one-size-fits-all solution. The way you choose to reward and cultivate loyalty will often determine what kind of customers you attract to your store, and what kind of community you build. The key to any good loyalty program is understanding your audience. Before you jump into any strategy, make sure you assess your target market.

Look at your user personas and ask yourself what kind of things your customers are likely to be interested in if they sign up for a loyalty program with you. Will they want points towards their next purchase, or will they be more interested in exclusive access to new products?

Here are some different types of loyalty program to consider:

Point-based programs:

A point-based loyalty program is one of the simplest options available. It works by giving frequent customers points whenever they make a purchase. Eventually, the points add up and translate into a certain reward, like a discount code, freebie, or special offer.

Where many companies struggle with point-based programs, is making them too complicated. It’s too common for companies to make the connection between points and rewards so confusing that customers end up having no idea what they need to do to get something. Make sure it’s easy for your customers to understand how their activities translate to rewards.

Tiered loyalty programs

Tiered loyalty programs are a common choice for companies looking to find the balance between desirable and attainable rewards. One way to combat this problem is to implement a tiered system which rewards loyalty and encourages additional purchases.

With a tiered program, you start offering small rewards just for getting involved, like free shipping or small discounts. The more customers purchase items, the more they move up the ladder to enter new categories of rewards. This encourages customers to keep purchasing to have a chance at getting better prices.

Tiered solutions are often effective for companies selling more expensive products, or things that require a bigger commitment. For instance, it’s common to see tiered loyalty programs among airlines.

VIP loyalty programs (paid programs)

Loyalty programs are intended to strengthen the relationship between companies and their customers. While charging a fee might not seem like a good idea, it can be a great way ensure long-term loyalty from your customers.

An annual, or one-time fee which allows customers to join a “VIP” community can be a powerful tool – when used correctly. For instance, Amazon allows customers to join Amazon Prime for a chance to get next-day delivery on all of their purchases. ASOS has a similar option for fashion shoppers.

The key to success with paid loyalty programs, is to make sure you’re giving your customers something significant in exchange for their cash. Your clients need to feel like they’re getting a genuinely good deal.

Value-based programs

Value-based loyalty programs require you to understand your customers and their needs. When you fully understand what your customers need most, you can improve loyalty by responding to the specific requirements of your customers.

For instance, if you know your customers are more interested in getting free products than free shipping, you can focus on this area to build deeper relationships with your audience.

Partnership loyalty programs

A partnership, or coalition loyalty program, is all about building a strategic partnership. This solution can be an effective way to not only retain your customers, but grow your business at the same time. The companies best-suited to partnerships are those who can deliver extra benefits to their audience, by connecting with a similar brand.

For instance, if you’re a local vet, you could improve your chances of appealing to your audience by partnering with dog food companies to offer free samples and discounts. The great thing about partnership-based programs is that you can offer your customers value that goes beyond what your company could offer on its own. Partnerships are also an excellent way to improve brand reach and connect with new potential customers.

Gamification loyalty programs

Gamification in customer service and sales is growing increasingly popular these days. Today’s customers love a chance to have some fun during their interactions with brands. Fortunately, there are ways for you to make your loyalty programs more engaging, by transforming them into games.

A gamification-based loyalty program involves holding competitions, contests, and even lucky draws for customers. The odds need to be decent enough to keep customers paying. For instance, you might give every customer making a $20 purchase a 1 in 5 chance to win free shipping.

When executed correctly, this kind of loyalty program can be very effective, as it helps to make the process of making a purchase more exciting and engaging. At the same time, you get the extra bonus of not always having to give away something for free.

Examples of loyalty programs

With so many loyalty program options available today, it’s easy to get overwhelmed choosing the right option for your business. If you’re not sure where to start, here are some examples which might help you.

1. Hyatt’s tiered loyalty program

The Hyatt brand offers a five-tier program for loyalty to encourage people to continue making purchases. To achieve the highest level of the program, you’d need to do a lot of travelling, and spend significant time in Hyatt hotels. However, it’s free to get started, and you can start generating points and earning rewards straight away.

Membership perks range all the way from discounts at participating hotels, to access to special offers only available for members. There are even options to take advantage of some of the deals offered at hotels, like classes, spa sessions and dining opportunities.

2. Sephora Beauty Insider

The points-based loyalty program offered by Sephora is one of the most highly regarded in the world. The service involves using a card to track points whenever a customer makes a purchase. Depending on the average amount the user spends online, there are various types of Beauty Insider accounts. These indicate who the top spenders are across the already loyal customer group.

Every dollar spent earns Sephora’s customers another point, which can be redeemed for top-notch beauty products at checkout. Sephora speaks to its audience by measuring points in a cash value, so it’s easier to see when you can afford a free gift.

3. Starbucks Rewards

Starbucks Rewards is a loyalty program in which customers download an app or sign up online, then add the amount of cash they’d like to use with Starbucks to their existing account. This solution means that users can purchase products with a dedicated card in-store, and earn stars or points as a result. Within the app, the points add up to free beverages and other bonuses.

Starbucks keeps its Rewards program as exciting as possible by offering things like double-star days where customers can earn double the normal amount of stars compared to usual. There’s also access to birthday treats too.

4. Amazon Prime

Amazon uses a unique approach to loyalty points which involves having customers pay an annual subscription price to earn a range of benefits. For just over $100 per year, Amazon Prime users get access to things like next-day shipping for free on millions of products. There are also a range of other benefits to access, like exclusive discounts and sales.

The Amazon Prime deal for unlimited shipping is extremely valuable to existing shoppers who make a lot of frequent purchases. At the same time, extra bonuses like Amazon’s Prime video streaming service and music streaming options make the solution even more appealing to people who want an additional source of entertainment.

5. United MileagePlus

The MileagePlus program from United aims to streamline the experience of earning rewards and points on daily purchases and applying those crucial points to payments for everything from rental cars to hotels, flights, and more. For the most frequent customers, United offers the option because a Premier user and receive the MileagePlus card associated with their tier.

The card associated with MileagePlus allows users to rack up a higher number of points and access new travel-related perks like free and checked baggage, priority boarding, upgraded seating, and access to deals with rental companies and partner hotels.

How to Track the Performance of a Loyalty Program

Implementing your loyalty program is just the first step towards true success. As with any initiative designed to transform and grow your business, your customer loyalty program should be built with a plan to measure its effectiveness. Customer Loyalty programs should delight customers, improve retention, and generate a sense of loyalty for your brand. Different programs and companies often call for different metrics and analytics. However, there are some points any business can benefit from tracking. Here are some ideas for what you can look at.

Customer Retention Rate

Customer retention rate is one of the most valuable tools you’ll have in measuring the success of your loyalty plan. The metric looks at how long customers stay with you. A successful loyalty program should allow this number to increase naturally over time. According to studies, even an increase of just 5% in retention can lead to an increase in profit ranging up to 100%.

The best way to determine your customer retention rate is to find the number of return customers you have at the beginning of a period of time and compare it with the number of customers you still have after a set time.

Negative churn

Customer churn is the rate at which customers leave a company. Negative churn measures customers who upgrade and purchase additional products or services – this is an excellent metric to measure too. Ideally, you’ll want to look at both customer churn and negative churn to determine how many people you’re going to be converting and retaining. Repeat customers are crucial to all retailers, as they make up a significant portion of your revenue.

Net Promoter score

One of the most important metrics to track when building your customer base, net promoter score helps to offer an insight into customer experience. With this statistic, you look at how many people are likely to help your company grow through referral. The customer data reveals on a scale of one to ten, how likely people are to recommend you to someone else.

The NPS score is calculated by subtracting the number of people who wouldn’t recommend your product, from the number of people who would. The fewer people who wouldn’t recommend your company, the better. Improving your net promoter score can help you to enhance your marketing strategy and improve repeat purchases.

Customer effort score

Otherwise known as CES, this metric shows you a little more information about customer satisfaction. With customer effort scores, you find out how much effort your loyalty program members had to put into making a transaction or solving a problem with your company. This could look at the effort involved in making a credit card purchase, or applying for a loyalty card, for instance.

Customer effort score is important, because it shows how hard your customers have to work to access the benefits of your business. The more your users have to work to buy your products or enjoy your loyalty rewards program, the less likely they are to become repeat customers.

Creating a Loyalty program

The way a marketer or business chooses to offer rewards to customers can make a huge difference to the company’s chance of both attracting clients and retaining them. Combined with things like pricing and feature sets, your ability to offer amazing user experience is a huge part of what makes your business successful. There are plenty of Bain case studies and other research reports to indicate how important it is to connect with your customers.

With a little luck, the program examples above will have given you a starting point to discover the type of program most likely to connect with your audience. Whether you use a punch card system, or another tool to enhance customer relationships, make sure you have a strategy in place to measure the emotional connection you’re creating with your audience.

Keep track of things like unsubscribe rates, and net promoter score, and pay attention to how your customers comment on your loyalty marketing strategy and points system. Feedback from customers can offer an amazing insight into which parts of your loyalty program need to change.

Building an emotional connection with your audience takes time and focus, but every case study and review you collect from your rewards customers will take you close to success.

Remember, even small businesses can benefit from offering loyalty programs. Something as simple as choosing to reward points towards free shipping whenever someone makes a purchase can make a world of difference.

Rebekah Carter

Rebekah Carter is an experienced content creator, news reporter, and blogger specializing in marketing, business development, and technology. Her expertise covers everything from artificial intelligence to email marketing software and extended reality devices. When she’s not writing, Rebekah spends most of her time reading, exploring the great outdoors, and gaming.