XM Knowledge Base
What is a customer loyalty program?
A customer loyalty program encourages customers to keep coming back to you, offering them reward incentives for their repeat business.
Whether it involves collecting points, swiping a card or just spending a certain amount of money with you, a customer loyalty program is an up-front deal with repeat customers: buy from us again, 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.
It’s a well-established way to retain customers and build loyalty. That said, it’s not always easy to get it right. Here are some tips for making your efforts a success, as well as customer loyalty program examples to inspire you.
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What is the ROI of a customer loyalty program?
Brands might wonder why they should invest in a customer loyalty program. Before are just a few benefits to consider:
Keeping existing customers costs you less
In times of economic uncertainty, brands must strive to retain their existing customers. There’s less money to go around and higher levels of competition, meaning there needs to be better reasons for customers to choose your business over others.
A customer loyalty program can provide that extra incentive to customers who might be debating whether to spend more with you. A rewards program for repeat purchases – perhaps with a discount or free product offered – can help you to ensure customers keep coming back to your brand.
This costs you less in the long run than trying to win new business.
Existing customers are a safe bet – the likelihood of selling to an existing customer is 60-70%, whereas it’s only 5-20% for a new prospect.
Offering added value attracts new business
It’s not only existing customers that can be swayed by a successful loyalty program. New audiences might also be interested in how customers earn rewards with your business, particularly if the customer rewards programs are offered straight away. This added value can be a great selling point, particularly when potential customers are comparing between your brand and a competitor.
Loyalty data is a powerful tool
Customer loyalty programs can be a rich source of useful data. From customer preferences, motivations, buying habits and more, you can gather a wealth of information to help you predict future customer behavior and tailor your customer experiences.
Over 60% of consumers told us that brands should demonstrate that they care more about them, and that they would purchase more as a result. Offering personalized rewards for loyalty is a great way to increase your customer retention and show that you care about customers as individuals with specific preferences and needs.
Customers are keen to join loyalty programs
No matter their generation, most consumers are either already a member of their favorite brand’s customer loyalty program or would join if there were one. Millennials in particular are keen to join (72%). Customers are already looking for loyalty programs to join – why not reward their loyalty?
Customer loyalty program types and examples
There are a few types of customer loyalty programs to choose from. Depending on the type of customer relationships you have, you can choose how to reward customers for their business with one of four program types:
1. A paid loyalty program
A paid loyalty program exchanges benefits for an ongoing or one-time fee, paid for by the customer. Amazon’s Prime system is probably one of the most recognizable paid loyalty programs on the market. For a recurring membership fee paid month by month, Amazon Prime users are able to access video, music and postage benefits at any time.
This model is particularly appealing because it’s paid for by the customers themselves. It might not be a suitable option for all brands, but if possible, it is worth considering.
2. A tiered loyalty program
In this type of loyalty program, customers get different benefits depending on their rank in the system. For example, if a customer makes repeat purchases or engages more with the brand, they will rank higher. The rewards they are able to access will be improved as a result.
The Virgin Atlantic Flying Club is a great example of this type of loyalty program. Rather than just offering “miles” or points for flights for customers to use on future journeys, Virgin Atlantic now offers a Flying Club, or customer loyalty program that provides tier points. The tiers – Club Red, Silver, and gold, offer different benefits to customers of each tier. This gives Virgin Atlantic an edge against competitors that don’t offer loyalty rewards, because it gives customers a reason to choose Virgin over another airline in a regulated industry where theres typically very little room for differentiation. The more a customer chooses Virgin, the more they’re rewarded. Win-win.
3. A rewards program (or points program)
Customer loyalty programs of this type reward customers with loyalty points, allowing customers to choose how they’d like to use these points for discounts or full purchases. This is probably the most common type of customer loyalty program, because it is easy to implement and simple to understand. There’s no hurdle to joining up, save providing details a customer might already provide during a checkout process. It’s one of the best customer loyalty programs you can offer as a result.
Many people will have encountered the Starbucks Rewards customer loyalty program, which allows you to collect ‘stars’ or points to use towards a free drink or food item. Starbucks got ahead of its competitors by starting this loyalty program, and has now gone a step further by introducing an app to help customers collect, check and spend their rewards.
4. A value-based loyalty program
A value-based loyalty program doesn’t directly benefit the customer, but it can convince them to make repeat purchases from your brand. Rather than giving customers financial discounts or free goodies, the brand donates a percentage of sales or pledges to take action on a social, environmental or economic issue.
Cosmetics company Lush tells customers about its ‘Charity Pot’ customer loyalty program, which donates all of the proceeds from selling a particular body cream pot to a number of charitable or nonprofit organizations that the business partners with. This encourages customers to buy specific items repeatedly and gives the brand a credible air of corporate social responsibility.
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How to create a customer loyalty program
Here are the steps needed to create the best customer loyalty rewards program for your business:
Determine if you need a loyalty program
It might seem unnecessary, but determining if a loyalty program will be a good addition to your business strategy is important before you start. You can figure out your customers’ lifetime values and also how much acquiring a new customer actually costs your business. This can give you a framework for how much to invest in creating a loyalty program and whether it is worth it.
Understand your current customers
The key to developing customer loyalty programs that will work is understanding your current customer base and what motivates them. For example, you should be able to answer the following questions about each of your customers:
- How much does this customer typically buy in one year?
- What kind of products/services do they buy, and how often?
- How quickly do they make a payment?
- How long have they been a customer?
- What other products do they show interest in, or might show interest in?
- What competitors or alternative suppliers might they go to?
- What profit is generated by their business?
- How satisfied is this customer with our service and customer experience?
- What would incentivize this customer to return for another purchase?
Your ideal target audience for customer loyalty programs is an individual who buys from you frequently, but could increase the profit they generate for your brand. They’ll ideally pay quickly and be interested in further products or services from your brand.
Ways in which you can gather this information include:
- Customer data collected during the purchase journey
- Operational data
- Financial data
- Feedback surveys
- Customer interviews
- Listening to customers across multiple channels
- Market research
Set your customer loyalty program KPIs and budget
Create KPIs to meet for your customer loyalty program. Do you want customers that buy three times a year to make four purchases? What sales increase would you like to see? How many customers would you like to participate in your customer loyalty program? Setting these goals for your rewards program will help you to determine progress and ROI at a later stage.
You’ll also have to create a budget for increasing customer retention through a loyalty program. This should be separate from your budget for developing new customer pipelines. Market research might help you to determine the average cost for your industry.
Create your customer loyalty program with their behaviors in mind
Choosing the right type of customer loyalty program for your business style is important. As discussed above, you’ll need to understand what motivates your customers. Is it giving back to the community? Is it the chance of multiple ongoing benefits, or an ad-hoc reward that generates freebies?
You’ll also need to work out what makes most sense for the business – for example will it be a point per dollar, or a stamp per transaction? How will you reward their loyalty?
Once you’ve decided, implement your program and ensure that your internal teams are aware of their roles in the system.
Spread the word about your rewards
Once you’ve decided on your audience and created your rewards system
The best way to inspire customers to join your customer loyalty program is to spread the word through your marketing, social media output and more. Make it clear to new customers that they can join your loyalty programs and benefit quickly from your offering, and ensure that existing customers are aware of the potential rewards they can gain by joining. You may offer initial incentives to join as well as ongoing rewards.
Top tips for loyal customers
Focus on ease
If you want customers to keep coming back, you need to make sure it’s simple for them to do so. Once they’ve bought into your customer 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 customer loyalty program or of your customer experience in general.
Fees are OK, as long as the value is above and beyond
We’ve recently seen the traditional customer 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 or additional perks and features.
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.
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 customer loyalty program. 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.
Tier your rewards
Make loyalty rewards a progressive achievement by building tiers into your customer loyalty programs. The more loyal a customer is, the more rewards they get. This is a form of gamification that 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.
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.
Developing customer loyalty through powerful experiences
Creating a customer loyalty program requires extensive knowledge of your customer experiences, behavior and preferences, meaning your brand needs a way of examining multiple input streams of data.
Qualtrics Experience iD offers a comprehensive system to collect and analyze customer data for in-depth loyalty insights. Capturing signals from every channel and using unrivaled analytics to find experience opportunities, Experience iD can help you to develop customer loyalty programs that target customers with the most to offer.
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