You may have heard that it’s much more expensive to acquire a new customer than it is to retain an existing one — and numbers don’t lie. It costs between five to 10 times more to bring in a new customer than to sell to a current customer. Because of this, companies are highly incentivized to foster brand loyalty. Retaining existing customers is much more cost-effective and offers an excellent return on investment.

One of the most popular methods to generate brand loyalty is offering a loyalty program to your customers. Implementing or enhancing a loyalty program will help boost your customer retention and business growth. 

Understanding loyalty programs

So, what are customer loyalty programs? A loyalty program is when businesses offer their existing customers incentives like discounts and free products to encourage them to make another purchase. There are many different forms of loyalty programs, but points-based programs are the most common.  

Whatever form they take, the main goal of customer loyalty programs is to enhance customer retention as part of lifecycle marketing. These programs make it more appealing to shop with your business and less beneficial to buy from your competitors to improve customer retention.

If a customer can buy the same exact product for the same price from Companies A and B, but Company B also offers a free gift with purchase through its loyalty program, the customer will naturally buy from Company B. 

The psychology behind loyalty programs

Loyalty programs tap into the psychology of customers to help companies retain their business. For one thing, they offer positive reinforcement in the form of a reward for customers who purchase from your business. Over time, this positive reinforcement creates a habit of buying from your brand over competitors. 

Loyalty programs also emphasize loss aversion — people’s inclination to avoid loss or FOMO (fear of missing out). If a customer buys from another company, they won’t get the benefits of the loyalty program. Loss aversion convinces them to shop with your business to avoid missing out. 

Keep these psychological factors in mind when building your own loyalty program, and don’t forget the three R’s. What are the 3 R’s of loyalty programs? They are rewards, relevance, and recognition. 

  • Rewards: Your loyalty program must offer customers rewards that have genuine value. Discounts, points, free products, or special offers all make great rewards. 
  • Relevance: The rewards must also be relevant to the customer receiving them. Offering free baby food to customers who aren’t parents, for example, won’t make an effective loyalty program — but offering those rewards to new parents will.
  • Recognition: A great loyalty program recognizes and rewards a business’s best customers instead of treating them as just numbers. 

The benefits of loyalty programs

Fostering brand loyalty benefits both brands and their customers. With a strong loyalty program in place, customers get rewards for their shopping, and brands get more return business. So, what are the three benefits of loyalty?

  1. Improving retention, reducing churn, and strengthening brand affinity

One of the best things you can do for your business is improve your customer retention. Loyalty programs help accomplish that goal.

Offering rewards through a loyalty program encourages customers to keep choosing your business over competitors. Rewards make shopping from your brand more appealing because customers get additional value beyond the products or services they buy. 

With a strong program, your customers are more likely to prioritize your brand, thus improving customer retention and reducing churn (the percentage of customers who stop shopping from your business after a given period). 

  1. Boosting revenue and customer lifetime value

Improving customer retention boosts your average customer lifetime value (CLV) and total revenue. Customer lifetime value is the total amount a given customer spends on purchases from your business over the life of the relationship.

Loyalty programs entice customers to keep making purchases at your company, boosting CLV. As CLV increases, so does revenue. 

  1. Turning customers into brand advocates and motivating consumer behavior

Loyalty programs focus on customer retention, but they can help you generate leads and acquire new customers as well. An excellent loyalty program excites customers and makes them more likely to talk positively about your brand to their friends and family.  When you pair a loyalty program with referral bonuses, customers are even more inclined to act as brand advocates and help bring in new customers for your brand.

Offering rewards gives customers more motivation to do specific actions, like:

  • Make purchases
  • Refer to friends and family
  • Engage with your brand

This is boosted when you offer exclusive access, perks, and personalized experiences that otherwise would not be available. With the right rewards, you can shape customer behavior in your brand’s favor. 

Types of loyalty programs

When you create your own loyalty program, there are many different structures you can use. Here are some of the top types of loyalty rewards programs:

Points-based loyalty programs

Points-based loyalty programs are the most common form of enterprise loyalty programs. In these programs, customers earn reward points for repeat purchases or otherwise being loyal customers of your brand. The customers can then redeem their points for rewards like:

  • Free products
  • Discounts
  • Special offers
  • Cashback

These programs are so popular because they are inherently flexible. They include multiple ways to earn and spend points and allow customers to personalize their own rewards. 

Tiered loyalty programs

Tiered loyalty programs rank customers into different groups and provide them with rewards based on those tiers. Typically, companies using these programs rank customers according to the total amount spent at the business, years as a customer, engagement level, or other key metrics. As customers rise through the tiers, they obtain more exclusive, valuable rewards. 

Some loyalty program examples that fit the tiered model include American Express’s loyalty program, Elf’s Beauty Squad program, and the Hyatt Hotels loyalty program.

E.L.F Beauty Squad
Elf’s loyalty program, Beauty Squad, has three different tiers that offer increasing rewards. Image Source: Elf

Paid loyalty programs

Sometimes, the rewards from a loyalty program don’t automatically come free with a repeat customer’s purchase. In paid loyalty programs, customers pay a participation fee to access the program’s benefits. 

Amazon Prime is one of the most popular loyalty programs and has been hugely successful for the company, with over 200 million members

Value-based loyalty programs

Instead of tangible rewards like freebies, some loyalty programs offer customers rewards in line with their values. Value-based loyalty programs persuade customers to buy from your business because you’ll donate to a charity that aligns with their values with each purchase. These may also be known as mission-based and community programs.

The shoe company TOMS has gained company loyalty over the last nearly 20 years since they

began their One for One model. In this program, for each pair of shoes a customer buys, they give away another pair. Customers like knowing their dollars go to more than just the company — and they go back into a community or a larger mission.

Points-based programs also combine well with value-based loyalty programs. You can give customers points with each purchase and then allow them to cash out those points to a charity of their choice. These programs don’t directly benefit the customer making the purchase, but they do benefit society in a way that’s meaningful to the consumer. 

Refer-a-friend programs

Many brands employ programs that not only reward customers for making additional purchases but also for recommending the brand to their friends and family. In a refer-a-friend program, the customer receives some reward — typically a discount or cashback — every time they refer someone to the business. 

Airbnb, for example, offers customers a travel credit every time they refer a new member to the site. For an added incentive, the new member also gets a free credit upon signup.

Examples of successful loyalty programs

Many businesses have loyalty programs in place, but they aren’t all equally successful. So, what is the best example of a loyalty program? Here are some examples you use for inspiration:


The coffee giant has an incredibly effective loyalty program that keeps customers coming back for more. With every Starbucks purchase made on the app, customers earn loyalty stars to redeem for free products like food, drinks, and merchandise. The app makes accumulating points easy and accessible for customers, two features of any successful loyalty program.

Starbucks loyalty program signup
The Starbucks app allows customers to participate in the loyalty program in three simple steps. Image Source: Starbucks

Sephora Beauty Insider

Sephora also has a points-based program, but it’s a hybrid-tiered one. The more customers spend at Sephora, the more points they earn and the higher tier they reach. At the highest rewards tier, customers get bigger discounts and gain invites to exclusive events. Customers can cash out their points for beauty product samples or other merchandise. 

Part of what makes Sephora’s program special is that program members become part of Sephora’s Beauty Insider Community. Customers share advice and tips within this community and talk about their favorite products. The community helps foster an emotional connection to the brand, which is one powerful strategy to improve customer retention

Creating your loyalty program

Understanding the different loyalty programs is just step one to creating your own. Consider these factors when developing your loyalty program for small business or large enterprise:

  1. Determine your goals: A key step when developing any program is to think about your goals. Do you want to increase customer retention across the board? Is it your goal to raise the average order value? Tailor your program according to the specific business metrics you want to impact. 
  2. Consider your industry: Different industries are suited to different types of loyalty programs. A referral program is ideal for low-frequency purchases like large furniture and appliances, while points-based programs are better for retail businesses with high purchase frequencies like coffee shops. 
  3. Understand your customers: Your program must address your customers’ needs and wants to be effective. Make sure you offer rewards that appeal to them. 
  4. Market your program: There’s no benefit to having a rewards program that no one knows about. Raise awareness of your program through email marketing campaigns and other marketing channels. 

Metrics and success measurement

It’s essential to measure the success of your loyalty program to ensure it works as intended. Track the following metrics to understand the success of your program:

  • Retention rate: The percentage of customers who stick with your business over a given timeframe
  • Reward redemption rate: The percentage of rewards customers are redeeming through the program
  • Churn rate: The percentage of customers leaving the loyalty program over a given period

In addition to monitoring these KPIs, you should also track the:

  • Cost of your program
  • Return on investment (ROI)
  • Program’s engagement rate

If the cost gets too high relative to your returns, you may need to change some details about your program. 

Challenges and solutions

You may encounter some pitfalls when implementing or improving your loyalty program. For example, some customers may have unrealistic expectations of the kinds of rewards they’ll receive through the program.

To counter this issue, make sure you clearly communicate the program terms and what’s available to participating customers. You don’t want to mislead the customers about your loyalty program — that will backfire and drive customers to your competition. 

Another issue some brands have with loyalty programs is a lack of clarity about the program’s performance. Even if you have access to data about the program, you still need to analyze that data and find actionable insights.

Loyalty program software can eliminate this issue. These software programs often include a dashboard that clearly shows the data about how effectively your program works and if anything needs improvement. 

Implementing loyalty programs with technology

Today, the right software makes it easy to implement and run a successful loyalty program. This software tracks customer purchase data and automatically issues customers rewards according to the program details. Some of the software options also track other customer data to better offer personalized offers and rewards in the programs, making them more effective. 

Examples of this software include Loyalzoo, a points loyalty program ideal for restaurants, and Loyalty Gator, which is geared toward businesses with physical locations. 

You can also use other marketing software to increase the success of your loyalty rewards program. Email marketing software like Constant Contact, for example, includes tools that help you promote your loyalty program through effective, easy-to-create emails. Constant Contact even allows you to automate email messages, such as when a customer is eligible for a new reward! Reach out to Constant Contact to learn more about improving your email marketing efforts.  

Conclusion: the future of loyalty programs

Loyalty programs have changed over the years, but they remain one of the best strategies to boost customer engagement and retention. In the future, expect brands to put even more emphasis on customer data and personalization to make their programs stand out. And don’t miss out on the growth opportunities you can gain with your own brand loyalty program.

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