What is a loyalty program? Definition, strategies, and examples

There’s nothing like the rush of winning new business. For a long time, marketing departments poured energy into messaging and product positioning to lure new people to their brands. However, while creating new sales leads will always be part of the job, it’s equally important to convert existing customers into repeat customers. Studies have found that it’s at least six times more expensive for businesses to acquire a new customer than to keep an existing one.

That’s why investing in customer loyalty programs — and the digital technology and platforms to support them — is a growing priority.

The fifth annual “State of Marketing” research report showed that marketers’ use of customer loyalty program platforms is projected to grow 80% in the next two years. The study also revealed that 63% of high-performing marketers are already using loyalty program platforms.

Customer loyalty programs aren’t just about offering discounts. They use the purchase history and customer-provided data to present customers with timely and relevant offers; and they improve overall customer experience. Companies can also grow their customer base and deliver even more compelling rewards by forming innovative partnerships with related businesses.

"63% of high-performing marketers are already using loyalty program platforms".
— State of Marketing Report, Salesforce Research

This article covers some common types of customer loyalty programs along with examples. But first, let’s cover off on the basics.

What you’ll learn:

• What is a customer loyalty program?
• Why are customer loyalty programs important?
• How to build loyalty in every phase of the customer journey
• For marketers, a new focus on customer experience
• What are some of the best customer loyalty programs?
• How do you start a customer loyalty program?
• What are some types of customer loyalty programs?

By definition, a customer loyalty program is a marketing approach that recognizes and rewards customers who purchase or engage with a brand on a recurring basis. A company may dole out points or perks, and graduate customers to higher levels of loyalty the more they buy. These incentives and specific benefits often result in the customer becoming a more regular consumer or the ideal — a brand promoter. Benefits may involve free merchandise, rewards, coupons, or insider perks like early access to new products.

Businesses can be wary of giving free extras — however, it’s a strategy that doesn’t have to incur huge costs. After all, psychologist Norbert Schwarz found that spending as little as 10 cents can create reciprocity between two people. Studies have found that members of customer loyalty programs typically spend up to 18% more than other customers.

Throwing in an extra small product or service with a purchase is an excellent way to reinforce a buying decision your customer just made. Everyone loves receiving something for nothing. And for every cent a business spends investing in a customer loyalty program, it is likely to reap multiples in return. By contrast, when a customer walks away from your business, their income stream is lost forever.

"95% of customers say trusting a company increases their loyalty”

Trends in Customer Trust Report, Salesforce Research

Research also shows that 95% of customers say trusting a company increases their loyalty. What’s more, research shows that 91% of customers say their trust in a company makes them more likely to buy more frequently.

The benefits of customer loyalty programs include:

• Better customer retention: Today, customers are making purchasing decisions not just on price, but on shared values, engagement, and their overall experience of your brand.
• More customer referrals: If your customers enjoy the benefits of your customer loyalty program, they’ll tell their friends and family about it.
• Cost efficiency: It’s more cost-effective for your business to retain happy customers than it is to consistently churn and acquire new ones.
• User-generated content: Programs that encourage happy customers to publish reviews and ratings on websites and social media create authentic ambassadors for your brand.

So, how should your business build a better customer loyalty strategy?

Customer loyalty is a precious commodity. If a competitor comes up with a better offer, then your customers will take it — even if they have a positive history with your brand. According to the second annual “State of the Connected Customer” report, 57% of customers have stopped buying from a company because a competitor provided a better experience.

That’s why at Salesforce, we believe that creating a customer-centric culture begins long before creating a rewards program. For example, it’s important for businesses to establish a customer service approach that engages customers across multiple channels — including contact centers, social media, and in-store. Companies should build credibility through personalized customer interactions that recall what has happened previously between the customer and the organization. It’s also a good idea to deliver additional value to customers, potentially by inviting them to participate in an online community associated with the product.

Nonetheless, having a well-designed customer loyalty program reinforces a customer’s relationship with their brand. Of course, throwing in a perk or two at the point-of-sale can be what prompts a customer purchase in the first place.

Gradually, however, a business would hope to build momentum as a customer is onboarded — with the goal of cementing a lifelong relationship. Typically, this means you would be presenting the customer with continual opportunities to maximize their loyalty rewards. You’d also be presenting them with smart, targeted communications that celebrate their “milestones” with the brand, as well as their individual needs and preferences.

The role of marketing departments is changing as loyalty programs become the connective tissue that drives the customer experience. Marketers used to be responsible for positioning products, crafting messages, creating ads, and posting on social media. But many are now switching to manage the customer journey and sustain those who are already engaged with the brand.

If the future of marketing lies in a radical change where marketing becomes the bridge builder across different experiences — from the first touch, through to sales and customer service support — it’s essential to create a shared view of the customer across an organization’s business units. Marketers are increasingly tracking customer data, backed by fast-growing capabilities such as artificial intelligence that help them draw insights and make sense of it.

Today, for example, roughly six in 10 marketing teams track customer satisfaction and retention. According to the “State of Marketing” report, the average marketing organization currently uses 14 data sources, a number that is growing by about 20% each year.

In addition, dedicated customer loyalty platforms offer a way for businesses to manage the customer experience after the point of purchase. This software can help businesses keep track of vital metrics such as churn, response rates, and retention rates. This allows them to judge how loyalty programs are performing, and to learn how customers feel about the company overall.

Key metrics for customer loyalty programs include:

• Customer retention rate: This indicates how long customers stay with you. In a successful loyalty program, this number should increase over time as the number of members grows.
• Negative churn: If churn is the rate at which customers leave the company, then negative churn measures customers who do the opposite by upgrading or purchasing additional services.
• Net Promoter Score: This is a customer satisfaction metric that measures, on a scale of 1–10, the degree to which people would recommend your company to others.
• Customer Effort Score: This measures actual experience, specifically how much effort a customer has to make to solve a problem with a company.

The most basic type of loyalty programs offers customers greater rewards the more they purchase from a retailer or visit an establishment. Examples include airline frequent flyer programs such as Southwest Airlines Rapid Rewards or United Airlines MileagePlus, and initiatives in the hospitality industry such as Starwood Preferred Guest or OpenTable Dining Rewards.

Other examples of brand-exclusive membership programs include Walgreens Balance Rewards, where shoppers receive back 10 cents for every $1 spent on most purchases, which can be redeemed on future purchases. Becoming a paid member of Amazon Prime effectively represents a pledge of allegiance to the global online merchant and includes perks such as free shipping and media streaming. Fashion retailer Banana Republic offers a program where credit card members can get upgraded to Luxe status, which offers free alterations and other perks after achieving a certain spend level. This entitles them to rewards such as free shipping for online orders and “choose your own sale” day.

Here are some tips to help your organization begin its own customer loyalty program.

• Create a points system — but make it simple: Allowing frequent customers to earn points that convert into rewards is the basic building block of a loyalty program. This works best for quick, inexpensive purchases at retailers such as fashion outlets and grocery stores. It’s important to make the relationship between points and tangible rewards as simple and intuitive as possible.
• Offer tiered rewards: A tiered loyalty program typically offers a small incentive for making an initial purchase. The value of the rewards increases as the customer moves up the loyalty ladder. This type of program tends to work better for higher-commitment and price-point businesses such as airlines, hotels, and insurance companies.
• Charge an upfront fee: It can be a good strategy to ask customers to pay a one-time fee that allows them to bypass common purchase barriers later on. Amazon Prime’s upfront membership fee, for example, allows subscribers to make frequent, repeat purchases without worrying about inconveniences such as taxes and shipping.
• Partner with another company: Think of other companies that would be a good fit. For example, if you sell hiking backpacks, consider forming a loyalty program with a maker of hiking boots. When customers receive value that’s relevant to them but goes beyond what your company alone can offer, it shows that your business really cares and understands their needs. Businesses can also grow their network to reach their partners’ customers. Companies with multiple brand names may also have a joint program, like The Key Rewards, for Pottery Barn, Williams Sonoma, and West Elm, to mention a few.
• Offer distinctive rewards: A bonus for purchasing a company’s products need not be a discount on future purchases. Customers who spend at a certain threshold could receive free tickets to events, or subscriptions to other products and services. Remember, too, that two-thirds of customers are more willing to invest in brands that take stances on social and political issues they care about. Customer loyalty programs can tap into this sense of altruism — for example, a percentage of every purchase could go to charity.
• Come up with a unique name: The name of your loyalty program should stand out from the crowd to draw interest. For example, Sephora’s Beauty Insider Program, with a clever spin on VIP, they include a level named VIB (Very Important Beauty Insider).