The importance of customer loyalty programs

Loyalty programs are an area often overlooked when it comes to driving business growth.

In their efforts to attract new customers, companies may forget to consider ways to build relationships with existing customers. Organizations need to do more than just produce an excellent product or provide reliable service; it is essential to turn customers into brand advocates and ambassadors.

Loyalty programs can make a significant contribution by helping to counteract consumers’ ongoing desire to try new brands and products. Recent research shows that high-performing loyalty programs can increase revenue by 15 to 25% annually by boosting purchase frequency, average ticket, or both.

Building a customer loyalty program is therefore a major undertaking for any company, but when executed well, it can be a major contributor to business growth.

What are loyalty programs?

A loyalty program is a structured strategy designed to encourage customers to continue making purchases or using the services associated with the program. It is an approach that recognizes and rewards customers who buy from or engage with the brand on a recurring basis.

Loyalty programs offer rewards, discounts, and other special incentives with the goal of attracting and retaining customers.

What are the objectives of a loyalty program?

The main goal of a loyalty program, as the name implies, is to build customer loyalty. A loyalty program is a cost-effective way to retain existing customers. Retaining a customer costs 3 to 10 times less than acquiring a new one. The following objectives for loyalty programs can be highlighted:

• Strengthening engagement and creating emotional connections between the customer and the brand over the long term, continuously leveraging the benefits of that relationship;
• Prevent losing customers to competitors by showing customers that we value our relationship with them and that this connection is rewarded in some way;
• Increase profits by increasing sales, both in terms of the quantity of the same product sold and through the sale of other products offered by the organization (cross-selling), while reducing operating costs.

What are the benefits of customer loyalty?

Loyalty programs offer several advantages for organizations. Loyal customers shop more frequently and typically have a higher average purchase amountthan occasional customers. On the other hand, customers recommend the brand to others, generating free and effective word-of-mouth marketing. Finally, loyal customers want to engage with the brand in a two-way manner and end up providing valuable insights into their behavior, which helps the company develop new products, services, and offers.

In general, we can say that loyal customers:

• Are less price-sensitive, making them more profitable;
• Focus more on long-term benefits and stay with the company longer;
• Reduce acquisition costs and the operational costs of serving the customer, increasing the company’s margin;
• Are easier to manage because, by understanding their customers, the company can offer a better solution;
• Tend to recommend the company or brand positively;
• Are less sensitive to competitors’ offers and marketing efforts, which also helps create a barrier to entry for new competitors;
• Are more willing to purchase other types of products from the brand.

The evolution of loyalty programs

When the first loyalty programs emerged, they were clearly a point of differentiation from the competition. In the era of stamp cards and exchanging points for coupons, loyalty programs helped reduce the cost of discounts. However, once everyone had loyalty cards, the concept ceased to be special.

The next era was about introducing new ideas and concepts into the programs. Rewards based on experiences and partnerships emerged, data collection began, as did targeted communication, along with the adoption of various technologies in both physical and digital environments. Loyalty programs followed the path of the omnichannel.

But today’s customers want more; they want something aligned with their personalities. They believe that loyalty can only be established if the brand’s values align with their own. Engagement must occur both inside and outside the purchase cycle. In other words, customers should be rewarded not only for transactional actions but also for demonstrating appreciation and interest in the brand.

Types of rewards in loyalty programs

Loyalty programs can provide different types of rewards to participating customers:

Financial benefit

This is the concept of “free money.” Customers feel they receive real value after each purchase, helping them save money. It is the fastest and easiest to implement.

Service benefit

It allows you to shift customers’ focus from discounts to a positive shopping experience (free shipping, warranty, etc.).

Gifts

Gifts are a gesture of appreciation toward customers and demonstrate that is investing in the customer experience. They are most valued when they are unexpected.

Events and experiences

These are great opportunities to foster deeper engagement, offer exclusivity, and build a bond between customers and the brand.

Psychological reward (sense of community)

These address the basic human need for a sense of acceptance and belonging. For example, joining a community with shared interests.

Sociological reward (prestige and exclusive treatment)

Sociological benefits are derived from membership in a loyalty program, which confers social status or the status of a specific social group.

Customized

There are no defined criteria for personalized rewards. They represent any type of reward that does not fit into one of the categories mentioned. They are the perfect opportunity to be creative.

Types of loyalty programs

There are different types of loyalty programs, and the selection should be made based on the organization’s objectives and the client’s profile.

Points program

The points program is based on a simple principle: the more the customer buys, the more points they earn. When a customer makes a purchase (in-store or online), they earn a certain number of points, depending on the amount spent. Often, an app is developed where users can manage their accounts, buy new products, view their points, and redeem them for rewards. This system not only increases the average purchase value of customers but also encourages them to always buy from the brand, reducing the likelihood that they will purchase from competitors. The points system should be kept simple so that customers can easily understand how it works and its benefits.

Paid membership program

These programs require customers to pay a recurring fee to join an exclusive members-only club. To be successful, they require a solid customer base and focus on retaining existing customers who make frequent purchases. The paid program must include benefits that are exclusive to members. It is necessary to show customers that the value of the program is clearly greater than its cost. Customers who join this type of program generally already have a strong connection to the brand.

Tiered program

This system is based on loyalty tiers. The more loyal the customer is to the brand, the more rewards they will receive. It generally uses the concept of “gamification,” where members reach higher tiers the more they “play.” The more points a member has, the more exclusive the rewards they will receive. The exclusivity of the highest tier is a major incentive for customers to buy more. To motivate members to reach higher tiers, you should include the percentages for each tier, indicating how many members have reached each level. The program can be based on points, purchase frequency, or other engagement metrics. You can create an app for customers to manage their accounts.

Solidarity program

A loyalty program doesn’t have to include direct benefits for participants. The company’s values can be incorporated into the program to build a stronger relationship with customers. By structuring a loyalty program based on shared values, customers are more likely to want to become loyal to the brand. One example is, instead of the customer receiving a discount, donating that amount to a social cause. This type of program creates a unique opportunity for the company to connect with customers on a deeper level.

Partnership program

With the growing number of loyalty programs available, customers are seeking greater flexibility in rewards. By partnering with other companies, it is possible to create a program that facilitates the development of new business relationships. Partnerships should be formed with companies that offer flexible benefits to help members achieve their goals. For example, if you are a sports footwear company, a good partnership would be a gym membership, so the reward would likely serve the same purpose as the initial purchase.

Community-based program

Community-based programs give members exclusive access to a community of people with shared interests. Within this community, members can connect with one another, find inspiration, sign up for exclusive events, and much more. The goal is to build a community where users can interact with each other and with the brand. By creating a platform like this, the brand gains access to consumer feedback and can use it for product development and to optimize other aspects. This type of program works for any brand, as long as it encourages conversations relevant to the brand and its products.

Subscription program

In this program, the company offers products or services through a subscription, improving the service and generally offering associated discounts. Subscription plans can have different durations (monthly, quarterly, annual, or others). For repeat-purchase items (ink cartridges, coffee, newspapers, magazines…), consumers want simplicity above all else. And the faster and easier they can get what they need, the better.

Exclusive events

Events help foster interactions, strengthen relationships, promote products, boost sales, and build customer loyalty. There are several possible formats: informal gatherings, seminars, trade shows, workshops, and courses. For example, if the company plans to launch a new product or run a special promotion for the holidays, customers enrolled in the loyalty program can receive exclusive communications and benefits.

Other types of loyalty programs

There are no limits to loyalty programs. There are countless options beyond those mentioned above, such as offering a discount coupon on the next purchase, offering rewards in exchange for referrals and new contacts, involving customers in the testing and launch of new products, granting access to the restricted area of the website, sharing useful content, among many others.

How to implement a loyalty program

For the implementation of a loyalty program to be effective, it is necessary to follow a structured process and ensure that the team responsible for the program has a good understanding of the customer and their preferences.

The main steps in implementing a loyalty program are:

1. Market segmentation

The first step is to conduct appropriate and creative market segmentation. Not all customers have the same interests and needs. It is necessary to study the target audience and segment it according to its preferences. Often, it is necessary to consult the Voice of the Customer during this first stage.

2. Defining the goal

Defining the program’s main goal is essential to clarify expectations and ensure the team is aligned. Some examples of objectives are: increasing customer engagement with the brand, increasing conversion rates, and improving the company’s understanding of the customer. Whenever possible, the objective should be quantified.

3. Selecting the program type and benefits

Once the goal is clear, it is necessary to define a set of benefits in which the value perceived by the customer exceeds the cost of remaining loyal to the brand. Then, a program must be designed that is transparent, logical, and simple from the customer’s perspective.

4. Calculation of costs and benefits

Before moving on to the implementation phase, it is important to estimate the amount that will need to be invested and the expected return. To do this, calculate the costs (implementation and maintenance) and the expected benefits of the program.

5. Defining the implementation plan  

To put the loyalty program into practice, it is necessary to define the implementation and communication plan, including actions, responsible parties, and deadlines. The format for monitoring the implementation must also be decided.

6. Evaluation of results

Evaluation metrics are fundamental to the program’s success. Frequently evaluating the benefits obtained and the costs incurred allows you to make the necessary adjustments and continuously improve the program.

Differentiating factors of a loyalty program

Once the essential phases of the implementation process are complete, it’s time to add differentiating features to the loyalty program, as there are elements that can make it even more appealing. Creating an appealing name and defining a central message for the program that focuses on something more human than monetary benefits are good examples of how to capture customers’ attention. Another element that can make the loyalty program stand out is building an emotional connection through surprise and curiosity. People are curious and are drawn to experiences that involve mystery and discovery. And when they aren’t aware that they’re going to receive a gift, receiving it creates an emotional high, which makes them want to experience it repeatedly. In other words, the element of surprise is important in loyalty programs.

Mistakes to avoid when implementing a loyalty program

Having a loyalty program does not guarantee immediate success in customer retention. There are a few common mistakes that should be avoided:

Evaluation of loyalty programs

After implementing a loyalty program, it is necessary to regularly evaluate whether it is achieving its defined goals.

It is important to determine whether the program influences consumer behavior. This can be done in two ways: by comparing the purchasing behavior of customers enrolled in loyalty programs with that of non-enrolled customers, and by comparing consumer behavior before and after joining the program. These analyses allow for an assessment of the impact of loyalty programs.

Another important analysis is calculating the return on investment. It is necessary to understand the program’s costs (discounts, gifts, event hosting, etc.) and the return it generates for the company (increased purchase frequency, increased average ticket size, number of active customers, etc.).

These evaluations should be conducted consistently and systematically, involving the team responsible for the program.

Successful loyalty programs

Building customer loyalty is becoming increasingly challenging. A loyalty strategy must be built around what is known about customers and the company’s objectives, as this is the only way to effectively encourage desired behaviors and contribute to business growth. Programs should be designed with the industry, the type of company (B2B, B2C, or a mix), and the target audience in mind.

Loyalty programs, when integrated with mapping and improving the Customer Experience, Customer Service Standards, methodologies for collecting and analyzing the Voice of the Customer, and a robust e-commerce and CRM (Customer Relationship Management) platform, can make a substantial contribution to organizational growth. Satisfied customers buy more frequently, purchase a wider range of products, and become loyal customers and brand advocates.