Your Guide to Starting a Customer Loyalty Program

One strategy to encourage customers to keep purchasing from you is through a customer loyalty program. Let's break down how loyalty programs work and what their benefits are.

Updated September 30, 2020



The success of your brand (and any brand) depends on building and maintaining a base of loyal, satisfied customers.

But the digital age has placed more power in customers’ hands, and made customer retention harder for your brand. With all the information they need at their fingertips, today’s customers are more educated than ever. They can easily compare purchasing options, and if they think that one of your competitors offers better value, they’ll quickly jump ship.

Don’t worry, though. Your brand has plenty of tools available for cultivating loyal customers.  One strategy to encourage customers to keep purchasing from you is through a customer loyalty program.

But what are loyalty programs? Why do loyalty programs work? What are their benefits? And what types of loyalty programs could your business use? Let’s explore – but first, let’s briefly define customer loyalty.

What is customer loyalty?

Customer loyalty is a customer’s devotion to your products, services or brand. It measures how willing a customer is to keep making purchases from you, instead of leaving you for a competitor.

Customer loyalty is the result of high customer satisfaction: when your brand consistently meets or exceeds the expectations of your customers.

When customers are satisfied with your products or services, and believe these goods are valuable, they’re more likely to stick around.

But that’s only half the battle. Customer service is just as important, if not more important.

  • Customers remember their experience when dealing with your brand. They’ll only remain loyal if this experience is top-notch.
  • Show your customers that they have value, and you’ll reap the rewards.

What are loyalty programs?

A loyalty program is a type of structured rewards program that rewards existing customers for staying loyal to your brand over a long period.

These programs usually reward customers’ repeat and frequent purchases.

However, they can reward any number of desired actions, such as:

  • Leaving positive reviews
  • Visiting the brand website or using the brand app
  • Attending a branded event
  • Making branded social media posts with appropriate tags and hashtags

Regardless of the actions rewarded, though, rewarding purchases is central within nearly every loyalty program.

Your Guide to Starting a Customer Loyalty Program 1

The Zumiez Stash loyalty program rewards customers for a large number of actions, including entering purchases, watching branded videos, visiting social media accounts, and visiting a physical store.

Businesses can run physical loyalty programs (using a punch card or stamp card), or use loyalty program software to track customers’ purchases over time.

Why loyalty programs work

Loyalty programs work because they operate on reciprocity: they encourage customers to help your brand by offering something valuable to the customers in return.

And once a customer has signed up for a loyalty program, and see the rewards available to them, they’re more motivated to commit to you.

  • They see themselves getting closer and closer to an incentive for something they already use and enjoy, so they want to keep working towards that coveted reward.
  • If there’s a limited time available to earn the incentive, they’re even more motivated, because they don’t want to miss out on the reward.

Loyalty program benefits

The main benefit of loyalty programs is ease of customer retention and satisfaction. Loyalty programs encourage customers to stay with you because you make them feel like VIPs. This star treatment makes it easier for your customers to trust you.

Retaining customers thanks to a loyalty program brings a wealth of benefits. Your existing customers really are your best customers!

  • It’s more cost-effective to retain consistent customers than to acquire new ones, due to the high costs of customer acquisition.
    • If the majority of your customers remain loyal, you won’t have to spend as much money on ads, and you won’t have to spend as much valuable time finding people in your niche.
  • Your existing customers are more likely to spend more on your products.
    • And the longer your customers remain loyal, the higher their customer lifetime value.
  • In addition, once you’ve cultivated a strong relationship with your existing customers, they’ll refer their friends.
    • So, they’ll become powerful advocates who can bring new customers your way!

Loyalty program statistics

Consider these statistics that show the benefits of loyalty programs (and of customer retention in general).

  • According to a Bond survey of more than 55,000 consumers, 79% said that loyalty programs make them more likely to continue doing business with the brands that offer them.
  • 73% of customers are “more likely to recommend brands with good loyalty programs,” and 66% “modify [their] brand spend to maximize loyalty benefits.”
  • 49% of consumers believe that they spend more after joining a loyalty program.
  •  65% of people ages 18-23 and 69% of people ages 24-29  are highly influenced by loyalty programs.
  • 76% of consumers think that loyalty programs form an important part of their relationship with brands.
  • It’s 5-25 times more expensive to acquire a new customer than to retain and satisfy an existing customer, and 16 times more expensive to bring a new customer up to the same level as a current loyal customer.
  • 65% of your sales will come from existing customers, and 80% of your future profits will come from just 20% of your existing customers.
  • On average, repeat customers spend 31% more than first-time customers.
  • Also, on average, a repeat customer spends 67% more in their 31st to 36th months of their relationship with a brand than in their first six months since an initial purchase from a brand.

Offering value through a loyalty program

However, designing a loyalty program isn’t always enough to drive customer retention in itself. Rather, you need to offer value to your customers so they’ll stick with you.

  • Customers are members of around 15 loyalty programs on average, but they actively use only 7 of these memberships.

One way to offer value is through personalization. Personalizing your loyalty program is vital, but not enough brands do so (this is a great opportunity to make your loyalty program stand out!)

  • Three-quarters of customers are likely to be more loyal to a brand if they think that brand understands them at a personal level.
  • However, only 22% of customers who use loyalty programs are “very satisfied with the level of personalization” that loyalty programs offer.
  • How to personalize your program? According to Bond, customers are looking for programs to engage with them “through the right channels,” “in the right place,” “at the right moments,” and “with the right messages.”

Selecting loyalty program rewards that motivate your customers to make repeat purchases, and meet the needs of your business, is also vital.

  • Types of rewards include free products or services, credits towards a purchase, exclusive items, and VIP experiences.
  • Whichever rewards you choose, be sure to set up a motivating reward structure (how many purchases, points, or actions it takes to earn rewards).

dunkin rewards loyalty program

Types of loyalty programs

In addition, choosing the right type of loyalty program to motivate customers is key to offering value.

Common loyalty program types include:

  • Points program
  • Cash back program
  • Tiered program
  • Threshold program
  • Punchcard program
  • Gamified program
  • Pay-to-join program

We cover these types in detail, and how to select the best type of loyalty program for your business, in a dedicated article on types of loyalty programs. 

Will a loyalty program work for my brand?

Despite all the benefits of starting loyalty programs, loyalty programs aren’t the best fit for every business. Answer the following questions to determine if a loyalty program is a good fit for your business.

Do people purchase your product or service frequently?

  •  For example, do you offer a recurring service or subscription model—or do you just happen to offer frequently purchased items, such as food and clothing?
  • Loyalty programs work best with high-frequency purchases.

How large is the average purchase from your brand?

  • Loyalty programs tend to work best with less expensive products and services, as they are usually built to encourage strings of multiple purchases over a shorter period.
  • However, they can also work with larger, less frequent purchases, like airline tickets and travel packages, as long as you use a tiered reward structure.

What market is your business?

  • Loyalty programs work best for these business types: restaurants/food service, retail stores, ecommerce, recurring services (fitness classes, salons routine maintenance), and hospitality (hotels, flights, cruise lines, travel agencies).

Most importantly, do you already provide top-notch products/services and exceptional customer service?

  • This is crucial for satisfaction, and customer satisfaction is what leads to customer loyalty.
  •  Set these foundations for satisfaction before you start a loyalty program, or else a loyalty program will be a waste of time and resources.
  • Gauge customer satisfaction through surveys, customer reviews, and one-on-one conversations.

Measuring a loyalty program’s success

Remember that it’s not enough to implement a loyalty program and hope for the best. Like all other marketing efforts, you’ll need to track your loyalty program’s success by measuring ROI.

  • Loyalty program software makes it easy to measure these key metrics:
    •  How many customers join the program
    • How many customers are engaging with your loyalty program
    • Number of active vs. inactive members
    • How long customers actively use the program on average
    • The number and frequency of purchases program members make.
  • Another way to gauge loyalty program success (indirectly) is to measure customer satisfaction.
    •  One way to do this is to use an NPS survey, which asks customers how likely they are to recommend your products or services to their peers.
    • You can also compare your customer retention rate, and examine average customer lifetime value, before and after you start your loyalty program.

Wrapping Things Up

If you’re thinking about starting a loyalty program, make sure that it will fit your business (you’re good to go if your business model involves frequent, inexpensive purchases.) Be sure to choose a type that best fits your business, offer value to your customers, select rewards carefully, and plan to track your program’s success.

Keep in mind, though, that loyalty programs are not the best choice for every business.  Your business might benefit more from other customer retention techniques, such as referral programs. Check out this article where we compare loyalty and referral programs.


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