Loyalty program

What is a loyalty program?

A loyalty program is an incentive plan run by businesses to offer benefits to the customers who frequently engage with the brand. 

Customer loyalty is essential for businesses because it translates directly into value. However, a loyalty program is effective in creating long-term value for the business as well as its customers only if it’s implemented and as part of a larger loyalty management strategy

Types of loyalty programs

Businesses use a variety of loyalty schemes to reward their customers. The following programs are the most popular ones:

  • Point-based: This is one of the most popular loyalty program types. Members earn points for their actions and redeem them for rewards.

  • Tier-based: To make their programs more tempting, some businesses rank their loyal members based on their spending levels. Members in higher tiers benefit from more exclusive rewards.

  • Cashback: When a member spends a certain amount, they receive a certain percentage back as cash or coupon to be used in next purchases. 

  • Paid (subscription): Members pay a recurring fee to receive the benefits of the program.

  • Punch cards: Members receive physical cards that are stamped after every transaction and exchanged for certain awards.

  • Hybrid: Combining several loyalty types is a great strategy to create an outstanding journey for loyal customers. Hybrid programs also offer a variety of financial and experiential rewards.

  • Group: Group or multi-brand loyalty program is an umbrella scheme where a parent company allows members to use their points at any of the brands owned by the group.

  • Coalition: This type of loyalty program is usually used by malls and shopping centers. In a coalition loyalty program, unrelated brands team up in a partnership. 

Types of loyalty rewards

One of the key decisions in running a successful loyalty program is picking the right customer rewards for your businesses. Effective loyalty programs use a combination of the following rewards:

  • Free, exclusive or limited products

  • Cashback or store/app credit

  • Discounts

  • Birthday gifts or gift cards

  • Free shipping

  • Partnership perks

  • VIP experiences (exclusive events such as invite to a to a movie premiere or event sponsored by the brand)

  • Charity donations

Loyalty program

How to build a loyalty program

Lots of brands see loyalty as an optional extra – and treat the development of loyalty systems as a nice-to-have strategy. However, that risks losing valuable customers who can help reduce acquisition cost and increase profitability for your business.

Take the following steps when building a successful loyalty program:

  • Identify what your objective is. The first step is to identify why exactly you want to develop a loyalty program. Do you want to reduce customer acquisition cost or increase repurchase rate? Do you want to reduce customer churn or increase average order value (AOV)?

  • Identify what data you have. To run your loyalty program successfully, you need to know what data is accessible to you: event data (purchase, login), behavioral data (shopping habits, value), business data (inventory, seasonality).

  • Identify what resources you have. Developing a revenue-boosting loyalty scheme requires dedicating financial and IT resources of the company. Your decision to buy your loyalty feature from a reliable vendor saves your dev team from having to spend hours on creating and maintaining a loyalty program.

  • Prioritize personalization. With your loyalty program you gain access to valuable first-party data, which you can use to tailor your rewards to what each individual customer wants.

  • Go omnichannel. To maximize the delight and comfort of the shopping process, let your customers move seamlessly between your online and offline stores, receiving and redeeming points without having to change channels. 

How to measure loyalty program success

Businesses use different metrics to measure the success of their loyalty programs. The specific requirements of your business and industry determine which of the following metrics you need to pick:

  • Increased AOV

  • Increased customer total orders

  • Reduced customer acquisition cost (CAC)

  • Increased customer lifetime value (CLV)

  • Increased repurchase rate

  • Reduced speed-to-market of new loyalty features

To learn more about how a loyalty program as a value-sharing tool helps your business, check out our “Definitive guide to customer loyalty.”

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