Understanding Customer Loyalty Programs

What are customer loyalty programs?

A customer loyalty program is a rewards program offered by a company to customers who regularly make purchases. A loyalty program may give a customer free merchandise, rewards, coupons, or advance released products.

Most brands today are implementing customer loyalty programs, because adding a customer loyalty program has been shown to have many benefits, including:

  • Boosting sales. Customers are tempted to spend more money when they have incentives to earn rewards or discounts.
  • Improving customer satisfaction. Shoppers expect to receive benefits from the companies they shop with. Whether you give them discounts, free products, or money back, offering rewards keeps customers happy and makes them more likely to return to your business.
  • Reaching new markets. Loyalty programs allow you to reach the masses with discounts, but also provide you with a way to segment offers by affiliation such as for students, military, teachers, employees, or even professionals in specific industries.
  • Market insight. By reaching out to different markets through your loyalty program, you gain important data into what types of customers are shopping with you, what they are buying, where they are shopping, and how much they are spending.
  • Increased revenue. Existing customers spend 67% more than new customers.
  • Greater customer engagement. Having a loyalty program gives you the opportunity to interact with your customers and keep them updated on your promotions and exclusive offers via email, mailings, SMS message, etc.

On average it costs a business about 5-25x more to acquire a new customer than it does to sell to an existing one.

Sephora is one example of a company with a successful customer loyalty program. The cosmetics brand uses a points-based loyalty program, and has customers use their Beauty Insider card at every purchase, which in turn allows Sephora to gather important purchase data. Sephora also offers special programs that give customers more rewards when they reach certain spending thresholds.

The Different Types of Customer Loyalty Programs

  • Loyalty Card Program. This is an incentive plan that allows businesses to gather important information about its customers like demographic and transactional data. Customers are offered product discounts, coupons, points toward products, or other rewards in exchange for actively using their card in store.
  • Points. The point program is the most common program as it is the simplest one. Every time a customer makes a purchase in-store or on a website, they get a certain amount of points depending on the size of their purchase. These points can then be converted into some type of reward.
  • Non-Monetary. This type of reward involves a brand providing a non-monetary incentive, such as making a donation to a cause, in lieu of discounts or free merchandise. Non-monetary rewards can be popular for certain target audiences, such as Millenials and Gen Z, because they allow consumers to connect with a brand in meaningful ways beyond the purchase process. For example, TOMS, the footwear brand, donates a pair of shoes to an underprivileged child in South America for each pair of footwear a customer purchases.
  • Tier Systems. This type of reward involves implementing a tiered system that rewards initial loyalty and encourages more purchases to acquire a higher loyalty level. With each level of loyalty comes different and better rewards for customers.
  • Rewards Partnerships. In rewards partnerships, a brand partners with other brands to offer their customers discounts with the associated brands. This type of program is best suited to brands with no customer-facing store, or a brand that doesn’t interact with customers regularly, such as insurance companies.
  • Gamification. This type of loyalty program is a new phenomenon and involves adding a game to your loyalty program to encourage customer engagement. In order to run a successful loyalty game, the prizes need to reflect the interests of your target audiences, and the odds of winning should be no lower than 25%.  To ensure maximum engagement with customers, make sure the game is simple and easy to interact with.

Physical-Based Loyalty Programs (Cards) vs. Digital Loyalty Programs

Physical-based loyalty programs are typically cards that can be used at a business. The customer brings their card to the business and gets it marked when they make a purchase, eventually accumulating enough points to receive a free item or discount.  Digital loyalty programs exist on devices or within apps, and have a larger variety of reward types. There are pros and cons to both types of programs.

Physical Customer Loyalty Programs

Cards are familiar, easy to carry, and have a low barrier to entry. Your customers have likely owned some in the past and are familiar with how they work. Also, it’s easy to pick up a card from the stack by your register and pop it into a wallet.

Paper cards are easy to lose or forget, and because this type of reward is popular, your customers will likely have many different cards to maintain. Also, cards limit reward variety because the customer only has one type of choice for their reward.

Digital Customer Loyalty Programs

Unlike physical punch cards, digital loyalty programs provide a variety of rewards. Apps can hold and organize a lot more information than paper cards, enabling you to promote a variety of ways to earn points, and giving customers more reward options to redeem. Additionally, because customers almost always have their phones with them, they won’t lose the app. Seventy-one percent of customers say they’re more likely to use a rewards card if it’s on their phone.

People have many apps on their phones, and your app could get lost among a sea of other apps. However, push notifications can keep your business top of mind.

Do Customer Loyalty Programs Really Work?

Customer loyalty programs are effective tools to both attract new customers and encourage repeat customers. The most recent statistics show that acquiring a new customer can be 5 to 25 times more expensive than retaining a current customer, and many consumers cite the presence of a loyalty program as one of the major reasons that they would consider a given brand.

Customer loyalty programs are also successful avenues for retaining customers. More than half of consumers reported that they will stay with a brand that they like.  And a 2016 study found that customers who are members of loyalty programs, such as frequent flyer clubs, generate between 12 and 18 percent more revenue than non-members, and that 58% of consumers shop at least once a month at stores whose loyalty programs they’ve joined.

Customer loyalty programs have seen a steady growth in the past 10 years, with membership growing from 3.3 billion to 3.8 billion from 2014 to 2016 alone. Customers today appreciate savings, with 69% of customers allowing the presence of rewards or loyalty programs to influence their shopping decisions. Not only are consumers willing to sign up for rewards programs, but many are actively seeking the benefits and perks of customer loyalty.

Brands have noticed these customer loyalty trends, with 57% of marketers increasing their spending on customer loyalty programs in 2017, compared to 2016.

Loyalty programs tend to attract customers who are either loyal to brands or trying to find the best deals possible. There are many ways to appeal to these types of customers through a variety of loyalty programs.

How to Create a Successful Customer Loyalty Program

Implementing a customer loyalty program can seem like a huge task, but it doesn’t have to be a painful process and the benefits that companies see make it absolutely worthwhile. The following guiding principles can help you create a successful customer loyalty program.

Ask for the Right Information
While customers can be extremely motivated by discounts and rewards, sometimes giving up a large amount of personally identifiable data can make them opt out. When setting up a customer loyalty program, ask for only basic information, such as name, email, or address, and avoid asking for any information that might be deemed unnecessary, such as a social security number.

Make Your Offers Simple and Consistent
Complicated customer loyalty systems generally confuse customers and make them less likely to sign up or continue using your program. To ensure your discounts and rewards are successful, keep your system extremely basic and keep everything transparent and consistent help to avoid any misunderstandings.

Make Your Offers Exclusive
Offering general customer loyalty programs can be very effective, but you can take it one step further by offering rewards to specific markets, like teachers, students, the military, or even your VIPs. These segments respond well when they see brands providing them with exclusive discounts—in fact, 84% of teachers said that they are more loyal to brands that offer teacher discounts.

Customer Loyalty Programs with SheerID’s Eligibility Verification Solution

Creating a successful customer loyalty program can be challenging, but asking for the right information, creating simple and consistent offers, and providing exclusive deals to target consumer groups will put you ahead of the competition and yield highly beneficial results.

Eligibility verification is a great way to make sure that your exclusive offers are only applied to the shopping cart of customers who truly qualify, in turn helping you to personalize your customer loyalty program like never before.

Want to Acquire More Loyal Customers?

SheerID helps leading brands like Amazon, Spotify, and T-Mobile use gated, exclusive offers to capture and retain high-value customers from lucrative segments such as students, teachers, and the military.

Read our e-book: The Definitive Guide to Creating Gated Offers