Loyalty is arguably the holy grail of marketing. Brands are increasingly turning to loyalty as a preferred way to grow their top line, bottom line, and drive sustainable growth in this hypercompetitive and ever-changing environment. Most brands have put enhancing or launching their loyalty program as a strategic priority. This is not surprising. Acquiring new customers may cost anywhere from 5 to 25 times the cost of retaining existing ones, and a mere 5% increase in retention may result in up to 95% increase in profitability.* Loyalty also drives significantly higher customer lifetime value through increased customer satisfaction and stronger customer relationships. Loyal customers not only stick around longer and shop more, but also recommend the brand to others.
A well-designed, well-executed loyalty program can help brands win. However, customer loyalty is also becoming harder to achieve. So, what does it take to create a highly effective loyalty program? While there is no magic formula, there are certainly elements that can lead brands and marketers to success. Before we look at them, let’s quickly recap the fundamentals.
What is a loyalty program?
A loyalty program is a program that systematically rewards customers for loyalty by offering tangible as well as intangible benefits such as discounts, additional services, special access, and other rewards.
A loyalty program is not the means to provide indiscriminate discounting or reward loyalty card ownership. A loyalty program must be data-driven and it must reward the right customers for the right behavior. Most importantly, a loyalty program is not a cost center. While delivering high value to customer, loyalty programs must return a profit.
Let's look at the different types of loyalty programs.
- Earn & Burn – This is the most common and simplest type of reward program. The customers earn points for spending money, and they can redeem those points for shopping with the same brand. The relationship between the brand and the customer is quite transactional.
- Tiered – In a tiered program, there are different levels, and the rewards and value offered to the customer grow with the tier.
- Perks based – A perks-based program focuses on exclusive benefits and privileges to its customers.
- Communities based – This program hinges on providing access to a loyal and useful community that is based on shared interests and values. It focuses more on relationships and intangible rewards.
- Coalition – A coalition program is a program that combines multiple brands under the same umbrella and allows the customer to earn points by shopping across that array of brands, making it convenient and high value for the customer. From a brand perspective, it is essentially an outsourced loyalty program where the loyalty goes to the loyalty provider instead of the brand.
- Gamified – A gamified program is based on challenges to engage the customers in a fun way. It encourages recurring behavior and drives engagement beyond transactions. However, it can be complex and high effort to build a gamified program.
Most brands typically take a hybrid approach toward their loyalty program and combine elements of two or more types of loyalty programs into their program. For example, American Express gives their credit card users points or cashback for their spend, while differentiating between the points earned based on tiers of their membership. It also provides them several perks such as travel and exclusive experiences. This way, Amex successfully combines earn and burn, tiered, and perks-based loyalty.
Now that we've covered the basics, let's talk about the features of an effective loyalty program.
Aligned with brand purpose and values
Provides high value for the customers
A good loyalty program delivers high value to its customers. It could be through a combination of high cash value, choice of redemption options, convenience, status, or exclusive benefits. We can’t find a better example of this than the hugely successful Amazon Prime program. The program provides excellent value to its customers – right from free and faster shipping to a wide variety of video content. It is a true win-win because Prime customers spend almost three times the money that non-members do.
Leverages intangible benefits
Simple, frictionless, fun
Nothing adds to a loyal customer’s frustration more than a complex and clunky loyalty program. While providing great value to a customer, a rewards program must be simple, intuitive, and easy to use. A simple program makes it clear which actions will be rewarded. Brands must reward customers for higher spend, engagement, and brand advocacy. Several programs focus only on spend, losing out the chance to build better relationships with their customers, and drive higher engagement. At the same time, the program must make it easy to redeem points, offering a variety of options in terms of redemption.
An element of fun drives even higher engagement. With seamless integration of loyalty program across touch points, touchless transactions, and gamification, brands can make loyalty a delightful experience for the customers.
Starbucks is one of the best examples of a frictionless loyalty program that makes it easy and fun for the customers. Starbucks has a dedicated loyalty app through which customers can place their orders ahead of time to skip the queue, make payments easily, and earn and redeem rewards instantly. There are free games and music in the app, as well as surprise offers, challenges, and bonuses to keep customers hooked.
Not all customers are created equal, and an approach that treats them identically is bound to fail. Customers know that brands are collecting their data and therefore expect brands to know them and tailor rewards and experiences for them. An effective loyalty program must use data appropriately to create relevant offers, incentives, and rewards. A great example is Sephora’s Beauty Insider program, which offers tier-based rewards and personalized perks allowing members to choose their own rewards. Sephora gives free samples and birthday gifts based on detailed analysis of a customer’s past behavior and preferences. Delivering personalized experiences to its members is key to Sephora’s loyalty program’s success.
This brings us to loyalty platforms and how brands can implement a loyalty program that best suits them and their customers. A loyalty management platform helps a brand launch, manage, and optimize its loyalty program. It also integrates with other systems such as marketing and CRM to provide a seamless omni-channel experience. The capabilities allow brands to define membership tiers, types of benefits, partners, products, and rules for accrual and redemption of points. A few notable platforms include Oracle Crowdtwist, Salesforce Loyalty Cloud, Antavo and SAP Emarsys Loyalty.
To sum it up, to create and manage a loyalty program that truly gives a brand a competitive edge, the brand must harness the power of data to identify the right segments for loyalty, determine the type of loyalty program that best suits the needs of customers and the brand, design a program in line with brand values, provide an omni-channel experience to the customers, and build an emotional connection through its program. Finally, it is important to remember that a loyalty program is not a be-all end-all solution to all marketing challenges. A loyalty program can thrive only if there is a compelling brand narrative and great customer experience overall.
*Source: "The Value of Keeping the Right Customers," Harvard Business Review