Interested in starting or improving your loyalty programme? Our comprehensive guide will break down everything you need to know—from how to get started to KPIs.
Every business wants to foster customer loyalty. More than just providing a consistent sales pipeline, it develops a connection with an engaged and returning customer audience, creating self-generating promotions and boosting new customer acquisition.
In essence, loyalty is what builds a true brand.
But without a dedicated system and strategy—a loyalty programme—you’re leaving customer allegiance to the whims of the universe.
At Epsilon, we’ve spent decades studying customer loyalty, building solutions, and advising our clients on how to achieve outcome-based marketing success—especially when it comes to loyalty programmes. So, we’ve assembled this comprehensive guide to help you learn everything you need to know to turn yours into a goliath.
Loyalty programmes are marketing and customer relationship strategies that enrich experiences and incentivise your returning customers to make more purchases—ideally, more often and for higher sale amounts per order.
This definition might seem broad, but that’s because there are myriad types of loyalty programmes (and rewards) used today. Most fall into a few general categories, but you’ll still find significant variations between companies’ structures, incentives, and how their customers earn or redeem rewards.
As an example, it’s believed the first modern loyalty programme began in the late 1700s when an American merchant began giving customers copper tokens they could trade for merchandise at a later date. This exchange resembles the simplest loyalty programme you’re probably familiar with: businesses handing out physical punch cards.
You might have a stack of these ”buy ten, get one free” cards still lying around—if you haven’t misplaced them all or accidentally put them through the laundry.
When customers enrol in a loyalty programme and complete a purchase or specific action, they receive physical or digital tokens—often as “points.” These are then redeemed for an associated reward.
The basic idea behind all loyalty programmes is that the opportunity to earn more and more points encourages customers to make repeat shopping visits as they work toward the next or higher-value rewards.
Odds are, you’re currently enrolled in some loyalty programmes managed by your favourite brands.
Loyalty programmes have evolved over the last 200 years, especially in the last few decades. They now incorporate sophisticated technologies and require extensive data management.
Those physical punch cards are much rarer, replaced by platforms that automatically track and apply rewards or facilitate redeeming points. With these technologies, programmes have also become more flexible, involving diverse structures like tiers, memberships, and referrals. Rewards range from merchandise and discounts to adventure experiences and charitable donations.
There are no limits to what a modern loyalty programme can be, so long as it:
Not at all! While loyalty programmes are designed to generate return business, their benefits should be enticing enough to convert new customers.
Credit card rewards represent one of the most common customer acquisition strategies that rely on loyalty programmes. Most offers attract new cardholders by touting benefits like multipliers for rewards points or airline miles during the first few months after signing up.
For some businesses, their loyalty programme is the primary product they’re selling.
Returning customers are the foundation of nearly every successful business. It’s virtually impossible to operate without them. But what if your returning customers purchased more and more often? That’s what a well-built loyalty programme helps accomplish.
As a common saying in sales and marketing goes, it’s five times as expensive to convert a new customer than it is to sell to existing customers. But unlike older loyalty programmes, customer acquisition strategies now rely on data. Does more recent reporting back up this assertion?
It does. Existing customers:
Your costs per sale rise when you ignore the people who’ve already done business with you, and that results in generating less revenue. Our own research demonstrates that loyal, returning customers spend 300% more compared to other consumers.
The numbers speak for themselves. It’s why over 90% of businesses have started some kind of loyalty programme.
Loyalty programmes are effective because they rely on the psychological characteristics and brain chemistry shared by all consumers. They engage fundamental and subconscious drives, such as:
These behaviours all relate back to what’s fittingly known as the brain’s “reward system.” As with other rewards, when your customers receive loyalty benefits, the neurotransmitters in their brain release dopamine, increasing their sense of enjoyment and happiness.
Per one academic review:
“A program might confer a special sense of status, enhance customer feelings of social belonging, build gratitude, promote reciprocation, or deliver a combination of these benefits.”
And according to the Kearney consulting firm, there’s a direct link between tapping into human psychology and your loyalty programme's success. They found loyalty programmes generally achieve a 30% bump in average customer spend, but those that create an emotional connection see 150% increases.
Those emotional connections relate to factors like overall customer experience, product quality and reliability, and shared social values.
Despite the impressive numbers, starting a loyalty programme doesn’t mean it will become an automatic success. You still need people to sign up for it.
So, what can you do to boost programme membership?
Generally, customers must be incentivised to sign up for loyalty programmes. This is especially true at a time when people’s wariness of personal data collection is increasing.
Signing up for a loyalty programme should be viewed as a distinct transaction between businesses and their customers. Many consumers will seek some form of instant gratification, and these incentives most often involve benefits like:
However, the incentives you use to encourage sign-ups will need to be tailored to your customer audience, their average purchase amount and frequency, and the products you’re selling. For some models, the allure of larger rewards in the future is more than enough to encourage sign-ups without any up-front benefits.
If your programme imposes sign-up barriers, it will negatively impact how many people join.
To better understand how people react to long or complicated sign-up processes, we can turn to user experience (UX) design strategies relied on when building apps and software. Again, human psychology plays a major role in a programme’s sign-up success.
When creating your programme’s sign-up process, you want to minimise:
When people agree to sign up for your programme, they want the experience to be seamless and easy. This needs to be a priority throughout planning and building your loyalty programme, or you risk consumers changing their minds and abandoning it before they even join.
You want this interaction to be as close as possible to saying yes or no when customers are asked if they want to be a loyalty programme member.
While immediate benefits will help boost your programme’s membership, consumers will also want to know more about its structure and long-term value. If your model is too complicated to understand or primarily based around that first and immediate reward, people are more likely to decide the membership’s ongoing value isn’t worth it.
A study of loyalty programmes across more than 350 grocery stores in 27 European countries found a positive correlation between simple programmes providing “direct and immediate rewards.” However, that disappears with more complicated models.
If your programme is more complex, you’ll need to design web pages or physical materials that clearly break down or summarise what’s being offered. Potential members should be able to understand what the programme involves and some offered rewards at a glance.
For example, if you divide membership into three tiers, people will need to know:
How you inform people of your programme's structures, rewards, and redemption processes relates back to minimising cognitive loads. A brief explanation should be all that consumers need to understand how the programme works and the benefits they receive from joining.
As mentioned above, there are myriad types of loyalty programmes because there are no limitations on your vision for customer experience—especially with modern technology platforms. All programmes can be distilled down to the basic process of purchases or actions earning rewards, but where you go from there is up to you.
Programme membership can be open to everyone or access-exclusive. Redemptions may or may not be applied automatically or have an expiry. You can partner with other businesses to expand the programme or with charitable organisations to promote tangible advocacy.
The options are limitless.
What matters most is that your customers find the programme’s experience and incentives not just engaging but compelling. Aside from meeting your customer audience’s expectations, any type of programme can be successful.
Here are five common types of programmes that you can look to for inspiration:
The most simple versions of modern loyalty programmes are based on accumulating points. Most other types still use this structure in some way because points provide an easy tracking method for businesses and members to see their progress toward and eligibility for rewards.
Typically, every dollar a customer spends on their purchases earns them points—spend more, earn more. Those points are then redeemed for rewards like:
Traditionally, points-based loyalty programmes operate on a flat structure—all points have the same value regardless of when the purchase was made or for what, and all customers redeem points for the same selection of rewards.
While tiered programmes incentivise customers to spend more or more often, they operate similarly to points-based programmes, with the difference that members who accumulate enough points in a given timeframe join a new tier that offers better rewards.
Businesses often determine their programme’s tiers based on total annual purchases.
However, you can increase how often members make purchases with shorter windows. For example, your programme could require customers to purchase $100 per month to move beyond basic membership. But remember that you’ll need to align the thresholds for tier progression according to your customer’s average monthly spend.
When building a tiered programme, you must consult customer purchasing data to determine the cut-offs for each grouping. Consider these two three-tier models of 100 customers:
You can also assign different point values to different types of products. Unlike point-based programmes' flat model, not every product is treated equally. This strategy will help you target:
However, you don’t have to adopt product categories as a constant structure. Instead, you can use them as promotional offers, allowing programme members to earn more points on select items for a limited time.
Announcements for double or triple points will certainly catch programme members’ attention.
For example, retail businesses can leverage these opportunities to clear out old inventory stock or take advantage of different seasons (e.g., school supplies in the Fall, and athletic equipment before a new season starts). Alternatively, you can assign more points for accessories to big-ticket items to encourage order bundling.
Some loyalty programmes flip the standard structure on its head, requiring an up-front cost to gain access to exclusive deals and opportunities. Consider the Tesco or Costco memberships, for instance, where members pay set monthly or annual fees for substantial discounts compared to shopping at their competitors.
One of the best (and easiest) methods for creating staunch brand loyalty is to offer the lowest prices on common goods or services. Consumers are often very willing to pay a regular flat rate for access to bulk or wholesale prices, especially if they need large product quantities.
A growing trend within loyalty programmes has been redeeming points for rewards that don't benefit the customer directly. Instead, some programmes now provide rewards that benefit social values and causes, like support for disadvantaged groups or environmental protections.
This aligns with the growing focus on organisations’ environmental, social, and corporate governance. Consumers want their business to go to companies that reflect their values.
Per a Sprout Social survey of consumers:
If that last stat seems like an outlier, it's because consumers know it isn't good enough to just talk the talk. But building a values-based loyalty programme shows you're walking it too.
This substantially impacts the emotional connections that are so essential to customer loyalty.
How much a loyalty programme costs to implement and maintain depends on three factors:
The cost of rewards should be factored into any membership fees and overall product pricing, and marketing for your programme will fall under that department’s broader budget. Per member, rewards and marketing costs should be fairly negligible, especially if the programme boosts sales.
So, the software platform represents the highest cost.
It also represents the biggest decision you’ll have to make when setting up your loyalty programme: do you build the platform yourself or purchase and customise a third party’s?
Developing software in-house (or via outsourcing) will give you the most control over its functionality and intellectual property (IP). But it also requires hiring internal development staff, reprioritising them away from existing projects, or partnering with an outsourced team.
Regardless of how you develop the platform, the biggest concern will be the return on your (significant) investment.
As with most software these days, the other route is to implement a platform built and maintained by a third-party vendor. The Software-as-a-Service model (SaaS) will generally require an initial implementation and customisation fee to help you get set up, followed by a subscription charge (e.g., monthly, yearly). Pricing may also be determined by the number of users with licensed accounts for the software.
If you decide to pursue third-party loyalty programme platforms, what features and functionality should you look for when evaluating your options?
Choosing which loyalty programme to implement is a significant decision, so you’ll want to ensure your top choice meets all these requirements and any unique specifications you might have.
To evaluate the success of your loyalty programme, you'll want to identify key metrics for which you can create reports within your platform. Five KPIs to monitor for all loyalty programmes include:
Our guide here covers everything you need to know to get started with building your loyalty programme. However, you should still customise yours beyond the basics to improve member participation and stand out from competitors. Consider strategies that will help attract new members, retain existing ones, and result in customers promoting their love for your programme.
Here are five tips to consider once your loyalty programme is in progress:
Today, loyalty programmes involve far more considerations than customers not losing their punch cards. The last few decades have seen major shifts—powered by technology platforms, new trends, customer engagement strategies, and more.
When you’re looking to build or improve your loyalty programme, you want to partner with the experts who have thrived through it all. For 50 years, Epsilon has been a global leader in outcome-based marketing, helping brands anticipate and adapt to their customers with measurable success.
Our expertise, technology solutions like PeopleCloud, and data-driven approach will have new members queuing up to join your loyalty programme in no time. So contact us today to get started!
Sources:
Academia. Review of the theoretical underpinnings of loyalty programs.
Accenture. Seeing Beyond the Loyalty Illusion.
Invesp. Customer Acquisition vs. Retention Costs.
Invesp. The Importance of Word Of Mouth Marketing – Statistics and Trends.
Kearney. Hacking human psychology to create true customer loyalty.
Nick J. F. Bombaij and Marnik G. Dekimpe. When do loyalty programs work? The moderating role of design, retailer-strategy, and country characteristics.
NY Times. Trading Stamps: A Long History.
Simply Psychology. Brain Reward System.
Sprout Social. #BrandsGetReal: Brands Creating Change in the Conscious Consumer Era.