How to build a loyalty program that stands the test of time
By Amy Rigby|5 min read|Updated Apr 19, 2024
Whether you’re drawn to the promise of 30-60% more sales or the possibility of boosting customer lifetime value by 6.3X, you've decided to look into building a loyalty program.
You’re in good company. The vast majority of brands have one, and most consumers already participate in at least one.
However, even the most popular brands have had customer reward schemes that failed (RIP, My Coke Rewards, eBay Bucks, and Uber Rewards). To help you avoid the same outcome, we’ll walk you through how to build a loyalty program that lasts, plus share tried-and-true tips from some of the most successful ones out there.
How loyalty programs work
Loyalty programs aim to turn one-time purchases into long-term customer relationships by rewarding shoppers for desired behaviors (namely, repeat purchases).
Examples include an airline's frequent flier program, which grants you miles for every flight you take, or the physical punch card from your local coffee shop, which rewards you with a free drink after you make a certain number of purchases.
Loyalty programs are effective at increasing sales, boosting customer retention, and improving customer lifetime value (CLV).
How to build a customer loyalty program
Developing a customer loyalty program is a major undertaking with the potential for massive ROI. It begins with understanding your target customers, including what motivates them and what rewards will keep them coming back for more. Balance that with your business needs, and you’ll create lifelong fans and bolster your bottom line.
Here’s how:
Step 1: Establish goals for the program
For maximum effectiveness, tie your loyalty program's goals to your departmental and company goals. The OKR (objectives and key results) framework can help make them concrete and measurable.
Objectives answer, “What do we want to achieve with this program?”
Key results answer, “What metrics will tell us we’re on the path to achieving our objectives?”
For example, if a SaaS company wants to get better at retaining customers, it might develop the following OKR for its loyalty program:
Objective: Increase customer retention
Key result 1: Increase NPS score to 45.
Key result 2: Reduce average customer service response time by 20%.
Key result 3: Reduce monthly customer churn rate from 5% to 3%.
Objectives are the compass that points you to the destination you want to reach. Key results are the roadmap that tells you how to get there. By using the OKR framework, you can tell when you're on the path to success.
Step 2: Gather data on your current customers
Once you know what you need the program to achieve, determine what your customers want. Open your POS and CRM software and dive into the analytics to find out:
Customer demographics
Frequent purchases
Favorite products
Average customer spend
Average customer lifetime value (CLV)
Additionally, talk to your sales and customer service teams. They have the most direct customer experience and have a wealth of information about:
What customers get excited about
What customers frequently ask for
Save this data for later when you choose rewards and incentives for your program (step 5).
Step 3: Decide how to structure your loyalty program
You can structure your program in various ways, depending on your goals.
Tiered loyalty programs have different levels of rewards that customers can unlock as their spending increases.
Points-based programs give shoppers points for desired behaviors (such as making purchases, following the brand on social media, or referring friends), which they can redeem for rewards.
Paid membership programs require a fee to join and grant access to exclusive member perks.
Cashback loyalty programs allow members to accrue enough points to earn a rebate on purchases.
Combination: You might decide to combine points and tiers, like Nordstrom’s The Nordy Club. Members earn points on purchases and can achieve different tiers (such as Ambassador & Icon Status) based on how many points they've accumulated.
Step 4: Optimize your customer service system
Never underestimate the power of one support interaction to win over a customer for life — or lose them. More than half of customers will do business elsewhere after one poor customer service experience.
To make sure your loyalty members receive excellent customer service:
Choose a CRM that lets you prioritize loyalty member support tickets over non-members.
Identify your top support specialists and dedicate this “A team” to loyalty members.
Offer multichannel support, where members have several options for contacting you (live chat, email, social media, or phone). Consider creating a dedicated member support phone number.
Priority support can even be one of your loyalty program’s exclusive perks. It’s one of the benefits that Hotel.com’s One Key offers.
Step 5: Pick the right rewards & incentives
You attract what you reward, so reward what you want to attract. If your goal is to increase average order value, for instance, incentivize higher spending by offering free shipping to members who reach a minimum of $50 per order.
Or, if you're a sports apparel brand that wants to increase signups from a specific customer segment (say, triathletes), you might incentivize enrollment by offering a discount code on triathlon gear.
However, brands should be cautious about creating a transactional relationship, which is not the same as creating loyalty. In fact, one report found that though most U.S. consumers still value discounts and points, they want incentives that go beyond bargains, including:
Early access to products
Personalized recommendations
Preferred communication channels
Being a part of a brand’s community
Additionally, aligning your rewards with brand values infuses your loyalty program with meaning. TOMS achieves this by giving loyalty members the option to donate their points to support mental health, which aligns with the Certified B Corp’s mission to improve lives.
When your loyalty program has a strong “why” behind it, customers are more likely to cut you some slack when your rewards change over time.
Step 6: Create a budget
Loyalty programs are an investment. Software development will likely be your biggest one-time cost, estimated to be anywhere from $30,000 to hire an agency to build a custom mobile app to $500,000 to develop loyalty software in-house (including things like developer recruitment and project management).
But then there’s also the cost of maintaining the technology, marketing and managing the program, supplying the rewards, and providing customer service to members.
Need a concrete guideline on how much to budget for ongoing costs?
One survey of 260 corporate respondents found that those with a loyalty program allocated roughly 28% of their marketing budget to customer loyalty program management and CRM in 2023.
Step 7: Make it easy (and enticing) to enroll
All that work you're pouring into your loyalty program is useless if customers have to jump hurdles to join. Keep your signup form minimal to improve conversion rates. You can always ask for more information later.
Sephora masters this by:
Making an irresistible offer: Sephora highlights what’s in it for the customer: points, free shipping, and rewards.
Asking for only one piece of information to sign up: The Beauty Insider’s initial form has a single field: email address.
But once you click "continue," it asks for additional information. The genius of this is that once a brand captures that email address, it can send follow-up emails to nudge the user to complete the form if they fail to do so on the first try.
Once you've simplified the enrollment process, be sure your customers know they can sign up. Place CTAs:
On your website. A banner at the top of your page advertising free shipping for loyalty members is a great way to increase signups.
At checkout. If it’s online, include a form where a shopper can sign up for your program right before they hit “purchase.” If it’s in-person, train cashiers to ask shoppers if they’d like to sign up for the rewards program to get instant savings on their purchase that day.
In marketing emails. When you launch your program, announce it to your email list. And post-launch, include regular reminders about the program in your marketing emails.
Step 8: Measure the success & progress of your loyalty program
You’ll likely need to frequently report your loyalty program’s progress to stakeholders. But remember: loyalty programs take time to provide ROI.
“A common mistake many companies make is trying to move too quickly,” writes Boston Consulting Group (BCG). “It’s fine to be patient, so long as the company has a plan and knows what it is trying to build.”
emind stakeholders that the true ROI of your loyalty program won't show itself within the first few months. By some accounts, it can take two years, especially for free programs.
BCG has developed a three-pronged approach to determining the value of a loyalty program over the long run:
Loyalty margin is how much your customers would have spent to obtain the rewards minus how much those rewards cost your company. You want high loyalty margins.
BCG gives the example of hotels: A "free" night costs the hotel only the price of cleaning the room (assuming no one was going to book it anyway), but for the customer, that hotel room might have cost them several hundred dollars to book.
Loyalty margin = Value of benefits to consumers - Cost of benefits to the program
Incremental share. It's easy for brands to think their loyalty programs are succeeding merely because members are spending more than non-members. But that could just be because your loyalty program attracts people who spend more anyway. The actual test, then, is, "Are loyalty program members spending more than they would have without the loyalty program?"
This is something that Boston Consulting Group calls "incremental share." It measures how much more customers spend because of the loyalty program. Here’s how to calculate it:
Incremental share = Total expenditure per member - Original expenditure per member
Program size is your total company revenue multiplied by the percentage of revenue generated by loyalty members.
"Once a program proves its profitability, generating a sustainable loyalty margin and a healthy incremental share," writes BCG, "the goal should be to increase its size and attract a larger portion of the company's customer base to contribute greater profitability and tie customers more closely to the company."
Program size = Total company revenue X Share of revenue generated by loyalty members (%)
Taken together, these three metrics paint a picture of your loyalty program's true value over time. But if you haven't yet reached the two-year mark, it's better to focus on immediate growth, such as the number of new monthly signups and total loyalty member count.
Step 9: Be mindful when changing rewards due to shifting business conditions
Things change: inflation may rise, the economy may tank, and incentives that were once exciting may become stale (or too pricey to be sustainable). It’s okay (and probably inevitable) to adjust your program’s rewards and structure to meet changing circumstances.
“Brands should expect some consumer frustration with program changes,” writes Mary Pilecki, VP and Principal Analyst at Forrester. But the good news? “Our research shows that this will likely subside as they become familiar with the new program.”
Pilecki adds that to mitigate consumer frustration, brands should:
Ask customers for feedback before making any changes. Customers are likely to be more understanding if you can honestly say that you made those changes based on their feedback.
When Starbucks revamped its loyalty program in 2016, its announcement explicitly stated that the change was “based on the #1 customer request of more Stars awarded based on what they buy at Starbucks, no matter how often they visit.” Sure, customers still complained, but they got over it. Today, Starbucks Rewards is one of the most popular loyalty programs.
Communicate about the changes before, during, and after. Program modifications shouldn't come as a surprise, and you shouldn't try to gloss over the truth. If you have to reduce rewards or make them more difficult to earn, explain why.
Also, be sure to throw in something extra, like priority support, so customers don't feel like it's all take and no give.
Be willing to budge a little. Even if you do everything possible to avoid ruffling feathers, some customers might still push back with valid requests. Listen to them. You may decide to roll back one piece of your change, but not all of it.
Build a loyalty program for the long haul
The loyalty program you launch will likely change. But by following the steps outlined above, you can boost its chances of lasting for decades to come.
Here are the main takeaways as you build your loyalty program:
Expect a significant upfront investment. Building a loyalty program isn’t cheap, but there’s a reason brands make the investment: It can pay off in the long run.
Be patient. Give your loyalty program enough time to really ramp up and start showing ROI. If that feels daunting, remember that successful programs make up a massive chunk of a company's revenue. More than half of Starbucks’ sales come from its loyalty members.
Be flexible. Expect to make tweaks to meet changing market conditions. As long as you tie your rewards to your brand values and maintain clear and consistent communication with customers, you can minimize consumer frustration.
At 40+ years old, AAdvantage, American Airlines' frequent flier program, is one of the oldest airline loyalty programs still in existence. Over the years, it's changed many times (when it first launched, it offered a reward of a free first-class ticket!) and will change yet again in 2024. But the key to its longevity? Rolling with the punches and remembering to prioritize members.
With the investment required to launch a loyalty program, you need to find every way to make those marketing dollars last. We can help.
Tremendous makes it easy to send monetary rewards to your loyalty members without paying more than the actual value of the digital gift cards you send. That's right: we're entirely free to use. In fact, if you buy enough gift cards from us, you can actually make money because we’ll share with you some of the revenue from our partnerships.
Try Tremendous for your loyalty program by signing up or taking a demo.
Published April 19, 2024
Updated April 25, 2024
