What is a Loyalty Program: Types and Different Strategies
How does a loyalty program work?
What a Loyalty Program Is and How It Works
A loyalty program has two sides: for the customer, it’s about how to earn points and get rewards; for the business, it’s about using what we learn about customers to send them better, more targeted marketing to lift conversions and retention.
Loyalty programs come in many forms, from simple punch cards to sophisticated tiered memberships, each aimed at encouraging repeat business. However, crafting an effective loyalty program goes beyond just selecting a model – it’s about choosing a strategy that resonates with both the business’s goals and its customers' desires.
We’ll unpack the essentials of loyalty programs, covering different types of programs, benefits, drawbacks, common pitfalls, and strategies for assessing program effectiveness. Let’s get started.
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What is a Loyalty Program?
A loyalty program is a structured marketing strategy that rewards customers for repeat purchases and engagement – usually with points, discounts, cashback, or exclusive perks – in exchange for the customer data a business uses to personalize offers and improve retention. Customers get savings and recognition; companies gain insight into who their best buyers are and what keeps them coming back.
Structure of a Loyalty Program
At its core, a loyalty program consists of two main elements: the external and the internal components.
External Component
The external aspect details the explicit benefits to the customer, outlining the basic rules for earning and redeeming rewards. For example, a customer might receive a 15% discount on merchandise once they have spent a specified amount. Retailers offer benefits like cashback, bonus points, and discounts on selected products as incentives for customers to share their personal information by filling out a form or registering in an app. From a business perspective, this aspect is considered an investment to motivate customers to share their personal data.
Internal Component
The internal component is centered on the business’s strategic use of the collected data for targeted marketing. Once a customer’s identity and purchase history are established, the company can monitor their shopping behavior. Marketers use this data to predict which offers are most likely to appeal to the customer, identify optimal timings for campaigns, and select the most appropriate products to recommend. This approach enables the delivery of personalized offers at the most opportune moments, aiming to secure repeat business, build a loyal customer base, and enhance profitability. For example, brands can email loyalty members who haven’t made a purchase in a month with a targeted offer to re-engage them:
Key Benefits of a Loyalty Program
The benefits of loyalty programs are extensive for both businesses and customers, but five standout advantages are particularly notable:
1. Attracts New Customers
Loyalty programs act as a magnet for new customers. They tap into the power of word-of-mouth marketing as satisfied customers naturally share their experiences, effectively drawing in a new, interested audience.
For instance, some brands employ a referral strategy where existing loyalty program members earn points for bringing in new members, rewarding both the referrer and the new customer upon a first purchase. This approach not only attracts new clients but also strengthens the bond with existing ones.
2. Enhances Customer Retention and Loyalty
Being part of a loyalty program means customers regularly receive benefits such as increased cashback, personalized offers, welcome bonuses, points, and discounts. These perks enrich the customer’s experience with the brand, fostering a stronger relationship and boosting repeat sales.
3. De-anonymizes the Customer
By agreeing to participate in a loyalty program, customers provide access to their personal information. This allows companies to learn about their preferences, purchase history, average spending, and contact details. This valuable data can be used for targeted newsletters, special offers, calculating Lifetime Value (LTV), and making predictions.
4. Increases the Average Spend
Loyalty programs encourage customers to spend more. By setting thresholds for discounts or offering points on purchases, customers are often persuaded to add just one more item to their cart. This strategy effectively raises the average purchase value. Loyalty program members also earn points with each purchase, which can be redeemed on future orders, further incentivizing higher spending.
5. Facilitates Data-Driven Decision Making
Loyalty programs provide businesses with a rich dataset about their customers' buying habits and preferences – this information is crucial for tailoring marketing strategies, optimizing product offerings, and improving overall service. With detailed insights into consumer behavior, companies can make informed decisions that align with their customers' needs and expectations, leading to better outcomes for both the business and its clientele.
Drawbacks of Having a Loyalty Program
While loyalty programs come with a lot of benefits and are effective for nurturing customer relationships and driving repeat business, they also come with their own set of challenges. Below are five notable drawbacks that businesses often face:
Costly Customer Retention
Offering widespread discounts to all customers can be a costly component of loyalty programs. Businesses generate revenue from the repeat purchases of customers who are motivated by personalized offers. However, when businesses give away promotions and bonuses at the cost of their profit margins, there’s a risk of financial loss without a well-executed targeted marketing strategy in the background.
Primarily a Long-term Commitment
Building a successful loyalty program is a process that doesn’t happen overnight. It involves testing hypotheses and may require several iterations to get right. The journey from pilot to full launch can easily span several months – making it essential for businesses to view loyalty programs as a long-term investment, demanding both time and patience to yield results.
Requires Substantial Investment in Technology and Expertise
Before even launching, a loyalty program demands robust infrastructure and a skilled specialist to manage the mechanics of the process. Brands without one often bring in a retention marketing agency. An employee tasked with launching a loyalty program must be capable of implementing it across different customer segments and communication channels, choosing the right platform for the job, such as Smile.io, Yotpo, or Maestra, taking responsibility for the program’s key performance metrics. This necessitates an investment not only in technology but also in hiring or training staff with the necessary expertise to manage the program effectively.
The right infrastructure also depends on where most of the customer interaction happens. For brick-and-mortar retailers, loyalty often runs through the point of sale itself – POS-integrated systems like FTx POS handle in-store rewards capture, barcode scanning, and age-verification at checkout, then sync the data with online channels and marketing tools.
Six Types of Loyalty Programs
There are many different types of loyalty programs – here are six of the most prevalent ones across various industries:
| Type | How it works | Example | Best for |
|---|---|---|---|
| Points-based | Earn points per purchase, redeem for discounts or perks | Ulta Ultamate Rewards | Frequent, low-value purchases |
| Tiered | Status levels unlock progressively better rewards | Sephora Beauty Insider | Brands where status drives spend |
| Subscription | Pay a recurring fee for ongoing benefits | Amazon Prime | Predictable, repeat demand |
| Cashback | Get a percentage of spend back as credit | REI Co-op Member Reward | Simple, universal value |
| Partnership | Earn and redeem across multiple brands | Amex Membership Rewards | Airlines, banks, coalitions |
| Hybrid | Combine several mechanics in one program | Starbucks Rewards | Diverse customer bases |
1. Points-Based Loyalty Programs
Perhaps the most common type, points-based programs allow customers to accumulate points with each purchase, which can then be redeemed for rewards, discounts, or exclusive offers. This system encourages repeat purchases by directly linking spending to rewards, making it particularly effective for businesses with frequent, short-term purchases. Example: Ulta Beauty’s Ultamate Rewards gives members one point per dollar spent, and the points turn into discounts on later purchases.
2. Tiered Rewards Programs
Tiered rewards create a hierarchy of loyalty levels, with each tier offering progressively better rewards. Customers advance through tiers based on their spending or activity level, motivating them to engage more to unlock exclusive benefits. This model is great for businesses looking to differentiate rewards and create a sense of achievement among customers. Example: Sephora’s Beauty Insider moves shoppers from Insider to VIB to Rouge as their yearly spending grows, and each level unlocks better perks and earlier access to sales events.
3. Subscription-Based Loyalty Programs
Under a subscription model, customers pay a recurring fee to access special benefits, such as free shipping, members-only sales, or premium content. This approach guarantees a consistent customer base and revenue stream, suitable for companies offering regular services or products. Example: Amazon Prime members pay a monthly or annual fee for free shipping, streaming, and members-only deals. Costco’s membership works the same way, with an upfront fee traded for ongoing savings.
4. Cashback Loyalty Programs
Cashback programs offer customers a percentage of their purchase back in the form of cash rewards, which can either be used towards future purchases or withdrawn. This straightforward value proposition is easy for customers to understand and appreciate, making it a popular choice for both businesses and consumers. Example: REI’s Co-op membership returns an estimated 10% of members’ eligible purchases each year as a member reward, so the value is easy to see.
5. Partnership Programs
Partnership (or coalition) loyalty programs unite several businesses under one loyalty scheme, allowing customers to earn and spend rewards across different brands. This expands the program’s attractiveness by offering a wider range of redemption options and encourages cross-brand exploration. This is a common loyalty program strategy for airlines, where partners can include banks, hotels and car rental services. Example: American Express Membership Rewards lets members earn points on one card and transfer them to airline and hotel partners such as Delta and Marriott.
6. Hybrid Loyalty Programs
Hybrid programs combine elements from different types of loyalty schemes to create a more flexible and engaging customer experience. For example, a hybrid program might offer tiered rewards for different levels of spending while also providing points for each purchase that can be redeemed for discounts or gifts. This type of program is tailored to meet diverse customer preferences and can adapt to various business models, making it highly effective for engaging a wide customer base. Example: Starbucks Rewards combines points (Stars) with app ordering, personalized challenges, and bonus-Star promotions.
Customer Loyalty Programs in Retail
In retail, a loyalty program has to work the same way in the store and on the website. The key is identifying the customer at checkout by phone number, app, or loyalty card, so every in-store and online purchase is tied to one profile. That single view of the shopper lets a retailer send the right offer later, whether the next visit happens in a store or online.
Most well-known retail programs blend the types above. Sephora’s Beauty Insider and Ulta’s Ultamate Rewards pair points with tiers, REI returns part of what members spend once a year, and Starbucks Rewards adds challenges and mobile ordering on top of points. In each of them, the same rewards and balances follow the customer across every channel.
How to Evaluate a Loyalty Program’s Effectiveness
Understanding the success and efficiency of a loyalty program is essential for optimizing customer engagement and maximizing return on investment – here are some critical metrics that you can use to evaluate your loyalty program:
Engagement Level
This measures how actively customers participate in the loyalty program. To gauge engagement, consider:
- The growth rate in the number of loyalty program members.
- Retention trends, seen through repeat purchases and overall customer activity.
- Traffic in physical stores and online.
Turnover vs. Bonus Points Balance
This metric evaluates how the balance of points affects a member’s purchasing engagement. A high balance of unredeemed points could signal a problem, indicating that the program may not be as engaging or rewarding as intended. To calculate this, you need to collect data on the following:
- The average discount provided to loyalty program members.
- Trends in earning and redeeming points.
- The total points balance across all members.
By analyzing these figures, businesses can understand how effectively the points system encourages purchases and engagement within the loyalty program.
Creating reports based on this data can be quite complex, but using software like Maestra can simplify the data collection and analysis process.
Average Purchase Value or Average Order Value (AOV)
The impact of the loyalty program on the average purchase value directly reflects its effectiveness. This involves tracking the average purchase amount, revenue per item, and the number of items per transaction over time. Tracking these variables can reveal if the loyalty program successfully encourages higher spending, thereby increasing the company’s revenue.
Though these metrics provide a comprehensive overview of a loyalty program’s effectiveness, deeper analysis might be necessary for your specific marketing objectives. A detailed report can be tailored to the marketer’s needs, focusing on particular areas of interest or concern within the loyalty program’s performance.
Loyalty Programs in Maestra
Implementing a loyalty program in Maestra is designed to be a straightforward and customizable process, akin to using a building block system. Initially, users select the kind of promotion they wish to run – either discount-based or points-based. These promotions can be further categorized into groups, each with its specific set of conditions.
Promotion setup page in Maestra’s interface
The promotion settings are divided into several key sections:
- Start and end date, identifier, and description: These basic details outline the timeframe and specifics of the promotion.
- Customer segment: This specifies the group of customers eligible for the promotion.
- Availability conditions: This includes the dates and times the promotion is active. For example, a promotion might run for a month but only be available every Wednesday until 1:00 PM.
- Eligible locations: This defines the touchpoints where the promotion is valid, such as offline only, through the mobile app, or in specific stores.
- Order composition or specific products: This details the items or order values the promotion applies to, like orders exceeding a certain amount.
- Interaction with other promotions: This setting allows you to choose how the offer combines with or excludes other promotions.
In points-based promotions, the setup mirrors that of discount promotions but includes additional parameters for the accrual and spending of points. Additional conditions are specified, such as the percentage of the purchase amount that will be converted into points on the customer’s account.
Configured promotions can be combined, applied sequentially, or a promotion can be excluded in favor of ones that are more advantageous to the customer or the store:
Mistakes to Avoid When Launching a Loyalty Program
When launching a loyalty program, it’s crucial to navigate around common pitfalls that can hinder its success. These mistakes often fall into organizational, technical, and operational categories. Here’s how to identify and avoid them:
Organizational Challenges
These tend to stem from a lack of understanding of the loyalty program’s processes and structure:
- Focusing too heavily on the customer facing aspects such as how much discount to offer, without considering the internal aspects such as how to track average order value (AOV).
- Lacking an employee skilled in targeted marketing, which may result in the program failing to hit its mark.
- Lack of clear objectives and goals for the program makes it difficult to gauge its success or ROI.
- Not having precise tools and metrics for evaluating program outcomes can leave its impact ambiguous.
One significant benefit of Maestra’s loyalty program is its omnichannel capability. However, in certain companies, online and offline channels are handled by separate teams, which makes it harder to connect them. To address this challenge, a dedicated specialist is necessary to analyze data and manage the loyalty program comprehensively, ensuring its effectiveness across all channels.
Technical Challenges
Opting for overly complex software can drain resources in establishing communication and IT infrastructure. Companies may encounter “integration chaos” if loyalty programs, email campaigns, website product recommendations, and mobile apps operate on separate, unlinked systems. A more efficient approach centers around a single marketing system (such as Maestra), consolidating all information into a single, deduplicated repository.
Operational Challenges
These can include:
- Lack of a campaign plan: Jumping into a loyalty program without a clear, iterative campaign strategy and without regularly comparing actual outcomes against projected outcomes can lead to misaligned efforts.
- Prioritizing intuition over insights: Basing marketing decisions on gut feelings rather than data-driven insights can result in overlooking what truly engages and retains customers.
- Being slow to adapt: A loyalty program that doesn’t quickly respond to feedback and adjust strategies accordingly risks becoming outdated and ineffective.
Key Takeaways
A loyalty program is a marketing tool that provides you with a deeper understanding of your audience, their behaviors, and, based on accumulated data, enables you to craft personalized offers for customers.
The anatomy of a successful loyalty program includes both cost-related aspects (such as providing discounts and bonuses to gather insights about customers) and revenue-generating components (like utilizing those insights for targeted marketing to encourage further purchases). In an effective loyalty program, the revenue generated from personalized promotions exceeds the costs associated with gathering customer data.
Evaluating the success of a loyalty program requires ongoing monitoring. It’s essential to analyze the level of engagement with the program, how the balance of points influences shopping behavior, and changes in the average transaction value.
Frequently Asked Questions
- The six most common types are points-based (earn points per purchase, like Ulta Ultamate Rewards), tiered (status levels that unlock better perks, like Sephora Beauty Insider), subscription or paid (a recurring fee for benefits, like Amazon Prime), cashback (a share of spend back, like the REI Co-op Member Reward), partnership or coalition (earn and redeem across brands, like American Express Membership Rewards), and hybrid programs that combine several mechanics, like Starbucks Rewards.
- A retail loyalty program rewards shoppers for repeat purchases in the store and online. It identifies customers at checkout by phone number, app, or loyalty card and links every transaction to one profile, so the retailer recognizes the same shopper in both channels and can tailor offers. Ulta Ultamate Rewards, Sephora Beauty Insider, and Starbucks Rewards are well-known retail examples.
- For most retail brands, a hybrid of points and tiers: points reward every purchase, and tiers give the best customers a reason to spend more. Points and cashback programs suit frequent, lower-value purchases, tiered programs suit brands where status drives spending, and subscription programs fit predictable, repeat demand. To check which one works for a given store, track the metrics in how to measure customer loyalty.
- The clearest gains show up among members who redeem rewards. At Urban Armor Gear, loyalty members who redeem bring in 2× more revenue per customer than those who don’t. Jewellerybox doubled the share of buyers who redeem points, from 1.7% to 3.3%, after putting reminders in front of every point holder.
- Points and tiers, rewards that customers can redeem at checkout, referrals, and a way to show point balances in email, SMS, and on site. Maestra keeps loyalty in the same customer profile as email, SMS, and on-site personalization, and a Forward Deployed Marketer sets the program up and runs it. “Our revamped loyalty program is crystal clear now,” says Nick Salisbury, E-commerce Director at Urban Armor Gear.
- It identifies customers at checkout by phone number, app, or loyalty card and adds every in-store purchase to the same profile as online orders. The brand can then follow up by email, SMS, or push after a store visit. Look for POS integration, barcode or QR scanning, and digital wallet passes. Ulta Ultamate Rewards is a familiar example: members earn and redeem the same points in stores and online.
- Yes. Urban Armor Gear replaced Klaviyo, Yotpo Loyalty, and Frosmo with Maestra and cut its marketing stack costs by 64%, about $100,000 a year. When loyalty sits on the same platform as email and on-site personalization, tiers, points, and rewards are available to every message without syncing data between tools. Standalone tools may still offer niche features, such as review collection in Yotpo.
- Two to seven weeks on Maestra, with the old loyalty tool running until the new program goes live. Migration is included, and a Forward Deployed Marketer does the setup. “We didn’t have to lift a finger to get the entire loyalty program set up,” says Nathan Amery, Head of Digital Marketing at Jewellerybox.
- For Shopify brands that want more than a points app, a less obvious option is Maestra: loyalty sits next to email, SMS, and on-site personalization, and a Forward Deployed Marketer runs the program. Standalone apps cover basic points and rewards but keep loyalty data apart from the rest of the marketing. Urban Armor Gear moved from a Klaviyo and Yotpo stack to Maestra and saves about $100,000 a year.
- It gives members a reason to act now, and the effect shows up in sales. I Love Linen doubled cashback points for one day during a recurring sale, and that Double Points Day became the strongest sales day of the month, with sales up 31% and orders up 19% against the sale-period baseline.