CUSTOMER LOYALTY

How To Create A Loyalty Program Strategy That Maximizes Revenue

by Emma Kimmerly

January 3, 2023


It’s great when you can acquire a new customer. But if you can turn a new customer into a loyal customer, you’ll unlock far more long-term revenue potential. According to a 2020 McKinsey survey on loyalty programs, members of paid loyalty programs are 60% more likely to spend more on your brand after they sign up.

But you can’t expect those numbers if you never put together a solid loyalty program strategy in the first place. How do you incentivize customers to buy from you, time and time again, and build long-lasting relationships? Let’s dive in and explore everything you need to know about building a loyalty program strategy.

Jump ahead:

What Do Loyalty Programs Do?

A lot of effort goes into making customers happy. Good customer support, a great unboxing experience, and a frictionless ordering process all factor into whether your customer loves you or not. Loyalty programs want to extend this further. The goal of customer loyalty isn’t just to make customers happy once. It’s to keep them so happy that they keep coming back to shop with you.

Why bother? According to a study by the Harvard Business Review, customer loyalty is one of the best business levers you can pull. A 5% increase in customer loyalty can increase profits by 25-90%, according to the Review. Loyalty programs aim to reduce churn so you can stop spending so much money on acquiring new customers…and start pleasing repeat customers.

 

What Are The Benefits Of A Customer Loyalty Program?

A customer loyalty program should increase the lifetime value of each new customer. Think about Starbucks loyalty cards, for example. Starbucks makes minimal profit on a one-time coffee buyer. But the repeat purchasers, the people who keep coming in every day for their cup of coffee, can add up to thousands of dollars of lifetime revenue for the company.

You don’t have to be Starbucks. But it does help to know which benefits of a customer loyalty program might suit you well:

  • Increased word-of-mouth marketing. A loyal customer is one who thinks about your brand more than the next customer. And if they think about you a lot, it’s more likely they’ll recommend you to friends. This gives you more access to the 13% of worldwide sales that happen free due to word-of-mouth marketing.
  • Reduced churn. “Churn” refers to the percentage of customers you lose over time. As with strokes on a golf course, you want this number as low as possible. Integrating a loyalty program strategy with your customer experience will incentivize customers to stay committed to newsletters, SMS lists, and loyalty programs with your company, reducing overall churn.
  • More revenue. Ultimately, it’s all about dollars and cents. And a loyalty program means that customers will learn to trust your experience over time. They’ll grow familiar with your ordering process and product quality. In turn, they’ll buy from you more often, boosting your revenue. That’s why the Amazons of the world invest heavily in signing people up for long-term memberships. Increased loyalty will always drive more revenue.
  • More predictability. Let’s say you boost the average CLV (customer lifetime value) of every new customer. What does this do to your company? It drives more predictable, consistent revenue. Rather than relying on holiday campaigns and seasonal spikes, customers who stick around can buy from you all year long.

 

Types Of Loyalty Rewards Programs

Even with all of the above, there are no one-size-fits-all loyalty rewards programs. You’ll have to pick one that suits your market the best. 

  • Points-based loyalty programs. Points-based programs are highly customizable, which is great if you need to incentivize customers to do different things. For example, you may offer a customer the equivalent points of a $50 purchase if they sign up to your newsletter. This can create synergy across your various marketing strategies.
  • Tiered loyalty programs. A tiered loyalty program should “gamify” your loyalty experience by enabling customers to unlock greater rewards as they go. This means that the more the customer buys from you, the more powerful the rewards get. The Nuuly example below shows an example of a program that intensifies in rewards the more the customer participates.

nuuly tiered loyalty program

  • Paid loyalty programs.  When in doubt, bribe. Legally, of course. Some customers are in it for the cold hard rewards, and paid loyalty programs are the simplest way to buy their loyalty. The Casper $200 Amazon Gift Card program below is a great example of a massive, up-front incentive intended to spur action.

casper paid loyalty programs

  • Value-based loyalty programs.  Not all customers are in it for themselves. Some simply want to know they’re making a difference in the world. You can create loyalty programs that reward third-party charities to incentivize more participation in your brand. A famous example is TOMS shoes, which donates proceeds of its product sales to mental health charities.

 

How to Create a Customer Loyalty Program

It’s one thing to be convinced a customer loyalty program is a great idea. How does it look in practice? We recently launched a loyalty platform for high-growth brands. You can find more details about our loyalty program here. But here are some of the essential steps to keep in mind if you feel stuck:

Step #1: Fit the rewards to your customers

Your market should determine what kind of loyalty program you choose. We explored different styles of loyalty programs above. Now it’s time to pick a style that suits your customers’ top priorities. 

Do they want to make a difference in the world? Enter the value-based loyalty program. Incentivize their loyalty with donations to a charity. Extra credit if you use a platform like Friendbuy, which will let customers view their lifetime rewards. This helps customers see the impact they’ve had on the world.

Are your customers thrifty? Points-based or paid loyalty programs give them the most obvious impact on their credit card statement. 

earning-events

What if you have customers who value their relationships with certain brands? Tiered loyalty rewards are great here, because they show your commitment to customers who go above and beyond for your brand. Tiered rewards can also be great for those thrifty customers who want to save, long-term.

Step #2: Get on a loyalty program platform

Tiered-based rewards, loyalty points, customer dashboard where they can view their totals. It all sounds like a lot. Outsource the hard work of your loyalty program to a platform designed expressly for enhancing the loyalty experience for your customers. 

For example, Friendbuy’s loyalty program gives you the infrastructure you need to:

  • Create unique earning events. You can choose specific behaviors (like making a purchase or signing up to your SMS list), as well as how many loyalty points a customer earns for that event. This gives you complete control over how you incentivize your customers.
  • Set up qualifiers. Let’s be honest: some customers might try to game the system. Friendbuy’s qualification features let you set up the standards you want to impose on which customers can use the program. 
  • Automate communication. If the goal of a loyalty program is to reduce churn with your company, then you’re going to pile up new customers in a hurry. After all, fewer of the older customers are leaving. Without automated communications, like push notifications, it would be too much to manage. But a good platform will let you build automated messaging to nudge your customers and alert them to new rewards.

Step #3: Announce your loyalty benefits

Once you have the infrastructure in place, it’s time to publicize what you’re about to do for customers. Why not rely on customers to find it themselves? Simply put, they’re too busy. According to Hubspot, the average customer is subscribed to about 16 customer loyalty programs. If you’re going to make an impact, you’ll also have to make a splash when you launch yours. 

spanx loyalty program

Take the example above, from Spanx. Notice that there’s a high-contrast button above everything else. Above the search bar, above the products, above the navigation tools. That button calls attention to a specific benefit ($20 off), enticing you to tap it and read on to find out how to get that benefit yourself.

Using a platform like Friendbuy, you won’t find it hard to announce your loyalty program to the world. But you do have to make a point of it. Highlight the rewards customers can gain, for example, as Spanx does. Don’t simply assume that customers will automatically sign up when you slap a button somewhere on your website. Come in with a bang to get people signed up. Once they’re in the system, the loyalty program will do the rest of the work.

 

Examples of Customer Loyalty Programs

To illustrate how it all works, we’ll highlight some great customer loyalty program examples you can refer to time and again. We’ll also get specific about what kinds of customer loyalty program incentives you can build to make yours as attractive as possible to new customers. 

Punch Cards 

A punch card is essentially a physical token of customer loyalty. With a Friendbuy loyalty program in place, you’ll give customers the digital version of a punch card, because they’ll be able to check their points and rewards on an account dashboard.

But no matter how you deliver the “punch card,” always remember how powerful those visual reminders are. It’s one thing if a customer knows that they earn points on every purchase they make from you. But if they occasionally get an email that says they’re 90% of the way to a $100 discount? That’s the kind of email that can spur action and bring your customers back in for another purchase.

Does it work? For the majority of us, the answer is a resounding yes. According to Hubspot, 52% of customers report making additional purchases at a store simply because they had a punch card in place.

Free Trials 

Free trials let you create a synergistic relationship between attracting new customers and retaining them. For example, you can set “signing up for a free trial” as the first trigger that creates loyalty points for your new customers. From that point, your customers can already join an enticing loyalty program before they’ve even run their credit card.

You can also use free trials in refer-a-friend programs. For example, a customer who refers a friend to sign up for a free trial might earn loyalty points toward their account. Again, it’s all about the synergy: you can use the benefits of a loyalty program to incentivize all sorts of behaviors that have an impact on attracting new customers as well.

Partner Programs 

Let’s think back to TOMS shoes for a moment. What makes a brand that generates so much loyalty from its customers? It’s the appeal of third-party benefits that go beyond the purchase you’re making. 

If you find that your customers aren’t as incentivized with loyalty points as you’d hoped, you can always link with partner programs to add an extra bit of value to your loyalty offerings. This adds a completely new dimension to your brand; customers who make one purchase may feel like they’re making two purchases in one action.

Referral Programs 

Referral programs and loyalty programs often go hand-in-hand. After all, a loyal customer is often a vocal customer. And the benefit of vocal customers? They might refer friends, creating word-of-mouth marketing that attracts new customers into your loyalty program. It’s a self-reinforcing cycle.

The simplest way to incorporate a referral program into a loyalty program is to give your customers points for every customer they refer. Using Friendbuy, for example, you can set a new purchase via referral to trigger loyalty points for the original referrer, also known as your brand’s “advocate.” 

naturebox loyalty program

The key to pulling this off? Reduce friction as much as possible. Some customers might be happy to turn into brand advocates, but they simply don’t have the time. Your job is to make it as time-efficient for them as possible to refer a friend. 

Take the above example from Nature Box. Notice there’s already a crafted SMS message or email ready to send. All the advocate has to do is select a friend and click a button. If you received potential loyalty points for a couple of taps on the phone, wouldn’t you be more likely to take action as well? That’s the idea here. Reducing friction turns loyal customers into potential brand advocates.

Points Systems 

A good points system is also “low-friction,” in a way. The simpler it is, the easier it will be for customers to figure out what kinds of rewards they’re looking at. The key here: be clear about exactly what people can earn. Put the benefits of your loyalty program front and center.

dollar shave club loyalty program

The above example from Dollar Shave Club is a testament to the power of making rewards clear. Both the headline and the elaboration are upfront about what both advocates and referred customers can expect to receive.

Whether you use a straightforward or tiered points system, always try to make the benefits of that system obvious. Put it in the headline of your landing page, as Dollar Shave Club did. Or add visuals to demonstrate how your tiered loyalty program works, as in this example:

cora loyalty program (1)

The key point to retain here: even loyal customers don’t want to have to search the fine print on your website. They might be loyal, but it doesn’t mean that they’re willing to do all of the work for you. Advertise your point systems upfront so the benefits of joining your loyalty program are apparent and obvious.

Loyalty Discounts 

One of the first benefits loyal customers will look for is simple: money off. This is the time-tested “get your tenth sub free” method of attracting customer loyalty. These discounts are especially reinforcing for people who know they’re going to buy from your shop anyway. If they’re confident they’ll place new orders in the future, then, they figure, they might as well earn discounts while they’re doing it.

But adding loyalty discounts for especially loyal customers doesn’t mean it’s a good time to rest on your laurels. Yes, a platform like Friendbuy can incorporate dashboards so customers can check up on their current discounts and watch how much progress they’re making in your loyalty program. But your discounts will be especially effective if they tie them into future purchases.

thinx referral credit

This referral credit email is a good example of that. In this case, a referral program created a $10 discount for the customer in question. But rather than simply turning this into a receipt, notice the “Shop Thinx” button on the bottom. 

The beauty of giving customers discounts is that you can essentially make sales pitches without making them feel like sales pitches. After all, who isn’t happy to see a discount arrive in the email inbox? It’s the next best thing to cash.

VIP Memberships 

Like the “tiered” program, VIP membership has the additional glitz and glamor of unique treatment. Some customers may even sign up for SMS lists and email newsletters if they feel the sense that they’ve “unlocked” potential discounts. They might not know what those discounts even are yet. They simply know that they like your brand enough that they want to be part of the exclusive club that gets special treatment.

The only question is: what does that treatment look like? There are a few ways you can steer your VIP membership:

  • Offer exclusive looks at new products. Even if you don’t add a discount to it, customers like the idea that they’re the first ones to see a new product. It gives them “first dibs,” in a way. And on your end, this gives you the opportunity to launch new campaigns to a ready-made list of engaged, loyal customers who are more likely to buy.
  • Create member-only discounts. These discounts don’t even have to be particularly steep. As long as they’re unique, they add to the appeal of having VIP membership as part of their engagement with your brand.

 

Measuring the Success of a Loyalty Program Strategy

How do you know when your loyalty program strategy is working? That’s just it. You don’t. Not unless you put some specific variables in place to measure the progress of that strategy. But it’s not enough to watch the bottom-line revenue and assume your loyalty program is working its magic. 

Ideally, your loyalty program strategy will show up in real terms, with noticeable improvements in a few areas. Here are a few key variables you can focus on to see if your loyalty program really is boosting loyalty:

Customer Enrollment Rate (CER)

This one is an intuitive one: CER, or customer enrollment rate, refers to how many customers sign up for your new loyalty program.

You can measure the rate by creating a clear customer journey with the option to sign up for your customer loyalty program. For instance, let’s say you have an existing customer journey mapped out now. Your customer discovers your website, shops around, and purchases a product. This triggers a confirmation email, shipping information, and everything else you do to encourage a great customer experience.

petflow referral program

It’s tempting to feel that “if it ain’t broke, don’t fix it” with these customer journeys. After all, if you’re earning revenue with a frictionless customer purchase process, you don’t want to throw a wrench in it.

But you can add post-purchase prompts, like the above, without getting in the way of a good customer experience. Whether you’re encouraging customers to sign up for a loyalty program or a referral program, a simple prompt after the purchase can make all the difference. To level up your customer enrollment rate, consider adding a button like this to every post-purchase experience. It doesn’t get in the way, but it could push your enrollment numbers to the next level.

Redemption Rate (RR)

The redemption rate is a statistic unique to loyalty programs. The question it answers is simple: when you create discounts or coupons, do people actually use them? This will help you calculate how much engagement your loyalty program is generating. A good enrollment rate is a strong indicator of engagement, for example. But a loyalty program with a low RR isn’t building long-term relationships with customers.

To calculate your RR, take the number of sales promotions/discounts you issued to customers. Take the number of times customers redeemed those discounts. (This should be easy, as unique codes help you identify who’s been redeeming them). Divide the redemptions by the discounts issued and multiply by 100 to get your percentage RR.

Customer Retention Rate (CRR)

Customer retention rate might not have much to do with your loyalty program explicitly, but it might say a lot about the success of your loyalty program. Your CRR is the rate of customers who remain customers after a certain time. For example, if you have two customers, but one of them drops off after two months, leaving you with one, you have a 50% CRR over those two months. 

CRR is a great variable because it tells you the results of your loyalty program’s overall engagement. The goal of a loyalty program isn’t to get customers to buy, after all. That might be a pleasant side effect. But the real goal of a loyalty program is to get customers to keep buying. If you have a great loyalty program and launch it during the holiday season, you’ll ideally have a high percentage of those customers returning to shop from you the following holiday season.

Repeat Purchase Rate (RPR)

While customer retention rate is a good indication as to whether your loyalty program is successful, you can still “zoom in” a bit. Enter the RPR, or repeat purchase rate. This is the percentage of your customers who make one initial purchase…but also stick around to make an additional purchase or more down the road.

Like CRR, this rate depends on the time selection you set as the criteria. For example, let’s say you set a time selection of three months. You’ll then take the number of customers who made multiple purchases within that selection and divide it by the customers who made any purchase.

When calculating RPR, the key is to select a time period that makes sense for evaluating your loyalty program. For example, you might weigh the three months after you integrate your loyalty program against the three months that came before it. This will give you a direct method of comparing how many customers stuck around for a second purchase after you put the loyalty program into place.

Negative Churn

You may have heard of “churn,” or the statistic that indicates how many customers have dropped off the radar over a period of time. A low churn rate means a high percentage of customers sticking around. But what about “negative” churn?

Negative churn is what happens when your monthly revenue from existing customers exceeds the revenue you lose due to cancellations and membership downgrades. In other words, negative churn is what happens when your loyalty program is generating more revenue from loyalty than your company is driving away. The goal isn’t simply to achieve negative churn. You can also measure how far your revenue goes in the green thanks to repeat purchases. The higher, the better. According to McKinsey, “lower net-revenue churn is correlated with higher growth.” In other words, if you can take that churn negatively, you should expect to see your company growing. 

Achieving negative churn might not be easy at first. But as you learn the tastes and desires of your customers and what drives them to keep buying from you, you can eventually create a captivating brand presence that captures and retains as many of its original customers as possible.

Building your loyalty program strategy from the ground up

Loyalty isn’t something you can just happen into. It’s something that you have to build. A good loyalty program strategy will utilize steps and promotional tactics like we’ve explored here, giving your customers a solid idea of the benefits they’ll get if they keep shopping with you. Don’t expect it to change everything for your company overnight. But do expect it to change everything.