How to Create an Effective Customer Loyalty Program

loyalty programs

Most business owners know that it’s far easier—and cheaper—to keep a satisfied customer than to acquire a new one. And research confirms this, with studies showing that it costs anywhere from five to 10 times more to gain a new customer than it does to sell to an existing one.

And the benefits don’t end there: Research also shows that current customers on average spend 67 percent more than new customers.

Statistics like these underscore the importance of customer retention for any business. One of the most popular and effective ways to encourage repeat business is with a loyalty program that offers customers anything from free merchandise to coupons to exclusive access to new products or services.

The popularity of loyalty programs

Loyalty programs aren’t new. But they are becoming more and more popular.

The 2015 Colloquy Customer Loyalty Census shows that the average American household belongs to 29 loyalty programs. Yet they only actively participate in 12 programs at least once a year.

Clearly, loyalty programs work—if they’re set up and run the right way.

Four types of loyalty programs worth considering

There are many different loyalty programs to consider. Some of the more common ones include:

1. Points systems

How it works: Customers earn points based on how much they spend with you and later receive special coupons or discounts once they reach set point levels. (For example, a customer could receive two points for every dollar spent and receive a $5 coupon for every 100 points they accumulate.)

Commonly used by: Airlines and credit cards

Pros: You avoid having to discount your products or services and it incentivizes your very best customers the most.

Cons: Lacks the instant gratification of other programs and can be one of the more complicated kinds of programs to set up and administer. Customers may also need to be reminded of their points status. 

2. Punch card program

How it works: Customers receive a punch card; each time they make a certain number of purchases, they receive a punch that earns them a reward. (For instance, buy 10, get the 11th product or service for free.)

Commonly used by: Coffee shops and gift shops

Pros: Easy for customers to understand and simple and inexpensive for you to set up.

Cons: Customers have to remember to carry their cards. Also, they could fraudulently punch the card. It’s also hard for you to gather data on what or how much the customer purchased.

3. Discount program

How it works: Customers receive a card that entitles them to point-of-sale discounts on all or some products and/or services.

Commonly used by: Grocery stores

Pros: Inexpensive for you to set up and offers instant gratification for customers.

Cons: It often rewards infrequent shoppers and may cause customers to think your regular prices are inflated.

4. Cash back program

How it works: Customers earn money from prior purchases and are able to redeem it (usually in the form of a gift certificate) after a set amount of time.

Commonly used by: Retailers like Kohls

Pros: Gives customers a strong reason to revisit your business.

Cons: It can be complicated and expensive to administer and it often does not appeal to infrequent customers.

Also keep in mind that not all loyalty programs have to have monetary incentives. You can also reward customers with invitations to special events, complimentary services and more. Carefully consider what works best for your business, and don’t forget to ask your customers which programs they prefer—their answers might surprise you.

Five loyalty program tips

Once you decide which loyalty program (or programs) is best for your business, you’ll want to keep the following things in mind when it comes to setting up your program.

1. Structure it right. There’s a fine balance between offering a reward customers want and one that makes sense for your business. Think things through before you commit to anything—once you do, it won’t look good if you change the structure soon after.

2. Consider digital loyalty apps. Digital loyalty apps let you reward customers without cluttering up their wallets and let you gather data on their visits and purchasing habits. Just a few on the market include Perka, a virtual loyalty card; Spendgo, which tracks and grants reward points; and Foursquare, a location-based reward program that lets you offer deals and rewards and encourages customers to spread the word about your business on social media. Just make sure any collection of customer data is fully disclosed and consented to by the customer—failure to do so could create legal and customer relations problems.

3. Get the word out. Customers can’t take advantage of your program if you’re not telling them about it. So make sure to inform them through your e-newsletter, direct mail pieces, social media pages and in-store signage. Also train your employees to promote the program.

4. Keep it fresh. Keep customers engaged by changing things up on a regular basis. Some ideas include double points on purchases or referrals for a set amount of time, new incentives and special giveaways.

5. Encourage advocacy in addition to spending. Social media is one of the best ways to spread the word about your business. And research shows that 74 percent of consumers chose companies/brands based on the customer service experiences others share online. Encourage positive buzz about your business by rewarding social advocacy—the digital loyalty apps mentioned above can help you do that.

If you already have a great product or service, you probably already have a legion of loyal customers. A loyalty program can be the icing on the cake that helps you keep those customers coming back for more.

Find an Agent

Please enter the valid ZipCode