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How to revamp your customer loyalty program

illustration of a suitcase on the floor next to cardboard shipping boxes and a guitar.

Business owner or consumer, you probably already belong to a customer loyalty program. Today, nearly three-quarters of U.S. adults report being a member of at least one rewards program.

But it’s easy enough to compel customers to join a program, actually getting them to participate is another. 

This is where the majority of customer loyalty programs are currently falling short.

Why? Because offering discounts is not the same as offering value. Customer loyalty is a fickle beast, and occasionally lobbing a discount in their direction isn’t going to turn them into a lifetime customer.

Successful customer loyalty programs are those that nurture customers to change their shopping behavior by offering multiple opportunities for brand engagement. By emphasizing touchpoints that build brand affinity and customer satisfaction, the very best loyalty programs have made memorable customer experiences the core of their value proposition. 

In this post, we’re going to cover:

  • How customer loyalty programs work
  • Different types of rewards programs
  • Important loyalty program statistics
  • Why customer loyalty programs fail
  • Top loyalty program examples
  • How to design a winning customer loyalty program

How do customer loyalty programs work?

The goal of a customer loyalty program is simple; to increase customer retention rates by persuading customers to buy from one brand instead of competitors. 

They do this by rewarding customers according to how much they engage or spend with a brand. The more they buy, the more rewards or perks they’ll earn. 

Visa or Mastercard-backed credit cards that allow consumers to accrue points is one such model that’s gained widespread popularity, especially in the era of frequent flyer miles.

When executed well, customer loyalty programs help to perpetuate a closed loop of escalating brand loyalty. The more that customers spend and redeem, the more customer satisfaction increases. This in turn encourages future purchases in pursuit of even bigger rewards – and so on it goes.

The mechanisms that brands use to encourage further spending and interactions depend on the type of program they’re using, as well as the metrics they’re hoping to improve, such as:

  • Boosting word-of-mouth marketing
  • Increasing customer lifetime value
  • Raising Average Order Volumes (AOV)
  • Growing overall sales
  • Driving differentiation from competitors

Types of rewards programs

  • Points programs
  • Tiered programs
  • Referral programs
  • Paid programs
  • Subscription programs
  • Value programs
  • Community programs

Are customer loyalty programs still fit for purpose?

Rewards programs have fast become a cornerstone of modern retail, with everyone from major department stores to small businesses choosing to launch their own offering. 

But you don’t have to look far to find numerous examples of brands who’ve caused controversy with their loyalty programs  – or chose to shelve them altogether.

Target, eBay, and Subway are just a few well-known examples of brands that have jettisoned their customer loyalty programs over the years. Others are grappling to ensure that programs stay relevant as value perceptions change. 

As we’ll explore further in this post, Starbucks has previously raised the ire of its customers with clumsy program adjustments. Even Sephora’s Beauty Insider, a popular case study for successful loyalty programs, isn’t immune to this trend. In 2020, the cosmetics giant made some pretty sizeable changes to their rewards program – for the third time in just four years.

This begs an important question: do loyalty programs still work in such a competitive retail environment?

Let’s take a look.

5 Loyalty program stats to pay attention to 

According to Accenture, more than 90% of companies today have some kind of customer loyalty program. It’s a high figure that reflects consumers’ growing interest in joining rewards programs; Yotpo’s State of Brand Loyalty 2021 survey found that almost 68% of respondents wanted to join a VIP or loyalty program, up from 59% in 2019.

But the picture isn’t all rosy. Surveys also reveal a lot of dissatisfaction in how loyalty programs are run:

  • Only 18% of consumers engage with every loyalty program they belong to.
  • Just 22% of members say they are very satisfied with the personalization they receive in loyalty programs.
  • 29% of customers wish that the rewards on offer were more interesting.

What this tells us is that despite consumers being more open to joining rewards programs than ever before, many programs are offering a lackluster experience

4 reasons why customer loyalty programs fail

So, why are rewards programs no longer hitting the mark? 

The truth is that many brands are operating out of a very outdated playbook. Traditional sales-driven loyalty programs that revolve around discounts and cashback no longer meet modern expectations for unique customer experiences.

When loyalty programs fail to thrive, it’s usually because they’re structured in a way that prevents them from recognizing the inherent value of their customers.  

1. Adopting a ‘punch card’ mentality

Ah, the humble punch card. These were among the first loyalty programs to exist before digitization made more sophisticated systems possible. I’m willing to bet that most of us have at least one ‘buy 9 and get your 10th coffee free!” loyalty card sitting on our wallets.

But this approach has a major flaw. Once the clock has reset to zero, your customer has no incentive to keep providing you with repeat business. 

This is what we call the punch card mentality; when customer loyalty programs fail to pull customers into longer-term lifecycles that promote brand loyalty. 

Even when programs ditch physical cards in favor of phone numbers or emails, this frame of mind isn’t always left behind.

screenshot of ASOS’s A-list rewards loyalty program

ASOS’ A-list rewards program is one such loyalty system that fell foul of this. Its value exchange rested on customers earning and redeeming points in return for ASOS vouchers, a process that quickly became dull and repetitive. The apparel brand chose to pull the plug in 2018, citing ‘a lack of engagement’ from the majority of its members.

This is a prime example of how punch card-style loyalty programs encourage ‘earn and burn’ shopping behaviors, providing little long-term value to either the brand or the customer.

2. Leaving your customers behind with program changes

It’s inevitable that retailers need to tweak their loyalty programs in response to changes in customer behavior or new product offerings. But the internet (especially Twitter) is littered with examples of brands who damaged the customer experience by making drastic changes to their rewards programs. Starbucks caused controversy in 2016 when it inadvertently left ‘normal’ coffee drinkers out in the cold compared with their frappucino-ordering counterparts. Where customers had previously earned the same number of ‘stars’ per order, this was changed to offer bigger rewards to those buying more expensive beverages, rather than those who demonstrated brand loyalty through frequent visits.

tweets criticizing Starbucks’ rewards program

This wasn’t the first time the coffee giant failed to get customers on board with loyalty program changes. Loyal repeat customers felt betrayed by their 2019 decision to remove its two-tier loyalty system – in many ways a reversal of the changes they’d made in 2016 to reward bigger spenders.

From Starbucks’ perspective, these changes were logical; they wanted to lower the cost of maintaining the program and make it simpler for customers to earn rewards. But the message is clear; making seismic changes to your customer loyalty program adds a huge amount of friction to the customer experience.

3. Creating ‘haves’ and ‘have-nots’

There’s an often-quoted statistic that 20% of Americans own 80% of the country’s wealth. The same can be said of many customer loyalty programs. 

Tiered loyalty programs are very popular for a reason. The model makes it easy to segment customers according to their value to your business – and to reward them accordingly. 

But there’s a big caveat; left unchecked, tiered programs can end up perpetuating a feudal system where a minority of customers reap all the perks, while the rest find the bar too high to participate.

A successful loyalty program will entice customers to purchase through the prospect of gaining access to bigger and better rewards. But if loyalty members are offered too few opportunities or too high a threshold to redeem rewards, their motivation will plummet. 

The result is that higher tiers remain active, and the much larger bottom tier suffers from low customer engagement and repeat purchase rates.

A 2016 analysis of tiered programs found that while earning rewards did encourage customers to spend more, it had the opposite effect on customers who struggled to qualify for perks. For those who couldn’t access higher membership tiers, loyalty programs actually created a negative perception towards a brand and resulted in higher customer churn.

If ongoing, lower-level support of your brand fails to reward customers with accrued benefits, your loyalty program could counterproductive. While it’s important to reward your most loyal customers, you still want to engage new customers to turn them into brand advocates. 

In short, if there’s no low-hanging fruit to give customers a sense of momentum, they’re likely to find another program that will.

4. Ignoring omnichannel engagement opportunities

If your loyalty rewards program remains stubbornly transaction-driven, you’re missing out on a huge number of opportunities to drive brand engagement/

In today’s omnichannel environment, customers can add value to your business in a myriad of ways. The best customer loyalty programs are those that recognize how sales are only one dimension of the customer experience. 

All of the touchpoints that lead up to the moment of purchasing – from liking you on social media to signing up to your mailing list – serve to build customer loyalty. By making an effort to reward these interactions with loyalty points or VIP access to new products, you can foster a much stronger emotional connection with your brand.

In sum, omnichannel loyalty programs allow you to shape behavior in a way that increases customer lifetime value to your brand. It strengthens your marketing strategy by building a customer base of loyal brand advocates. In short, it’s next-gen influencer marketing – with a lot less hassle.

How to create a customer loyalty program that customers want to use (with top loyalty program examples)

1. Put personalized loyalty rewards at the center

Consumers never join a loyalty program with the intention of not using it, but this is a very common scenario after the first purchase is made. When rewards don’t feel exciting or relevant to your customer, they’re unlikely to want to engage. In fact, an offering that’s clearly not addressing a customer’s needs is likely to provoke a negative response.

Your loyalty program should be designed with one person in mind; your customer – and that customer alone. 

By integrating personalization into your loyalty program, customers will feel much more invested in participating because rewards have been tailored to their habits and preferences, rather than just whatever product or discount the brand is happy to give away en-masse.

screenshot of Target’s circle benefits program

Example: Target

Target has long been known as a master of personalized experiences, using robust analysis of customer data to predict which products customers will be interested in buying next. 

It’s taken this a step further in its Target Circle loyalty program, where customers gain access to tailor-made discounts on the product categories they’re most interested in. This is in addition to standard offerings like early access to events and storewide sales and birthday rewards.

2. Make your loyalty program experience-focused, not transaction-focused

As we explored earlier, programs that only allow customers to learn points through sales are now too inflexible to be appealing to the majority of customers. 

Furthermore, retention marketers who turn rewards programs into a numbers game make it difficult to forge an emotional connection with customers. If a program is perceived as too ‘difficult’ or doesn’t excite customers, they’re unlikely to invest in it.

By aligning your loyalty program more closely with your brand values, you can make the experience of participating in your program much more engaging for customers. 

Example: North Face

North Face’s XPLR Pass program has set a new standard in experiential loyalty programs by incentivizing customers to engage more with the great outdoors – putting one of its core brand values into action.

Via their mobile app, customers can accrue loyalty points in unique and on-brand ways, such as by ‘checking in’ at national parks or testing North Face apparel out in the field. This idea of getting outside and exploring underlies the entire program, even offering customers the opportunity to redeem points on hiking and climbing trips that put their North Face gear to the test.

By using gamification principles to add a more interactive element to their program, North Face has given its customers access to an ongoing experience that’s rewarding in more ways than one.

3. Don’t underestimate the value of paid loyalty programs

Many brands worry that offering a paid customer loyalty program will raise eyebrows. As consumers expect more seamless experiences both in ecommerce and offline, it’s easy to assume that customers will balk at the suggestion of paying extra for enhanced service. 

But this doesn’t hold up in the stats. According to a Mckinsey study, consumers are 60% more likely to spend money with a brand after joining a paid loyalty program, compared with just 30% at a free program. Furthermore, paid loyalty programs open the door to offering a much broader variety of rewards and experiences that might be not economical under a free system. This includes rapid shipping methods or luxury experiences like unboxings.

screenshot of Amazon Prime’s membership levels

Example: Amazon Prime

Amazon Prime broke new ground in 2005 by doing away with points systems in favor of something far simpler; membership pricing. 

It popularized the notion that if you wanted to access free shipping and exclusive discounts, you should have the option to pay for it.

The genius of this strategy lies in the fact that customers are far more likely to take advantage of privileges they’re already paying for. So, despite Prime costing the ecommerce giant an eye-watering amount in shipping fees, they easily claw this back through their $119 annual membership fee.

ASOS Premier logo

Example: ASOS Premier 

Remember the discontinued ASOS rewards program we mentioned earlier? The brand learned from this mistake by putting resources into marketing their paid delivery program ASOS Premier, which gives customers access to express shipping through their online store for a whole year.

The value exchange in this program is much more evident to customers than a cashback-based program, as customers can easily calculate how many orders they need to place in order to have the program pay for itself.

4. Understand your customer

You shouldn’t be designing a customer loyalty program for your brand if you don’t have a good grasp of the above. This is because copy-pasting a generic points program or tiered loyalty program model is unlikely to strike a chord with your customers.

Why? If the mechanics of your program aren’t aligned with the shopping behaviors of key customer segments, your value proposition is going to be much weaker.

Example: Hugo Boss

screenshot of Hugo Boss personal invitation to the rewards program

Hugo Boss is a great example of a rewards program that truly understands its customer base. 

At first glance, it doesn’t really look like a loyalty program at all. The Hugo Boss Experience is free to sign up for and has no loyalty tiers, allowing all members to access its perks from day one. This includes a free tailoring service, private styling appointments, and door-to-door uber delivery.

At first glance, this might look like a strange system. How can you incentivize customers to spend more when they already have access to great rewards? 

As a luxury fashion brand, Hugo Boss understands that the clientele most interested in these services already have high levels of brand loyalty, allowing them to maintain a high-end image while increasing customer satisfaction.

A new era of experience-led loyalty

The change in the game is clear; consumers want to participate in customer loyalty programs that offer experiences that help them bond more closely with brands – and they don’t mind paying for the privilege.

As expectations grow for more diverse offerings that embrace omnichannel shopping capabilities, the winners will be brands that use rewards programs to enhance lifetime value. By actively supporting customer desires for personalized offerings and innovative experiences, retailers can gain a serious competitive advantage.

Be a winner, and start revamping your customer loyalty program.

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