How to build a loyalty program that stands the test of time

By Amy Rigby|7 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.

What is a customer loyalty program?

Driving new sales with existing customers can have a huge impact on long-term growth, especially for B2C companies. A customer loyalty program rewards buyers every time they make a new purchase with a brand, encouraging repeat business. Rewards can include discounts, free products or services, exclusive access to new offerings or events, gift cards, and other monetary incentives.

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).

Benefits of customer loyalty programs

Customer loyalty programs require an investment from your brand. Executing a successful program takes time, operational resources, and money. But the long-term impact of increasing customer loyalty can be significant. A thoughtfully executed loyalty program comes with some major benefits.

Improves customer retention

When customers are rewarded for making purchases from your brand, they’re more likely to stick around and buy from you again.

Increases customer lifetime value

Customers who stay engaged with your brand tend to spend more over time, increasing their lifetime value (CLV).

Provides a competitive advantage

When your brand offers a relevant, engaging customer loyalty program, it can help you stand out from your competitors — especially if they don’t have their own programs in place.

Unlocks valuable insights into your customers

Your loyalty program members represent your most engaged customers. Reviewing their purchases, engagement activities, and reward selections can help you better understand what customers care about and how to best serve their unique needs and preferences.

Types of loyalty programs

Every business’s customer base is unique. What motivates one group of customers to engage with a brand might fall totally flat with another. The good news is that there are several different types of loyalty programs — and you can choose the program design that resonates best with your customers.

Points-based programs

In a points-based program, customers earn points each time they make a purchase or engage with your brand in high-value ways. Each point typically has a monetary value tied to it — for instance, 25 points may be worth $1 in rewards. These points accumulate until the customer decides to redeem them for discounts, products, or other benefits.

Starbucks Rewards is an example of a points-based program that rewards customers with points that they can redeem for free products or discounts.

Tier-based programs

In a tier-based program, customers are placed into different tiers based on their purchases. As customers spend more money with a business, they move up into higher tiers with more enticing rewards and benefits.

Sephora’s Beauty Insider program combines a points system with tiers (Insider, VIB, and Rouge) that offer special benefits, including a $100 Sephora credit for Rouge customers.

Spend-based programs

In a spend-based program, customers earn rewards such as credits or discounts based on the total amount they’ve spent with a brand.

Cash-back programs

In a cash-back program, customers receive a percentage of their total spending back as cash or credits. For example, West Elm’s Key Rewards program gives customers 2% cash back on purchases made within its group of retail brands and 5% cash back to West Elm card members.

Game-based programs

Game-based programs incorporate challenges, competitions, or other activities that customers complete to earn rewards. These programs keep customers engaged with interactive missions that grow their brand loyalty over time.

Fortnite’s Battle Pass program rewards players as they complete in-game challenges with perks such as new character skins, items, and styles.

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

Once you’ve defined your business goals and understand what motivates your customers, it’s time to choose a structure for your loyalty program. Here are a few questions to help you choose the best option for your brand.

How often do your customers make purchases from you? If your customers make frequent, lower-cost purchases, a points-based or cash-back program could work well. For higher-cost, less frequent purchases, a tier-based program might work better to drive loyalty.
How do your customers engage with your brand currently? If you sell to a young, social media-active, highly engaged audience, a gamified program structure could resonate with your buyers. An older, more time-constrained audience might prefer a more straightforward points-based or cash-back design.
Do you offer limited-edition or seasonal products and services? If you sell seasonal or limited-edition products or services, a tier-based program can reward your most loyal customers with exclusive or early access. If your offerings stay consistent year-round, a points-based program can motivate customers to come back.
What kinds of loyalty perks are your competitors offering? Take a look at what your competitors are offering in their loyalty programs for inspiration — and then design the simplest program that best aligns with your customers’ behaviors and interests.

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 and 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 and 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.

Customer loyalty program FAQs

How do customer loyalty programs make money?

Happy customers tend to stick around longer and spend more. Both retention and customer lifetime value (CLV) — how much a customer spends with your brand over the span of their relationship — can boost your bottom line. Acquiring a new customer is up to 7x more expensive than retaining an existing one. And loyalty program members generate 12-18% more incremental revenue than non-members, increasing the lifetime value of these customers.

What is the typical cost of a customer loyalty program?

Customer loyalty program costs vary widely based on a number of factors, including:

Operational costs associated with managing the program, such as program managers and customer service representatives
Technology costs from your loyalty program app or website and your rewards and incentives platform
The cost of discounts, rewards, and perks such as free shipping or add-ons
Promotional costs associated with marketing your loyalty program to new and existing customers

As you plan out your loyalty program, you’ll want to model how these costs will impact growth metrics like CLV, purchase frequency, and average order value so you can invest the right amount to drive a strong ROI.

What is the success rate of loyalty programs?

Today, 91% of consumer brands offer some kind of loyalty program, a strong signal that businesses are generating value from their efforts. Eight out of 10 consumers participate in at least one retail loyalty program, subscription, or membership. And loyalty program members generate more revenue than non-members, whether those programs are free or paid.

To give your loyalty program the best chance of success: