Every business wants to foster customer loyalty. More than just providing a consistent sales pipeline, it develops a connection with an engaged and returning customer audience, creating self-generating promotions and boosting new customer acquisition.

In essence, loyalty is what builds a true brand.

But without a dedicated system and strategy—a loyalty programme—you’re leaving customer allegiance to the whims of the universe.

At Epsilon, we’ve spent decades studying customer loyalty, building solutions, and advising our clients on how to achieve outcome-based marketing success—especially when it comes to loyalty programmes. So, we’ve assembled this comprehensive guide to help you learn everything you need to know to turn yours into a goliath.

Table of Contents

  1. What are Loyalty Programmes?
  2. Why Start a Loyalty Programme
  3. How to Get Customers to Sign Up for a Loyalty Programme
  4. Types of Loyalty Programmes
  5. The Cost of Loyalty Programmes
  6. Choosing Loyalty Programme Software
  7. 5 KPIs for Measuring Loyalty Programme Success
  8. 5 Tips for Loyalty Programmes

What are Loyalty Programmes?

Loyalty programmes are marketing and customer relationship strategies that enrich experiences and incentivise your returning customers to make more purchases—ideally, more often and for higher sale amounts per order.

This definition might seem broad, but that’s because there are myriad types of loyalty programmes (and rewards) used today. Most fall into a few general categories, but you’ll still find significant variations between companies’ structures, incentives, and how their customers earn or redeem rewards. 

As an example, it’s believed the first modern loyalty programme began in the late 1700s when an American merchant began giving customers copper tokens they could trade for merchandise at a later date. This exchange resembles the simplest loyalty programme you’re probably familiar with: businesses handing out physical punch cards.

You might have a stack of these ”buy ten, get one free” cards still lying around—if you haven’t misplaced them all or accidentally put them through the laundry.

How Loyalty Programmes Work—The Basics

When customers enrol in a loyalty programme and complete a purchase or specific action, they receive physical or digital tokens—often as “points.” These are then redeemed for an associated reward.

The basic idea behind all loyalty programmes is that the opportunity to earn more and more points encourages customers to make repeat shopping visits as they work toward the next or higher-value rewards.

Odds are, you’re currently enrolled in some loyalty programmes managed by your favourite brands.

Modern Loyalty Programmes

Loyalty programmes have evolved over the last 200 years, especially in the last few decades. They now incorporate sophisticated technologies and require extensive data management.

Those physical punch cards are much rarer, replaced by platforms that automatically track and apply rewards or facilitate redeeming points. With these technologies, programmes have also become more flexible, involving diverse structures like tiers, memberships, and referrals. Rewards range from merchandise and discounts to adventure experiences and charitable donations.

There are no limits to what a modern loyalty programme can be, so long as it:

  • Drives customer engagement and (returning) purchases
  • Allows customer purchases to contribute toward rewards 
  • Leverages data to:
    • Refine strategies
    • Personalise experiences
    • Track customer progress
    • Find new marketing opportunities

Are Loyalty Programmes Only for Returning Customers?

Not at all! While loyalty programmes are designed to generate return business, their benefits should be enticing enough to convert new customers.

Credit card rewards represent one of the most common customer acquisition strategies that rely on loyalty programmes. Most offers attract new cardholders by touting benefits like multipliers for rewards points or airline miles during the first few months after signing up.

For some businesses, their loyalty programme is the primary product they’re selling.

Why Start a Loyalty Program?

Returning customers are the foundation of nearly every successful business. It’s virtually impossible to operate without them. But what if your returning customers purchased more and more often? That’s what a well-built loyalty programme helps accomplish.

As a common saying in sales and marketing goes, it’s five times as expensive to convert a new customer than it is to sell to existing customers. But unlike older loyalty programmes, customer acquisition strategies now rely on data. Does more recent reporting back up this assertion?

It does. Existing customers:

  • Are 50% more likely to try new products
  • Spend 31% more. 
  • Are cheaper to retain than new customers, according to 70% of survey respondents
  • Have a 60-70% likelihood of making a purchase, whereas there’s only a 5-20% chance new customers do.

Your costs per sale rise when you ignore the people who’ve already done business with you, and that results in generating less revenue. Our own research demonstrates that loyal, returning customers spend 300% more compared to other consumers.

The numbers speak for themselves. It’s why over 90% of businesses have started some kind of loyalty programme.

The Psychology Behind Loyalty Programmes

Loyalty programmes are effective because they rely on the psychological characteristics and brain chemistry shared by all consumers. They engage fundamental and subconscious drives, such as:

  • Progress toward the next goal or reward and averting their loss
  • Membership and belonging to groups
  • Positive reinforcement following purchases

These behaviours all relate back to what’s fittingly known as the brain’s “reward system.” As with other rewards, when your customers receive loyalty benefits, the neurotransmitters in their brain release dopamine, increasing their sense of enjoyment and happiness.

Per one academic review:

“A program might confer a special sense of status, enhance customer feelings of social belonging, build gratitude, promote reciprocation, or deliver a combination of these benefits.”

And according to the Kearney consulting firm, there’s a direct link between tapping into human psychology and your loyalty programme's success. They found loyalty programmes generally achieve a 30% bump in average customer spend, but those that create an emotional connection see 150% increases.

Those emotional connections relate to factors like overall customer experience, product quality and reliability, and shared social values.

How to Get Customers to Sign Up for a Loyalty Programme

Despite the impressive numbers, starting a loyalty programme doesn’t mean it will become an automatic success. You still need people to sign up for it.

So, what can you do to boost programme membership?

Immediate Sign-up Incentives

Generally, customers must be incentivised to sign up for loyalty programmes. This is especially true at a time when people’s wariness of personal data collection is increasing.

Signing up for a loyalty programme should be viewed as a distinct transaction between businesses and their customers. Many consumers will seek some form of instant gratification, and these incentives most often involve benefits like:

  • Discounts on your current or next purchase
  • A head start on progress towards your first reward
  • Gifts and product giveaways

However, the incentives you use to encourage sign-ups will need to be tailored to your customer audience, their average purchase amount and frequency, and the products you’re selling. For some models, the allure of larger rewards in the future is more than enough to encourage sign-ups without any up-front benefits.

Minimise Sign-Up Barriers

If your programme imposes sign-up barriers, it will negatively impact how many people join.

To better understand how people react to long or complicated sign-up processes, we can turn to user experience (UX) design strategies relied on when building apps and software. Again, human psychology plays a major role in a programme’s sign-up success.

When creating your programme’s sign-up process, you want to minimise:

  • Cognitive barriers – This refers to anything that may prevent consumers from completing the action you desire, such as downloading a dedicated app to join the programme or providing excess information. Every barrier represents a potential "abandonment point," and most fall into one of three categories:
    • Too many steps before completion
    • Each step’s perceived length
    • Each step’s perceived difficulty

  • Cognitive load – The more thinking required or choices provided to consumers, the more cumbersome the sign-up process will feel. People are often asked to sign up for programmes during in-store or online checkouts. Asking them to join already places a barrier between them and their purchase, so the sign-up process needs to be as simple as possible. You want to minimise:
    • The number of choices and decisions people must make
    • How much they have to think about choices and decisions
    • Confusion over choices and the differences between their options

When people agree to sign up for your programme, they want the experience to be seamless and easy. This needs to be a priority throughout planning and building your loyalty programme, or you risk consumers changing their minds and abandoning it before they even join.

You want this interaction to be as close as possible to saying yes or no when customers are asked if they want to be a loyalty programme member.

Communicate Programme Structure and Ongoing Value Clearly

While immediate benefits will help boost your programme’s membership, consumers will also want to know more about its structure and long-term value. If your model is too complicated to understand or primarily based around that first and immediate reward, people are more likely to decide the membership’s ongoing value isn’t worth it.

A study of loyalty programmes across more than 350 grocery stores in 27 European countries found a positive correlation between simple programmes providing “direct and immediate rewards.” However, that disappears with more complicated models.

If your programme is more complex, you’ll need to design web pages or physical materials that clearly break down or summarise what’s being offered. Potential members should be able to understand what the programme involves and some offered rewards at a glance.

For example, if you divide membership into three tiers, people will need to know:

  • What the tiers are
  • The minimum purchase amounts or other requirements to joining each tier
  • The benefits each tier offers
  • How those benefits differ from each other

How you inform people of your programme's structures, rewards, and redemption processes relates back to minimising cognitive loads. A brief explanation should be all that consumers need to understand how the programme works and the benefits they receive from joining.

Types of Loyalty Programmes

As mentioned above, there are myriad types of loyalty programmes because there are no limitations on your vision for customer experience—especially with modern technology platforms. All programmes can be distilled down to the basic process of purchases or actions earning rewards, but where you go from there is up to you.

Programme membership can be open to everyone or access-exclusive. Redemptions may or may not be applied automatically or have an expiry. You can partner with other businesses to expand the programme or with charitable organisations to promote tangible advocacy.

The options are limitless.

What matters most is that your customers find the programme’s experience and incentives not just engaging but compelling. Aside from meeting your customer audience’s expectations, any type of programme can be successful.

Here are five common types of programmes that you can look to for inspiration:

Points-Based Programmes

The most simple versions of modern loyalty programmes are based on accumulating points. Most other types still use this structure in some way because points provide an easy tracking method for businesses and members to see their progress toward and eligibility for rewards.

Typically, every dollar a customer spends on their purchases earns them points—spend more, earn more. Those points are then redeemed for rewards like:

  • Discounts (percentage or flat values)
  • Additional merchandise
  • Experiences (e.g., vacations, lessons, event tickets)
  • Memberships or subscriptions for other services

Traditionally, points-based loyalty programmes operate on a flat structure—all points have the same value regardless of when the purchase was made or for what, and all customers redeem points for the same selection of rewards.

Tiered Programme Memberships

While tiered programmes incentivise customers to spend more or more often, they operate similarly to points-based programmes, with the difference that members who accumulate enough points in a given timeframe join a new tier that offers better rewards.

Businesses often determine their programme’s tiers based on total annual purchases.

However, you can increase how often members make purchases with shorter windows. For example, your programme could require customers to purchase $100 per month to move beyond basic membership. But remember that you’ll need to align the thresholds for tier progression according to your customer’s average monthly spend.

When building a tiered programme, you must consult customer purchasing data to determine the cut-offs for each grouping. Consider these two three-tier models of 100 customers:

  • Equal-sized tiers – Perhaps you want to keep the size of each tier roughly equal. To do so, you’ll need to segment your customers by:
    • Tier 1 – The 33 customers who spent the least
    • Tier 2 – The 33 customers who spent closest to the average amount
    • Tier 3 – The 33 customers who spent the most, with a special reward and announcement for the top spender 

  • Exclusive tiers – You can tap into the subconscious drive for social status if you divide the tiers by:
    • Tier 1 – The 50 customers who spent the least or below the average amount (i.e., the first and second quartiles)
    • Tier 2 – The 25 customers who spent an above-average amount but not the most (i.e., the third quartile)
    • Tier 3 – The 25 customers who spent the most (i.e., the fourth quartile)

Product Categories

You can also assign different point values to different types of products. Unlike point-based programmes' flat model, not every product is treated equally. This strategy will help you target:

  • More sales on items with higher margins
  • Products you want to boost sales numbers for
  • Increase general turnover

However, you don’t have to adopt product categories as a constant structure. Instead, you can use them as promotional offers, allowing programme members to earn more points on select items for a limited time.

Announcements for double or triple points will certainly catch programme members’ attention.

For example, retail businesses can leverage these opportunities to clear out old inventory stock or take advantage of different seasons (e.g., school supplies in the Fall, and athletic equipment before a new season starts). Alternatively, you can assign more points for accessories to big-ticket items to encourage order bundling.

Memberships and Subscriptions

Some loyalty programmes flip the standard structure on its head, requiring an up-front cost to gain access to exclusive deals and opportunities. Consider the Tesco or Costco memberships, for instance, where members pay set monthly or annual fees for substantial discounts compared to shopping at their competitors.

One of the best (and easiest) methods for creating staunch brand loyalty is to offer the lowest prices on common goods or services. Consumers are often very willing to pay a regular flat rate for access to bulk or wholesale prices, especially if they need large product quantities.

Values-Based Programmes

A growing trend within loyalty programmes has been redeeming points for rewards that don't benefit the customer directly. Instead, some programmes now provide rewards that benefit social values and causes, like support for disadvantaged groups or environmental protections.

This aligns with the growing focus on organisations’ environmental, social, and corporate governance. Consumers want their business to go to companies that reflect their values.

Per a Sprout Social survey of consumers:

  • 70% want to see brands take a position on social issues.
  • 55% would boycott a brand for a stance opposing theirs.
  • 53% believe most brands only take a stand for PR purposes.

If that last stat seems like an outlier, it's because consumers know it isn't good enough to just talk the talk. But building a values-based loyalty programme shows you're walking it too.

This substantially impacts the emotional connections that are so essential to customer loyalty.

The Cost of Loyalty Programmes

How much a loyalty programme costs to implement and maintain depends on three factors:

  • The rewards
  • Marketing
  • Your management platform

The cost of rewards should be factored into any membership fees and overall product pricing, and marketing for your programme will fall under that department’s broader budget. Per member, rewards and marketing costs should be fairly negligible, especially if the programme boosts sales.

So, the software platform represents the highest cost.

It also represents the biggest decision you’ll have to make when setting up your loyalty programme: do you build the platform yourself or purchase and customise a third party’s?

Developing software in-house (or via outsourcing) will give you the most control over its functionality and intellectual property (IP). But it also requires hiring internal development staff, reprioritising them away from existing projects, or partnering with an outsourced team.

Regardless of how you develop the platform, the biggest concern will be the return on your (significant) investment.

As with most software these days, the other route is to implement a platform built and maintained by a third-party vendor. The Software-as-a-Service model (SaaS) will generally require an initial implementation and customisation fee to help you get set up, followed by a subscription charge (e.g., monthly, yearly). Pricing may also be determined by the number of users with licensed accounts for the software.

Choosing Loyalty Programme Software

If you decide to pursue third-party loyalty programme platforms, what features and functionality should you look for when evaluating your options?

  • API integration support – You’ll need to integrate your loyalty platform with your other software platforms to streamline management. Application programming interfaces (APIs) enable you to sync data across your entire environment and run automations that eliminate time-consuming tasks. Your loyalty platform should integrate with platforms like your customer relationship management (CRM) and email marketing platforms.

  • Customer segmentation – Your loyalty platform should make management easier by organising your customers according to their data and profile attributes. A sophisticated platform will automatically identify different categories and segment customers accordingly so that you can initiate personalised marketing campaigns.

  • Tiered support – While you can build a flat programme structure, you want to look for a platform that facilitates easy creation and management of tiers. Referring back to the psychological factors that impact loyalty programme effectiveness, your platform should enable you to create exclusive groups that drive customer engagement and motivate their participation.

  • Point-earning customisation – Since your programme should be uniquely adapted to your customers, you need to ensure that your management platform will support flexibility regarding how customers earn points. Purchases aren’t the only option—perhaps leaving feedback or supporting the brand on social media will earn them points too.

  • Reward and selection management – Loyalty platforms need to monitor reward inventory (if supply is limited) and provide customers with a seamless method to redeem their points. 

  • Omnichannel support – Targeted marketing campaigns for loyalty programme members rely on integrating with the various channels you use for engagement (e.g., email, social media). The platform should be able to export customer lists for each channel at a minimum.

  • Security, Privacy, and Compliance – As you’ll be managing and storing customer data—including purchases or payment information—you’ll need to ensure the platform complies with all security and privacy requirements, such as the PCI DSS and data protection laws (e.g., GDPR).

  • Data analytics and reporting – The platform must be able to help you monitor programme success by analysing and reporting on data. Look for easily interpreted dashboards and customised reports as key features.

  • Scalability – Ideally, your loyalty programme will help you significantly expand your customer base, so your management platform must be able to scale when supporting more data and customer imports or adding new employee accounts to manage it.

Choosing which loyalty programme to implement is a significant decision, so you’ll want to ensure your top choice meets all these requirements and any unique specifications you might have.

5 KPIs for Measuring Loyalty Programme Success

To evaluate the success of your loyalty programme, you'll want to identify key metrics for which you can create reports within your platform. Five KPIs to monitor for all loyalty programmes include:

  • Membership – Keeping track of programme membership is essential to determining how successful the programme is. Specifically, you want to track:
    • Acquisition – How many new members join, informing you of whether the sign-up process is intuitive and new customers understand the value on offer.

    • Retention – How many members remain in your programme? You especially want to track “one-and-done” members, as quickly dropping out may be a sign that there’s not enough lasting value for them to remain or the rewards structure is too confusing.

  • Reward redemption rate – Engaged members will be active programme participants. Suppose you have a large number of customers join, but few redeem the points they earn. In that case, you should evaluate the rewards' value or consider initiating a marketing campaign designed to encourage redemptions.

  • Member vs. non-member spend – This metric will tell whether membership incentivises larger purchases or more frequent purchases. If there's no difference, consider member-exclusive promotions to boost this metric.

  • Customer lifetime value – Although they can lead to a significant sales increase, starting a loyalty programme is a considerable investment and may operate at a loss initially. Tracking customers' lifetime value—or how much they'll spend with your brand over time—will help inform you whether (and how soon) you'll achieve positive results.

  • Incremental margin – Similar to how customer lifetime value is used, your incremental margin assesses the impact of managerial decisions based on a change in sales. It will inform you whether your programme is profitable now.

5 Tips for Loyalty Programmes

Our guide here covers everything you need to know to get started with building your loyalty programme. However, you should still customise yours beyond the basics to improve member participation and stand out from competitors. Consider strategies that will help attract new members, retain existing ones, and result in customers promoting their love for your programme.

Here are five tips to consider once your loyalty programme is in progress:

  1. Personalisation – Every aspect of your programme should be as personalised as possible for each customer, from messaging to rewards. Personalisation is critical to developing the emotional connections that foster loyalty programmes and customer loyalty.

  2. Unique Rewards – If your competitors are also operating loyalty programmes, the best way to differentiate yours is by offering unique rewards. Many programmes stick to flat discounts based on points—so standout rewards like an afternoon yacht trip or surfing lessons make a huge splash.

  3. Gamify the experience – Gamification adds the same elements of progression, scoring, mild difficulty, and competition found in video games to your programme. Adopting this strategy will enhance your members’ loyalty experience, keeping them actively engaged and participating. 

  4. Offer referral points – Word-of-mouth advertising remains among the most effective channels for new customer acquisition. 90% of people are more likely to trust brand recommendations from friends, and it results in a 500% increase in sales over paid ads. Offering your programme members points for referring your business is a phenomenal approach to generating new customers and quality leads.

  5. Reward reminders – Even though most loyalty programmes have transitioned from physical cards to digital management, people may still forget to use the points they've accrued. Sending them reminders, setting point balance maximums, and establishing expiry dates are all strategies you can leverage to keep members engaged with the programme and using their rewards.

Partner with Epsilon—The Loyalty Experts

Today, loyalty programmes involve far more considerations than customers not losing their punch cards. The last few decades have seen major shifts—powered by technology platforms, new trends, customer engagement strategies, and more.

When you’re looking to build or improve your loyalty programme, you want to partner with the experts who have thrived through it all. For 50 years, Epsilon has been a global leader in outcome-based marketing, helping brands anticipate and adapt to their customers with measurable success.

Our expertise, technology solutions like PeopleCloud, and data-driven approach will have new members queuing up to join your loyalty programme in no time. So contact us today to get started!

Sources:

Academia. Review of the theoretical underpinnings of loyalty programs. 

Accenture. Seeing Beyond the Loyalty Illusion. 

Invesp. Customer Acquisition vs. Retention Costs. 

Invesp. The Importance of Word Of Mouth Marketing – Statistics and Trends.

Kearney. Hacking human psychology to create true customer loyalty. 

Nick J. F. Bombaij and Marnik G. Dekimpe. When do loyalty programs work? The moderating role of design, retailer-strategy, and country characteristics. 

NY Times. Trading Stamps: A Long History. 

Simply Psychology. Brain Reward System. 

Sprout Social. #BrandsGetReal: Brands Creating Change in the Conscious Consumer Era. 

UX Mag. Cognition & The Intrinsic User Experience.