Loyalty programs: How they work, examples, and tips

Any business knows it can’t just open up shop and expect customers to come rolling in—they need to be motivated to buy. In many situations, an excellent product or an outstanding customer experience (CX) will do the trick. Sometimes, however, organizations need a dedicated strategy to entice customers to continue buying.

Customer loyalty programs reward repeat customers with product discounts, special offers, and other benefits. This guide covers how these programs work, their benefits, and how they contribute to positive CX.

More in this guide:

• How do loyalty programs work?
• Benefits of customer loyalty programs
• Types of loyalty programs
• 5 examples of customer loyalty programs
• How to create a successful loyalty program
• Frequently asked questions
• Boost customer loyalty with good customer service

How do loyalty programs work?

Loyalty programs are advantageous to both buyers and businesses. When a consumer makes repeat purchases, it boosts a business’s bottom line. In exchange for this customer loyalty, a business rewards consumers with exclusive benefits, free items or upgrades, early access to products, and more.

Though each type of loyalty program works differently, here’s the general process:

1. A new customer makes a purchase or gives their information to a company.

2. The company prompts the customer to sign up for its loyalty program.

3. The customer signs up and starts to receive rewards for purchases.

4. As the customer continues to use the loyalty program, they receive better and better rewards.

As we’ll cover later, businesses can implement different types of customer rewards programs. These can be incentives based on a point system, programs that encourage customer referrals, or systems that combine different structures.

Benefits of customer loyalty programs

When businesses start customer loyalty programs, they can expect to see several benefits. Below are a few of the top examples.

Boosts revenue and retention

One of the main benefits of customer loyalty programs is that they’re an effective way to increase revenue and boost customer retention. Loyalty programs entice consumers to stay with your brand and make more purchases to get their rewards.

For example, a shopper may increase their order size to receive a discount or make more frequent purchases to obtain a higher tier in a loyalty program. This helps a business build brand loyalty and increase customer lifetime value (CLV).

Builds stronger customer relationships

Establishing a loyalty program can help you connect and build stronger customer relationships. When you go beyond a purely transactional interaction and offer rewards and incentives, it can help you exceed customer expectations and show them you value their continued business.

Differentiates a brand from its competitors

Implementing a customer loyalty program is a great way to stand out from other brands that may not have one. A loyalty program can:

• Give customers another reason to engage with your brand.

• Provide rewards that allow loyal customers to purchase products at a lower price than your competitors.

If a customer is trying to decide between two or more similar businesses, a loyalty program may be a key differentiator in that decision.

Encourages word-of-mouth marketing

Loyalty programs can also encourage word-of-mouth marketing, especially when customers are rewarded for telling others about your brand. For instance, you can reward customers with a discount for providing a review on Yelp.

This also plays into referral customer loyalty programs. When a customer refers a friend to your business, for example, you can reward the customer with a free month of service if their friend makes a purchase.

Shows customer appreciation

A customer loyalty program is one of the best ways to show customer appreciation. While many programs are based on spending volume, you can get creative with the rewards you offer. Surprise customers with personalized discounts or acknowledge milestones like birthdays with an exclusive sale. Doing so gives you an opportunity to thank customers for their business.

Motivates consumer behavior

These programs can encourage customers to take certain actions. For example, you can entice customers to sign up for an email newsletter or text alerts by offering a discount code.

Types of loyalty programs

There are several types of loyalty programs, and it’s important to find one that best suits your organization’s needs. Here are some of the most common.

Points-based programs

Point systems are among the most popular programs. They reward customers with points for completing designated actions like purchasing or submitting feedback. Customers can redeem points for:

• Credit toward their next purchase

• Discounted services

• Giveaways

Customers can track their accumulated points with a loyalty card, online account, or mobile app. A points program is a fairly recognizable reward format for customers. They understand how to take advantage of it, so it’s an easy way to build customer loyalty.

Tier-based programs

Tier-based programs give consumers rewards based on their level of spending. For example, a business could have a “diamond level” tier that customers can access after spending $10,000 within a year. These diamond-level customers could earn exclusive pricing for your most expensive products and services.

A tier-based program can motivate your customers in lower tiers to spend more to reach the next level. The more exclusive the reward, the greater the customer appeal.

Mission-based programs

Not every rewards program focuses on tiers and discount codes. If your company is highly mission-driven, you may want to try a customer loyalty program with a cause. Mission-based programs make offers like “5 percent of purchases go towards the charity of your choice.” These programs can be more effective when you partner with a nonprofit organization that strongly connects to your company’s mission.

Spend-based programs

Spend-based customer rewards programs allow businesses to recognize high-spend customers. The concept is simple: The more you spend, the more rewards and discounts you earn.

Airlines, in particular, are transitioning from points-based programs to spend-based systems. It allows them to engage deeper with travelers who pay more for fewer flights.

Subscription programs

A subscription program, also known as a premium loyalty program, is where customers subscribe, pay a fee upfront for a product or a service, and receive rewards in return. Customers can redeem these rewards and use them toward future purchases.

Referral programs

Referral programs reward customers for referring their friends and family. This word-of-mouth strategy can help turn loyal buyers into brand advocates—plus, the referred customer may even refer your brand to someone else in the future. These programs can also reduce your customer acquisition cost because the customer remains loyal to your brand while actively finding more customers on your behalf.

5 examples of customer loyalty programs

If you need some inspiration, check out these examples of customer loyalty programs.

Marriott Bonvoy

Marriott Bonvoy Benefits is a tier- and points-based loyalty program that allows members to redeem free hotel nights, meals, and other experiences with points. They can also earn points with car rentals and flights, share points with friends and family, and get free Wi-Fi and special rates.

Grubhub

Food delivery Goliath Grubhub offers its customers a subscription loyalty program through Grubhub+. For $9.99/month, consumers get access to:

• $0 delivery fees

• Lower service fees

• 5 percent back on pickup orders

• Priority Delivery for less

• Other exclusive offers

With the program, hungry shoppers are encouraged to make repeat purchases through their app, rather than one of their competitors.

Grubhub also shows how a customer service strategy can intertwine with a loyalty program. Grubhub used Zendesk to automate its processes and connect more effectively with consumers and delivery drivers. This helped customers see the benefit of sticking with the company for loyalty incentives and quality customer service.

Delta Airlines

Delta SkyMiles Medallion is a tier- and spend-based program that rewards users for booking flights with the airline. The tiers are based on how much Medallion Qualification Dollars (MQDs) the user spent during the previous year, which they can acquire through flights or partner credit card points.

• Silver: The customer spent at least $5,000 MQDs.
• Gold: The customer spent at least $10,000 MQDs.
• Platinum: The customer spent at least $15,000 MQDs.
• Diamond: The customer spent at least $28,000 MQDs.

With each tier, the customer is entitled to more and more benefits like travel vouchers, priority service, and complimentary upgrades.

Amazon Prime

Amazon Prime is an example of a paid subscription program. For a set annual fee, Prime members can access several benefits, such as free two-day shipping, video streaming, music, special deals on Prime Day, and more. This encourages customers to choose Amazon for all their shopping and entertainment needs.

Ben & Jerry’s

Ben & Jerry’s ice cream has a mission-based loyalty program. While the company doesn’t offer benefits like product discounts or gifts, consumers are enticed to buy pints because of shared values. For example, for every themed pint purchase, the ice cream company donates profits to charities that align with its values, such as animal welfare, human rights, climate activism, social programs, and more.

How to create a successful loyalty program

Now that you’ve learned about different customer loyalty programs and seen some examples from popular businesses, you’re better equipped to implement one of your own. To get started, follow these top tips:

• Establish your goals: Determine what you want to get from your loyalty program and how it fits into your wider customer experience strategy. For example, you may want to focus on the financial benefits like increasing referrals, sign-ups, or revenue. You may also decide to use a loyalty program to heighten your customer experience and connect with your consumers more effectively.
• Understand your audience: The key to a successful customer loyalty program is ensuring the rewards reflect your customers’ wants. Take time to understand their needs and what would entice them to come back again and again.
• Choose the type of program: After setting your strategy, select the program type that aligns with your goals and customer interests. Also, decide whether you want to track it by hand or use customer loyalty software.
• Market your program: Once your customer loyalty program is in place, spread the word to attract your first members. Consider doing this through email campaigns, messaging on receipts, or pop-ups on your website.
• Review performance: Monitor how your customer loyalty program performs and adjust based on what you see and any feedback you receive. You can gather insights from your customer loyalty program software or calculate the program participation rate.

While going through this process, take a customer-first approach. When you make every decision with your customer in mind, you’re more likely to find success.

Frequently asked questions

Boost customer loyalty with good customer service

Customer loyalty programs can be the thing that sets your business apart and increases customer retention. However, before you develop and launch your program, you must ensure your customer experience is in good shape.

At Zendesk, we are CX experts and have helped more than 160,000 businesses create outstanding customer experiences and develop long-term customer relationships.

Explore Zendesk customer service software to see how we can help you build meaningful connections with your customers.