Building an Effective Loyalty Program: Strategies and Best Practices

With 75% of consumers admitting to favoring a brand with a loyalty program (KPMG), businesses can no longer sleep on building retention programs. But not all loyalty programs are created equal – to make an impression, you need a flexible, personalized, and omnichannel loyalty program that’s both stimulating and rewarding.

This guide will help you create a loyalty program that differentiates your brand. Let’s start with the operations behind designing and running a loyalty program and finish with a heavy handful of best practices and inspirations.

Learn more: Explore Voucherify's Open Source Loyalty Accelerator

Why building a loyalty program is in your brand’s best interests?

Creating a customer loyalty program is a strategic move that can yield numerous benefits for your brand. Here are some examples of how rewards programs move the needle:

Know before you build: Loyalty operations

Creating a successful loyalty program involves more than just offering rewards. It requires careful planning, understanding of your customers, and efficient operations. Here are key considerations to keep in mind before you build your loyalty program:

1. Loyalty is an interdepartmental effort

Working together across teams is key to a successful loyalty program. When you plan and assign tasks carefully, everyone knows their role and what to do. This will help you implement the program smoothly without sudden pushback from revenue or tech teams.

2. You need to be ready to manage the program across multiple lifecycle stages

1. Design phase – Define program goals and reward structure. Develop program rules and terms.
   
   
2. Integration phase – Integrate the program with existing systems (e.g., POS, CRM, CEP) while ensuring data security and compliance with local regulations.
   
   
3. Launch – Launch awareness campaigns to promote the program. Decide whether you want to run a pilot project in selected locations first. Example: Michelin's French pilot loyalty program with Voucherify.
   
   
4. Management – Oversee member enrollment and account management. Track inventory and costs associated with rewards. Manage data export to external BI tools.
   
   
5. Customer Support – Address complaints and ensure member satisfaction with the program.
   
   
6. Program Development –  Analyze program performance and member engagement to rotate rewards and adjust benefits.

3. Loyalty management can get expensive fast (if done wrong)

Running a rewards program can be pricey. You need to consider the cost of building and maintaining the necessary infrastructure and software, whether you do it in-house or buy a pre-made solution. Both your IT and marketing teams will have to dedicate time and resources to keeping the program running smoothly. To make things more efficient, a loyalty program should try to limit its need for IT support as much as possible.

Here are some features that should make your life easier:

• Marketer-friendly dashboard – your loyalty software should have a place where marketers/loyalty managers launch and manage the loyalty program rules, rewards, and distributions by themselves, without developers.
  
  
• Developer-focused workflows – you should look for solutions with open APIs, SDKs, webhooks, bulk actions, audit logs, and custom data schemas to make the program implementation and maintenance much easier for technical teams.
  
  
• Support for large deployments – the blend of online and in-store commerce has presented new hurdles for big companies managing loyalty programs. One challenge is ensuring a consistent experience across various touchpoints like mobile, social media, and content. Another complex issue is making these programs successful on a global scale, involving multiple branches and teams.

• User roles & approvals – your loyalty solution should support multiple teams at once. You should also look for features such as separate API keys for different user roles, MFA, SAML, approval workflows, and custom user roles with different access levels.

• Account notifications – list notifications you would like to get about the loyalty program for your developer team (for example, about errors) or your CRM team (for example, about suspicious activity).

How to design a loyalty program that works?

Now, that we’ve gone over the baseline, let’s go over the loyalty program design step-by-step.

1. Choose the loyalty program type and name

The heart of a successful loyalty program lies in choosing the right incentives and mechanisms. Whether it’s points, tiers, or rewards, selecting a program that aligns with your business and resonates with your customers is essential.

Here are some of the most popular loyalty frameworks:

1. Point-based earn-and-burn – let members earn points for placing orders and spend them on rewards, e.g., discount coupons or use as cash with a predefined exchange rate.

2. Membership program with levels – a point-based program where customers access higher status with automatic benefits, e.g., free delivery and member-only discounts.

3. Frequency program – count member order frequency and reward each milestone with a reward, e.g., a free accessory after every 10 visits.

4. Cashback program – members get back a small percentage of the order total with each transaction.

5. Paid subscription program – let members pay a small fee to access the program with benefits such as priority checkout, free delivery, and member-only promotions.

6. Hybrid model – mix and match different elements of each program to find a program structure that suits your needs.

The next step in developing a loyalty program is crafting its narrative, which includes choosing a name, defining levels, naming those levels, and establishing a tone of voice. The program's name is crucial as it is the first thing customers will see, so it should be connected to your brand and feel exclusive. For example, creative names like Sephora Insider make the program feel special, and naming the currency (e.g., Style Points or Glamour Gems) can add a unique touch.

2. Define program T&Cs and enrollment policy

Terms and conditions are essential for any loyalty program to ensure transparency and high participation rates. While they might not be the most exciting aspect, clear program rules are crucial. Given the complexity, it's wise to consult a legal advisor, especially regarding data privacy laws like GDPR or CAN-SPAM.

Another thing is your enrollment strategy. Decide if your program will be exclusive and invitation-only, like Easyjet’s Flight Club, where customers are invited based on their spending. Alternatively, for an inclusive program, define how customers can join, such as by default after a first purchase, after spending a certain amount, filling out a form, or subscribing to a newsletter. The approach depends on your target audience and desired behaviors.

3. Set up clear guidelines for managing member data

Effectively managing customer data is the backbone of any successful loyalty program. By collecting, analyzing, and leveraging customer insights, you can personalize experiences, tailor rewards, and enhance engagement. But it’s not all sunshine – dealing with sensitive information requires robust data management policies and trusted partners, such as CRM and CDP platforms (Segment, mParticle, Braze).

To clear up your strategy around data management, answer the following:

• Will you keep member data directly in the loyalty software?
• How and what type of customer data will you collect (preferred meals, dietary restrictions, age, preferred delivery option, address)?
• How can members remove or update their data?

Based on your answers, update your Privacy Policy and FAQs accordingly to match the type and frequency of personal data operations. You should also prepare processes for inactive & fraudulent accounts termination.

4. List earning rules (reward actions)

The fun part comes after the dreadful data management episode – defining how members earn rewards. Instead of only rewarding purchases, include different ways to earn points to make the program more interesting. Encourage customer engagement by offering incentives for various activities to boost overall interaction with your brand, such as:

• Following and interacting with your brand on social media.
• Joining the program and filling out their profile.  
• Referring a friend.
• Joining the newsletter.
• Taking part in a survey.
• Shopping at a partner’s store.

Here is a cheat sheet on how to refine and battle-test your earning rules:

• Which transactions to incentivize (channel, min spend, frequency)?
• Which non-transactional behavior to incentivize (e.g., profile completion & submitting shopping preferences)?
• Will all tiers offer the same earning rules with the same points mapping?
• Determine if and how earning rules and points value change with tiers.
• Do you plan to limit earning rules to specific levels, segments, orders, locations, or capping eligible transactions per day? Do you plan blackout periods?
• Define spending limits & product exclusions for specific earning rules. Make sure that redeeming rewards or purchasing vouchers doesn’t grant points.
• Decide whether points are calculated on the order total pre- or post-applied discounts and tax.

Do your rules seem too dull? Here are some ways to spice them up:

• Point accelerators – set rules working in a limited period to accelerate earnings (e.g., double points in the holiday season).
• Personalized rules – define rules working only for selected member groups (e.g., double points for customers with Gold tier).
• Member challenges – gamify the program with game-like features with milestones, badges, or leaderboards.
• Celebrating special occasions – celebrate special occasions like anniversaries, birthdays, or holidays with bonus points.
• Product-based earning rules – set special earning rules for some products, e.g., double points for any seasonal products.

5. Set up loyalty tiers (optional)

Tiers are optional membership levels in a loyalty program that help distinguish between varying levels of customer loyalty and customer lifetime value (CLV). Tiers can be set based on the number of purchases, amount spent, years as a customer, or other factors, with annual spending or points collected being the most common criteria.

Each tier can offer different types and values of rewards, such as special services, early access to new products, or access to limited editions for VIP customers. Additionally, the number of points awarded per dollar spent can increase with higher tiers.

The loyalty program rules that apply to each tier could differ in various ways:

• Rewards – offering some rewards only to higher tiers, e.g., physical prizes for the bottom level, points for the second, and cashback for the highest tier.
• Rewards value – offering different discounts to different tiers (5, 10, 15% off).
• Earning rules – giving 1 point for an X spent for the bottom tier, 1.5 points for the same amount for the middle tier, and 2 points for the VIP tier.
• Expiry dates – for example, VIP clients could have longer expiry dates for their rewards.

6. Put together the loyalty rewards catalog

Design loyalty rewards with your customers in mind by offering valuable incentives they truly desire, not unwanted stock. But remember that simplicity is key – don't overwhelm customers with excessive choices, as this can lead to indecision.

Here are some examples of rewards you can offer in your customer loyalty program:

• Free products, services, or samples
• Member-only pricing, discounts & promotions
• Physical rewards and exclusive product gifts
• Cashback & store credit
• Charity donations
• Priority access & VIP Experiences
• Free shipping & free curbside/BOPIS service
• Better return policy & extended warranty
• Partnership rewards (coalition rewards)
• Giveaway entries, mystery gifts & instant win rewards
• Extra service upgrade

Reward structures can vary – direct rewards can be granted for specific actions, while point systems offer flexibility with wider reward catalogs. Some programs even allow points to be cashed out for money. The best approach depends on your audience and goals.

In general, loyalty rewards are categorized into three sets: technology- and service-based rewards, value-based rewards, and emotional-based rewards.

To find the most suitable rewards structure, I recommended placing your rewards on a matrix to see which rewards bring the highest/lowest differentiation and which have the highest/lowest direct impact on loyalty.

Another thing to consider is the rewards redemption and instant loyalty gratification. Your loyalty solutions should be designed to allow for fast points redemption, speedy reward delivery, and points conversion. The longer customers need to wait for the fruits of their loyalty towards your company, the more annoyed they will be.

There are 4 ways you can go about redeeming loyalty points for rewards:

• Automatic redemption – automatically redeem all points during checkout to claim cashback/discount/promotion.
• Milestone redemption – automatically redeem points once a threshold is reached, e.g., 250 points for a $20 voucher.
• Manual exchange – let members select the reward from the reward catalog and exchange the points for it.
• Pay with points – let members choose if and how many points they want to redeem at checkout to cover the entire/part of the payment.

Businesses should address loyalty program logistics for both online and offline shopping. For brick-and-mortar stores, consider how customers will redeem rewards, such as through physical loyalty cards or offline-capable mobile apps. Clearly inform customers about redemption methods and limitations to prevent frustration and reduce customer service calls.

7. Place limits on loyalty rewards and earning rules

Define how and when members earn and spend points or claim rewards. These rules can limit earning based on factors like customer segment, cart contents, or specific buying situations. For instance, you could offer movie tickets only to US customers based on a partnership with a cinema chain. Similarly, you could award double points for purchases that include perfume to encourage specific categories.

Loyalty rewards can carry multiple additional limits to protect your budget better, such as expiration date, stacking policy, application hierarchy, minimum spend threshold, or other usage limits. Take a look at the table below to get the full picture:

8. Set (or don’t) expiration policies

A sense of urgency is crucial for the success of loyalty campaigns. Features like expiry dates on coupons and points motivate shoppers to act. Configure expiry dates in loyalty program software to ensure points and rewards can't be used post-expiration.

9. Craft the loyalty member experience

You should think of the following building blocks of a standout loyalty experience:

• Loyalty landing page – to effectively cover the rules and conditions of your customer loyalty program, and to potentially include a subscription form if needed, a landing page is ideal. This page can encompass all necessary elements, such as program information, the subscription form, and the legal T&Cs.
  
  
• Sign-up form – ensure that the registration process is quick and easy by collecting only the essential information and offering a sign-up bonus.
  
• Loyalty wallet – the wallet is a centralized hub where members can view all available rewards and points, promotions, offers, expiry dates, purchase history, order tracking links, and their current rewards program tier. Providing a customer cockpit keeps customers informed about their deals and rewards, facilitating their use and driving more revenue.
  
  
• Interconnected rewards – to have a coherent loyalty strategy and make the most out of your promotional activities, you should have a holistic approach to running promotions. Combining different promotion types can bring in benefits you would not get otherwise. Promotion stacking, if done wisely, can help you protect your budget from abuse.

10. Design the loyalty communication strategy

Besides messages advertising your customer loyalty program, you should also think about the notifications for the existing program users. You could notify them about crucial loyalty moments:

• New rewards added to the catalog
• Rewards & points expiration
• Rewards they are eligible for & close to unlocking
• Extra rewards they can earn (for example, on double point days, on specific orders or products)
• Earning history – points added, removed, expired
• Tier upgrades, at risk of the downgrade, downgrade
• In-app upselling nudges to show the points to be earned or close to expire

Which channels to use? The world is your oyster with a rich selection of media:

• Push and in-app notifications
• Web notifications
• SMS messages
• Email
• Social media posts
• Chatbots
• Physical resources such as leaflets
• Dedicated mobile app

If you use distribution channels like email, SMS, or other messages, you should craft an appealing copy and visuals to encourage customers to join the program and earn the rewards. You can prepare a couple of versions and A/B test them to see which one has the highest open and click-through rates.

Summary

Designing and creating a customer loyalty program involves extensive customer research and internal coordination to establish the best conditions and rewards. Building a loyalty program management system internally can be a lengthy process, potentially taking months or years.

Voucherify simplifies this by offering an API-first, headless loyalty platform that can be integrated within weeks. It allows you to create and launch loyalty programs quickly using a marketer-friendly dashboard, enabling non-technical staff to manage the program independently.