Loyalty Program: Definition, Purposes, How It Works

Keeping existing customers has become more challenging than attracting new ones. Companies are constantly in search of a winning customer retention formula. However, what works for some might not work for everyone. Yet, there’s a tactic that brings results—loyalty programs.

What Is a Loyalty Program

Loyalty programs comprise incentives offered to customers who make repeat purchases from a brand. Companies across various industries use loyalty programs as a retention tool and a way to show gratitude to their clientele. In a way, it’s like sending thank-you cards to customers who choose their brand.

These programs vary between organizations  but, in most cases, provide buyers with the following:

  • early access to new products and sales
  • member-only discounts
  • gifts

More and more companies familiarize customers with a reward program right after their first purchase. Such a move motivates newcomers to continue buying from the company, as they know it leads to better offers.

The Most Commonly Offered Loyalty Programs

When creating a loyalty program, companies should rely on customer data showcasing users’ purchasing patterns, needs, and preferences. From there, they can go for:

Points-based Loyalty Program

Points-based systems have proven effective in increasing buyer engagement. Companies invite their customers to collect points to access special offers. Depending on the offer, points can be converted into a credit a customer can use for a next purchase or exchange for a gift.

Businesses employ different technologies to streamline the tracking process. For instance, customers create accounts where all their purchases and points are stored; some companies even develop apps accessible through smartphones.


Spend-based Reward Programs

Spend-based reward programs are for customers who spend considerable sums on a company’s products or services. The rules for accessing the incentives within a spend-based program are straightforward: the more money customers spend, the more rewards are at their disposal.

Tier-based Loyalty Programs

Gamification has entered the business environment. You know how progressing in a video game means moving through levels. Many companies have adopted the same approach, creating a tier-based rewards system where reaching a certain level unlocks exclusive offers, such as special pricing for the most exclusive items.

Mission-based and Referral Programs

Mission-based loyalty programs are ideal for companies that want to present themselves as more than a service provider; they want to be perceived as valuable community members. When participating in such a program, customers get to choose a cause to which a percentage of their money will go.

On the other hand, with referral programs, companies reward customers who recommend their products or services to friends and family. This program has also proven valuable as a marketing tool, making existing customers brand advocates.

The Effects of Loyalty Programs

Modern-day customers expect a complete experience that goes beyond the quality of products or services. That’s where loyalty programs come into play. If created and implemented properly, they can:

Increase Customer Retention

As said earlier, loyalty programs are valuable retention tools that encourage existing customers to buy frequently and spend more money on a brand’s products or services, knowing they will be rewarded for their efforts.


Loyalty programs are also a great way of showing appreciation to loyal customers. Buyer preferences have changed; they want a partner helping them overcome specific challenges, not just a vendor they buy from.

Stand Out in the Market

A well-thought-out loyalty program can help a brand differentiate itself from competitors. Customers will always turn to a business with a better offer. If a company provides discounts and rewards to buyers, they are more likely to choose it over another brand with a similar offering but without a rewards program.

Grow a Customer Base

Aside from helping companies retain existing customers, loyalty programs enable them to acquire new ones. For instance, referral programs reward customers for spreading the good word about a brand. That way, an organization ensures the retention of existing customers and the growth of its customer base.

Loyalty programs are not set in stone. They are subject to change to yield the best results. Companies must be ready for a lot of testing to determine what works or doesn’t, ensuring the program they build aligns with their business objectives and buyers’ needs.

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