A Comprehensive Loyalty Program Guide for E-commerce Stores
Updated: Mar 24
Loyalty program management can seem overwhelming.
Do you feel like there’s so much to do and no guarantee that your e-commerce store won’t lose money?
You want a large tribe of loyal customers.
But, you’re fearful that using the wrong loyalty program will result in a poor customer experience. You believe that your loyal customers will run to your competitors if your loyalty program fails.
Your concerns are valid. Loyalty programs are tied to rewards and rewards cost money.
Here’s the thing though - it’s possible to create highly successful customer loyalty programs.
We’ve been doing it since 2010.
In fact, some of our clients achieved 41% growth in average order value after working with us.
And it isn’t because we wave a magic wand and everything falls into place.
Instead, we understand that successful loyalty programs aren’t based on a technology-first model.
Using a technology-first approach is similar to saying that you can run a successful marketing campaign without understanding your target customer’s pain point.
You’ll spend tons of money doing something that’ll have no impact.
All highly successful loyalty programs are based on the principle of strategy first, technology after.
The right strategy helps a brand build meaningful customer relationships that boost the brand’s reputation and ultimately lead to more sales.
A one-size-fits-all approach is a recipe for disaster!
This guide explains how you can get the most value out of a loyalty program for your e-commerce store. You’ll learn:
The most common types of loyalty programs
The benefits of loyalty programs
What not to do when creating a loyalty program
How to determine if your business is ready for a loyalty program
The steps for creating a successful loyalty program
Use the Table of Contents below to navigate this article.
Table of Contents
What is a Loyalty Program?
The best way to define a loyalty program is to look at what it isn’t. A loyalty program isn’t:
A way to trick people into buying your products
About forcing people to love your brand
A strategy for instantaneous business growth
A technology solution that miraculously fixes all your problems
All the tactics you use to strengthen your brand focus on addressing the needs of your target customer at each stage of an evergreen sales funnel. What we mean here is that you don’t stop paying attention to your customers once they’ve made a purchase. Instead, you keep engaging and building relationships with them so that they become your repeat customers and unofficial brand ambassadors.
It’s all about shifting from being product-centric to being customer-obsessed. And not in a way where you’re bombarding customers with sales material all day, every day. Far from it!
Your customer obsession helps you always make customers happy and provide the best experience possible so that they fall in love with your brand. It’s about melding culture, people, and technology together seamlessly so that your customers are satisfied and eventually become loyal customers.
Let’s be clear. A loyal customer isn’t only someone who loves your brand and tells people about it. That person has to make a certain number of purchases (five in fact) before becoming a part of the loyal customer category.
But, a loyalty program encourages existing customers, regardless of the number of purchases made, to either keep purchasing or spread the word about your brand.
Nothing sells a brand better than word-of-mouth advertising. A loyalty program incentivizes the word-of-mouth advertising process by encouraging your existing customers to either keep purchasing or tell others about your brand.
There is always some type of reward in exchange for these repeat purchases or brand promotion. In fact, Goran Dautovic reports that more than “70% of [American] consumers are willing to recommend a brand that has a good loyalty program.”
A loyalty program is an incentivization system that provides rewards to existing customers in exchange for repeat purchases, referrals, or both.
What Are The Benefits of a Loyalty Program for E-commerce Stores?
A customer loyalty program is one of the most commonly used customer retention strategies by businesses across industries. Tom Caporaso states that “it costs five times more to attract a new customer than it does to retain one, and increasing customer retention by just 5% leads to a 25% to 95% increase in profit.”
This mind-blowing reality supports the fact that about 90% of brands have a customer loyalty program. Your e-commerce store is missing out if you aren’t actively pursuing this effective customer retention strategy.
But, it isn’t about blindly hopping onto the bandwagon. You want results and the best way to get those results is to use the strategy-first approach. A customer loyalty program provides five benefits:
Improved customer retention
Increase customer lifetime value (CLV)
A competitive edge
Rich customer data is one of the best benefits of a customer loyalty program. You can get deep insights into customer spending patterns and spending behaviors. This data can then be used to inform decisions you make about your product line and the strategies you want to use to grow your business. Knowing exactly what the customer wants is a valuable golden nugget.
The data can also be used to create targeted marketing campaigns. For customers who repeatedly purchase certain products, you could offer:
Bundled deals to encourage them to purchase similar items
Special discounts that prompt repurchases
Special access to premium packages related to the frequently purchased items
Repeat customers are likely to spend increasingly more money with each transaction. A customer loyalty program helps you retain those repeat customers and entice them to spend more money over time. Ultimately, this leads to a sustainable increase in sales rather than a momentary sales boom.
Increased sales also come in the form of referrals. Repeat customers who are rewarded for referring their friends can be your biggest brand ambassadors. They’ll bring new customers in who keep your revenue line on an upward trend.
Improved Customer Retention
You already know that the ecommerce market is highly competitive. Customer retention becomes more difficult as competition increases with new brands entering the ecommerce space each year. Your brand will start experiencing a higher churn rate - a mathematical measure of when a customer stops buying from your brand within a specific time period.
Breaking down churn rate on a customer-by-customer level will reveal the number of purchases the customer makes over a specified time period (usually 30 or 60 days). The reality is that about 25% of first time customers make a second purchase. This means that your churn rate could be 75% after a customer makes an initial purchase.
The loyalty program you use for your ecommerce store can help you reduce the churn rate at each stage of the customer’s life cycle. This is possible because the loyalty program improves your customer retention rate. It’s a much better option than spending thousands of dollars trying to acquire new customers to compensate for those lost.
Shopify defines CLV as, “the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime.” Remember that loyalty programs help you create repeat customers.
These repeat purchases in turn increase the overall lifetime value of these customers. So, your focus shifts from having many customers who only make one-time purchases to getting more purchases from loyal customers.
A Competitive Edge
Customer loyalty programs help brands creatively meet the unique needs of their customers. You learn so much about the customer experience that you make each customer feel valued. This gives you a competitive advantage over other e-commerce stores that don’t have loyalty programs.
What Are The Types of Loyalty Programs?
There are nine common types of customer loyalty programs. The loyalty program you choose for your e-commerce store depends on your strategy. Remember, strategy first, technology after.
Before we discuss the nine main types of customer loyalty programs, let’s debunk a myth. Discounts don’t create loyalty! Any loyalty program based on discounts is unsustainable because it’s a strategy that’s very easy to copy. A price war with your competitor only leads to lost revenue.
Loyal customers are looking for value. They’ll pay full-price for something they find meaningful to their way of life. Your aim is to use your loyalty program to highlight the value your brand offers.
Point-Based Loyalty Programs
Point-based programs offer points in exchange for purchases. Oftentimes, a customer has to accumulate a certain number of points before becoming eligible for a discount or a freebie. This may seem contradictory to what we just said about discounts. It isn’t.
Our experience with clients has shown that only about 60% of points are redeemed. So, a good portion of your customer base will continue purchasing without ever redeeming their points. But, your customers will still feel like your brand is rewarding them because they have these points in their accounts.
Also, the dollar value you set for your points often means that it will take a lot of purchases before the customer can claim a worthwhile discount. So, your customer will end up in the loyal customer category if the aim is to get a discount. The customer will already find value in your brand and want to support it by the time the discount comes around.
You must be cautious though. Making it too difficult to access points can be a big turn-off for customers. Too many rules and restrictions are also deterrents.
Starbucks has a great (and effective) point-based loyalty program. The company’s loyalty program is tied to freebies rather than discounts. Starbucks’ points are called stars and customers can earn rewards if they accumulate 25, 50, 150, 200, or 400 stars.
The more points (stars) accumulated, the better the rewards. Here are some key takeaways from the Starbucks’ star program that you can apply to your customer loyalty program:
How people can get stars
The countries/regions eligible
Stores that may be unable to issue rewards
Other important details the customer should know
Tie rewards to freebies instead of discounts.
Create a tiered points structure with the highest tier offering the most attractive freebies.
Be creative with the branding for your program.
Premium & Subscription Loyalty Programs
Premium loyalty programs allow you to provide the best value to your high-ticket customers. These are the customers who’ll willingly spend premium prices for exclusive access. Here’s how it works - the customer pays upfront for immediate access to perks that can be used anytime.
This isn’t a loyalty program for the average customer. Instead, it’s a loyalty program that strengthens your relationships with your best customers. They get instant gratification and are more likely to become even better customers.
Some companies use the terms premium and subscription interchangeably when discussing loyalty programs. Both types of loyalty programs are actually quite similar. But, premium programs tend to focus on one-time (or annual) payments for exclusive access while subscription programs tend to focus on regular monthly payments for exclusive access.
Subscription box companies, such as BirchBox, have subscription loyalty programs. BirchBox’s subscription loyalty program is pegged to its loyalty points system. Customers earn points when they purchase subscriptions, refer friends, and/or write reviews.
Rei Co-op has the perfect example of a premium loyalty program. Premium members pay only $20 and get lifetime access to a range of benefits. It’s a one-time payment that brings instant gratification since premium members can access special pricing for outdoor school classes, garage sales, special offers, and 10% cash-back every spring.
Only consider a premium loyalty program if you can offer exclusive access to top-notch products or services immediately. A subscription loyalty program is only an option if you offer products or services monthly.
Tiered Loyalty Programs
You could choose to group your customers into tiers with each tier receiving specialized loyalty benefits. This is called a tier loyalty program. The value of the rewards increases as customers move upwards in the tiers.
A tiered loyalty program can be an add-on to an existing loyalty program. Marriott Hotels has one of the best tiered loyalty programs. The program has six tiers ranging from Member to Ambassador Elite. The rewards become increasingly enticing the higher you go on the tiers. You can view the details of Marriott’s tiered loyalty program by clicking here.
Here’s what you can learn from Marriot’s tiered loyalty program:
The membership levels cover a wide range of customers from those just making their first purchases to those who’re seasoned purchasers.
There’s a visual description of what customers at each tier can receive. This makes the tiered approach easy to understand.
There are three additional lifetime rewards that specifically nurture premium customers. Who wouldn’t want to be a Marriott customer with all these rewards?
Cash-back Loyalty Programs
Customers receive cash-back for a predetermined amount spent if a company has a cash-back loyalty program. It’s like saying you’ll get $1 back for every $20 spent.
One of the most popular cash-back programs is Kohl’s Cash. The cash-back a customer receives increases with each $50 spent. The trick though is that Kohl’s Cash is only available during occasional Kohl’s Cash promotions.
It seems like Kohl’s has a cash-back cycle. There may be a month or two where customers can earn Kohl’s Cash followed by a month or two when they can redeem the cash they earned.
Credit cards offer another popular example of cash-back programs. Most credit card companies offer percentage cash-back on purchases. For instance, the Citi Double cash-back card offers 2% cash-back on all completed purchases. That’s a sweet deal!
Here are some key takeaways from both types of cash-back programs:
Carefully consider the types of purchases that would qualify for cash-back rewards from your e-commerce store.
Determine whether a percentage cash-back or a fixed dollar cash-back would work better for your business.
Alternating cash-back redemption periods with cash-back accumulation periods could be a viable option for your e-commerce store.
Community Loyalty Programs
Community loyalty programs offer audience segmentation opportunities. You offer rewards and benefits to customers based on their community groupings. In this context, community groupings means a collection of customers grouped based on interests, topics, and/or values that are important to them.
Customers benefit from the experience of being a part of an active community of like-minded people. Luisaviaroma, an e-commerce store that sells men’s, women’s, and children’s clothing, has a special club for one of its most popular products - the LVR Sneakers.
Members of the LVR Sneakers Club receive exclusive sneakers and are only granted access for a year. There are also specific criteria to join. The customers must enroll in LVVR Privilege, earn 1,000 LVR points, and redeem those points before they can access the club.
The LVR Sneakers Club is one approach to a community loyalty program. You could also create a loyalty program where members get exclusive access to social media discussion forums and customer support. It’s all about making the customer feel a part of an exclusive group relevant to his or her interests.
Gamified Loyalty Programs
It’s possible to include gaming elements in loyalty programs through the use of challenges and/or badges. Let’s use Paola Mayfield’s simple online fitness store, Super Pao Fit, as an example. Paola is primarily a personal trainer, but she also sells resistance bands her clients will need to use during their sessions.
Paola could create a monthly challenge where her clients should complete 10 resistance band workouts. Those who complete the workout would receive a Rising Star badge. Any client who earns three Rising Star badges within a year would get a free one-hour session with Paola.
This challenge would keep her clients motivated to achieve their fitness goals. It would also build a healthy competitive spirit amongst them because they feel like they’re being recognized for their efforts. She could even create a Leaderboard so that her clients can compare their progress.
The key to making a gamified loyalty program work is to make it:
Relevant to the audience
Positive reinforcement for recurring behavior
A rich source of data. You can see what your audience responds to and make appropriate adjustments.
Free-Perks Loyalty Programs
Loyal customers get free rewards or gifts in a free-perks loyalty program. It’s your way of saying thanks for customer loyalty. The Starbucks example we discussed earlier can be viewed as a combination of points and free-perks since customers get free items when they accumulate a certain number of points.
But, free-perks don’t have to be connected to points. You could offer a free perk for every 10 purchases for instance. It also sweetens the deal when these free perks come as a surprise to the customer. Why not support a brand that gives me something useful for free because of my loyalty?
Let’s be clear though. All good loyalty programs should have a system for scoring customers. Free perks are good. For instance, you could give three perfume samples for each perfume purchase. But, there needs to be a mechanism on the backend to score customers.
A scoring mechanism is crucial because you don’t want to spend money on “cherry pickers” - customers who only take gifts and never pay full price. Scoring makes it easier to invest since there’s a predictable ROI.
For instance, you can look at your transactional data and create a list of customers with high growth potential, those you believe are most likely to spend top-dollar for increased benefits. Your scoring mechanism would track these customers and reward them accordingly. So, you’ll know that by giving one of these customers a free sample of your product, you’ll see a higher probability of growth in order value because this person isn’t randomly being given a feebie.
Mission-Driven Loyalty Programs
Mission-driven loyalty programs offer no direct benefit to the customer. Instead, they come from the perspective of the customer sharing a brand’s overall social mission. The customer enjoys knowing that a purchase supports a worthy social cause.
Bombas is a good example of a company with a mission-driven loyalty program. Not only does Bombas provide customers with high quality socks, but each purchase helps a homeless person. Bombas has a “give a pair when you buy a pair” mission.
A homeless person gets a brand new pair of socks each time a customer purchases a pair. They’ve already donated five million pairs of socks! This demonstrated that they have customers who believe in their mission and continue to support them because of it.
Some tips for running a successful mission-driven loyalty program include:
Tie the mission directly to your products.
Be authentic. People can sense you hopping onto a mission just to sell products. Don’t give them that impression.
You could consider partnering with a non-profit organization with a mission that directly ties in with your own.
Hybrid Loyalty Programs
Hybrid loyalty programs use multiple combinations of programs to provide the best customer experience. Some of the examples used throughout this article are actually hybrids. The Marriott Hotels example, for instance, uses both a tiered and points-based loyalty program structure although it’s primarily a tiered loyalty program.
Another good example is Chipolte’s rewards program. Loyal customers earn both points and the opportunity to participate in challenges. Successfully completing challenges increases the customer’s points balance.
Points can then be used for a wide selection of freebies. So, Chipotle combines points, gamification, and free-perks to create a hybrid loyalty program customers love.
Some tips to make a hybrid loyalty program work include:
Clearly understand the types of customers you have and the loyalty programs that would work best for them.
Develop a strong loyalty program management system that makes the hybrid experience run smoothly.
Do some trial-and-error in the initial stages to determine what hybrid combination works best.
When is a Loyalty Program NOT Worth It for An E-commerce Store?
A loyalty program becomes meaningless to any brand when any of these eight issues come to play. But, there are some additional issues worth highlighting.
An e-commerce store that sells big ticket items purchased infrequently by one customer won’t benefit from a loyalty program. Think about companies that sell houses and cars virtually. Those expensive, one-time purchases don’t warrant investment in a loyalty program for customers.
Less Than 1,000 Customers
It’s great to want your small e-commerce store to thrive. But, it can be difficult to run a successful loyalty program with less than 1,000 customers. There wouldn’t be enough customers to truly assess how best to employ a loyalty program management strategy.
You need a representative set of data if you’re using the strategy-first approach for your loyalty program. That’s the approach you should be using if you want the program to be effective. You won’t have a truly representative set of data with fewer than 1,000 customers.
Your best option in this case would be to create a Customer Relationship Management (CRM) program. The team at LoyalMe can help you do this. Starting with a CRM makes it easier for you to transition to a loyalty program when you have more than 1,000 customers.
Loyalty program management has many moving parts that require considerable investments of time and money. We usually recommend investing at least 2% of your revenue in your loyalty program budget so that you can hire the right experts. Expertise is crucial if you want a strategy unique to your business that effectively supports loyalty program technology.
Resources don’t stop at the expertise, strategy, and technology though. You should also consider loyalty program marketing. Your marketing team should be trained in the best ways to get this loyalty program in front of your target customers. It’s about marketing in a way that makes the program irresistible.
If You Want to Make Quick Money
It takes six to eight months to start generating additional profit from a loyalty program after you launch it. So, you can’t expect to earn a quick buck. It’s a long-term strategy that is only worth the investment if you stick with it.
Do Rewards Really Create Loyalty?
It depends. Rewards only create loyalty if they’re relevant to the customer’s needs and it’s impossible to get those rewards without being actively engaged in the loyalty program. They don’t create loyalty if:
It’s too difficult to collect enough points to get the reward
Delivery takes too long
The quality of either the service or the product is poor
Rewards form the basis of The Incentive Theory. People are attracted to behaviors that are rewarded. A loyalty program rewards customers for spending behaviors that help with business growth.
5 Steps For Creating a Kickass Loyalty Program for Your E-commerce Store
You will only experience the benefits of a loyalty program if it’s customer-focused and based on a well-developed strategy. Always carefully assess whether your e-commerce store is truly ready for this type of program based on its:
Existing customer base
Accessibility to expertise
If you’re lacking in any of these areas, you can reach out to us to help you fill the gap. You can start developing a kickass loyalty program for your e-commerce store when all four elements are solid.
Here’re five steps you should follow to make the loyalty program successful.
1. Start With a Strategy
A clear strategy will help you understand where you are now, where you want to be, why you want to be there, what’s missing, and how you can use a loyalty program to get there. It’s a strategy that must keep your customers at the heart.
The customer-centric approach starts with a deep understanding of why your customers support your brand. What problems are you really helping them solve in meaningful ways? Doing a deep dive into your customers' minds can then help you position and develop your loyalty program strategically.
This checklist helps you tick off all the strategy questions you should answer.
What are my competitors doing? Do they have loyalty programs? Are those programs working? What are the good and bad elements of their programs? How can I make our program better?
Do my customer’s needs and behaviors align with the loyalty program I want to create?
Is my business at the right stage of growth to support effective loyalty program management?
What quantifiable outcomes am I expecting from this loyalty program within the next 12 months?
How do I want my customers to think and feel about the program?
What will influence customers to become a part of the program?
How much money will I need to make this program successful? Do I have money for:
Loyalty program management
2. Design the Program
Five elements contribute to the design of a loyalty program:
Program type - You can choose one of the nine types of loyalty programs mentioned in this article. Figure out what will work best for your customers. Ensure that you choose a program that won’t cause your company to lose money!
Program benefits - What benefits can customers expect from your program? Remember, don’t make it difficult to access the benefits (but don’t make it too easy either).
Program rules - Develop a detailed Terms and Conditions document similar to Starbucks’ Rewards program and make it easily accessible.
Program operations - Decide whether your program is going to be exclusively online or if it’s going to be omnichannel. Choose the right person to lead the loyalty program management team.
Program analytics and reporting - Be clear about how you’re tracking the program’s progress. What are the indicators that you’ll use to determine if the program is meeting its goals? How often should reports be generated?
3. Develop a Growth Forecast and Budget for Different Scenarios
Your growth forecast and budget are based on:
The current and projected size of your customer database
The spend levels of your customers
How you expect CLV to grow
You’ll need a best-case, worst-case, and break-even budget that covers these elements. Consult with your Chief Financial Officer (CFO) to ensure these budgets are accurately developed.
There’s also an important consideration for points-based customer loyalty programs. You should discuss the need for liability funds with your CFO. Liability funds are essentially the money you’ll need to pay out rewards. You and your CFO should answer these questions:
How will the liability funds be managed?
What happens with breakage*?
Should points expire?
It would also be good to get legal advice about the regulations around the points.
*Breakage rate is the percentage of points issued that aren’t redeemed. High breakage rates indicate that your customers may be earning points, but they’re not actively engaged in your loyalty program. It could also indicate that your customers don’t know how to participate in your loyalty program.
4. Get the Technology Needed to Effectively Run the Program
You need one of the best loyalty program platforms to effectively run the program. These platforms are equipped with the technology necessary to make your strategy work. Four questions you should answer when searching for the best loyalty program platform for your business are:
Can it easily merge with your existing marketing technology systems?
Is it user-friendly so that all the relevant people on your team can access it?
Can it be adjusted or tailored to the strategy you developed?
Is it accompanied by an agency that can help so that you don’t waste time trying to understand the technology?
Not sure which platform to choose? Schedule a demo with us so that you can see if LoyaltyMe is right for your needs.
5. Develop a Launch Plan and Launch
Loyalty program marketing takes centerstage at this step. Your marketing team will need to develop:
A detailed launch plan
Strategies for getting consistent customer feedback
A plan for celebrating your most loyal customers on social media
Strategies for leveraging the customer loyalty program to encourage referrals
You’re ready to launch when all the planning is done!
Your e-commerce store can experience the benefits of a loyalty program. But, your business has to be ready to make this loyalty program work so that you can personalize the customer experience and boost ROI.
You have to decide whether to build CRM and loyalty expertise in-house or hire a partner. Remember that loyalty program management and loyalty program marketing require the right expertise if you want success.
LoyalMe is ready to provide the CRM and loyalty expertise you need to get the most value from a loyalty program. We’re happy to help you achieve the best results for your ecommerce store.
Schedule a demo with us to see if we’re the right fit for your needs.