How to Start a Loyalty Program: A Strategic Guide for Marketers

It’s well known that customer loyalty programs are a leading strategy to increase LTV, improve retention, and build strong relationships with customers. Most top brands have them, and in many cases, these programs fueled their rise to the top and continued success. Brand leaders in loyalty have been shown to grow their revenues 2.5x as fast as their competitors. It’s clear that a great loyalty program can turn your brand into a powerhouse.

For a brand without an existing loyalty program, the question is where to start.

Starting a loyalty program may seem like an enormous undertaking. Conceptualizing a full-fledged loyalty program can be difficult — it may be overwhelming to determine how to reward your customers, what to reward them with, and how to set tiers or statuses.

Take a deep breath — we’re here to help. We’ll take it one step at a time. Here’s a quick crash course on how to begin building your loyalty program.

Focus on Clarity, Rather than Complexity

Many of the loyalty programs you’re probably familiar with are layered with complexity — where you have to jump through hoops like riding X segments, traveling Y miles, and spending Z dollars to level up to Extra-Special-Best-Ever-Premium-Magnum status. Or you have to buy five specialty drinks, two new food items, and a coffee made for dogs to earn 100 bonus points. But you’ll jump through those hoops and buy the coffee made for dogs even when you don’t own one because you love the brand and are highly motivated by the rewards.

When seeing the complexity involved in some of the most successful loyalty programs in the world, brand marketers may think their loyalty program must be complex to succeed. Complexity is a privilege that comes with maturity. While complex systems can be highly successful for tried & tested programs, new loyalty programs should take a different path.

Start simple.

During the early stages of a loyalty program, aim to first optimize for customer sign up rates for the program. New loyalty programs should aim to provide quick value to customers in the simplest format. In order to capture customer attention, customers should be able to understand how the program works and the value that it will provide to them within a few seconds. Added complexity only increases the intrinsic cognitive load for a customer, which may negatively impact sign-up rates.

Most mature loyalty programs started simple. For example, the first iteration of the American Airlines AAdvantage program resembled a punch card, where taking a few flights earned you a free trip. As they’ve learned more about their customers, matured, and expanded partnerships, they’ve slowly added complexity over time.

Offer only a few high-quality, valuable rewards rather than many low-quality rewards. Make loyalty points simple to understand and easy-to-earn. Provide ample opportunity for customers to learn how the program works and when they can expect rewards.

Your customers’ success in understanding and engaging in the program directly reflects your brands’ diligence in building it.

Understand Your Existing Customers

Don’t put the cart before the horse. Before designing what a loyalty program will look like for your business, the first step is understanding where your customers stand today. Without a strong picture of your customer base, it’s difficult to determine which metrics to optimize with your loyalty program.

Utilizing data from your POS or CRM systems, build an understanding of how customers typically interact with your brand: how often they purchase, how much they spend, what products they purchase, etc. This data establishes a baseline, which you can use to compare your loyalty program with in the future as a measure of effectiveness. Customer data is the historical map of your business, representing patterns and trends in your customer behavior. You must identify specific metrics as targets for improvement in your program.

Next, survey and interview customers to identify their needs. Understand their perception of the brand (like what first attracted them to your brand, what their favorite products are, or where you could improve).

A loyalty program only works if it appeals to what customers want from your business. It’s the reason a customer will walk to get a bagel from your shop instead of stopping at one of the other 4 they pass along the way. Customers themselves are the best source of truth when it comes to what they want to be rewarded for and how they want to be rewarded.

It’s important to not move on from this step before you have a complete picture of customer behavior. While it may be tempting to push forward into launching your new loyalty program as soon as possible, understanding your customers is key to accurately building an effective program. It’s far more difficult to fix mistakes in the construction of your program than to avoid them in the first place.

Develop a North Star Metric for the Program

A North Star metric is used to define the purpose of your program. It’s the one key metric that you will track to understand impact and success. In order to be effective, North Star metrics must boost revenue, reflect your brand’s values, and evaluate progress. Relevant examples of North Star metrics are: visits per customer per month, purchases per customer per year, average order value, or page views per user per month.

Loyalty programs can be complex, so setting a North Star metric is crucial to creating a program that drives real value for both your customers and your business.

After spending time analyzing customer data, your key areas for improvement should typically begin to stand out. They may align closely with current company objectives, or they may be entirely new insights (though this is less likely).

There are likely multiple metrics that you would like to improve, but it’s best to identify a single metric to start. This focuses the effort of your program around a shared goal — enabling the mechanics of your program to have clear-cut measurability and key results. It’s also likely that your program will have second-order effects on other parts of your business, even when focused on a North Star.

Defining a North Star metric allows everything else to fall into place. Use this guiding light to assign what actions customers should be rewarded for.

For example, if your North Star is average order value, reward customers with points for every dollar they spend at your store and offer special bonus points for spending above a certain amount. Reward customers with a free sample of an additional item that you know they’ll love (like a side or a drink), so that they’ll start adding it to their order each time they come in. The functional components of your loyalty program (like tiers, points, and rewards) are the tools used to direct impact your North Star metric.

Maintain Your Brand Identity, Mission, and Voice

Brand identity, mission, and voice represent the personality of your brand. Your brand’s personality speaks to loyal customers. It bolsters the creation of an emotional connection with customers, beyond the transactional nature of a consumer-brand interaction. In many ways, your brand identity is what makes your brand unique. In a world with increasing competition, brand personality and authenticity is how you engage and retain consumers.

When building a loyalty program, it’s important to ensure that it makes sense within the context of your brand. Your loyalty program should utilize familiar language, references, and branding. For example, Starbucks loyalty points are called “Stars”, as a nod to the company’s name, and Sephora’s top tier loyalty status is called Rouge, invoking Hollywood glamour and exclusivity.

It’s not only important that the branding and naming of your program align with your established brand voice, but also how you reward customers. Rewards should deepen the connection between your brand and your customer. They should enable a customer to try a product that they haven’t before, give them exclusive access to special products, or a deal on their favorite item. Don’t reward customers with rewards that might seem random or external to your brand (like an Amazon Gift Card or a free pair of Airpods). Keeping rewards within your brand ecosystem not only maintains the coherence of the loyalty program, but can also improve the perceived value of your products as rewards.

Loyalty is an incredibly powerful way to build your brand. While it may seem daunting to begin, the potential upside is strong enough to take the plunge. Developing a loyalty program is no longer just for big brands. Small and medium-sized brands now have the opportunity to develop an effective strategy with a relatively small investment. Start simple, understand your customers, define your North Star, and retain your brand’s personality. Once your program is live, you can expand and iterate on your program as you learn more about your customers’ needs and behavior.

Hang’s expert loyalty team can help your brand get off the ground with your loyalty program. We’re building a next-gen customer engagement platform for your brand to create valuable, long-lasting relationships with your customers.

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