Do Loyalty Programs Really Work?
30 June 2023
Amy Gavagnin
Do Loyalty Programs Really Work?

In recent years, loyalty programs have rapidly become a staple for businesses looking to redefine the relationship between brand and customer. What was once a simple transaction between the storefront and general shoppers, has now evolved into a race to create richer and more meaningful connections between the brand and individuals.

From airlines to coffee shops, many companies today offer a variety of rewards, gamified tasks, personalised communications as well as multiple other incentives to encourage customers to engage with them.

But do these programs really work? Does your business need one? Are they worth the investment?

In this blog, we explore some of the ways businesses can determine whether a loyalty program is the right solution for their business, as well as some of the alternative solutions available to businesses that are not quite ready to commit to a full comprehensive loyalty program.

The Short Answers

Do loyalty programs work?

Yes, loyalty programs do work. But they do not necessarily work for every business model, nor does every business model need or require a full comprehensive loyalty program.

However, the effectiveness of a loyalty program largely depends on how well it is designed and executed.

Click here to better understand how to design a successful loyalty strategy

Does your business need a loyalty program?

Ultimately, whether a loyalty program is the best approach will depend on the unique needs and goals of the business.

During the initial stages, businesses should ask themselves the following questions:

  • Does the business have sufficient margin to cover the cost of rewards?
  • What customer behaviours does the business want to stimulate via the program?
  • Is the business adequately resourced to manage the program?
  • Does the business have the technology required to implement and operate a potential loyalty program?

To determine whether a business is in true need of a loyalty program, it is also encouraged that the business first determines its core objectives i.e., what the business wishes to achieve by creation of a loyalty program.

Types of objectives may include:

  • Increase customer retention
  • Increase customer loyalty
  • Increase customer lifetime value
  • Encourage repeat purchases
  • Increase customer engagement
  • Boost brand awareness
  • Gather customer data and insights
  • Encourage referrals and word-of-mouth
  • Improve customer satisfaction
  • Gain a competitive advantage in the market

Should the business aim to achieve a number of various objectives through loyalty, it is recommended that the business kickstart its loyalty journey by creating a comprehensive loyalty program strategy.

To gain a better understanding of how to set up the right foundations for your loyalty program strategy see here.

However, other businesses that possess a singular objective could potentially explore introducing targeted loyalty elements as opposed to a comprehensive loyalty program.

Are loyalty programs worth the investment?

Not always, loyalty programs can be extremely expensive to implement and execute.

Depending on the level of complexity, loyalty programs can also make a significant impact across all departments within a business (e.g., marketing, legal, financial, customer service etc.).

Without proper knowledge and strategic insights regarding the true extent of how your program might impact overall business operations, missing small details early in the strategy design can lead to catastrophic end results.

In fact 77% of loyalty programs purely designed with transactional motives are said to fail within 2 years of launch.

However, with the right expertise, preparation, rewards mix and technology, loyalty programs have the potential to create extremely valuable results for the business.  

The Drawbacks of Loyalty Programs: Why They May Not Work for Everyone

While loyalty programs can be effective for many businesses, there are some cases where they may not be the best fit. Some examples include:

  • Low-Frequency Purchases:
    If a business sells products or services that customers only need to buy occasionally, such as a car dealership or a wedding planner, it may be difficult to incentivise repeat purchases through a loyalty program.
  • Complex Implementation and Maintenance:
    Implementing and maintaining a loyalty program can be complex and resource-intensive, particularly for small businesses. It requires dedicated systems, processes, and staff to manage the program effectively. Additionally, ongoing investment is necessary to update and adapt the program to meet evolving customer expectations and market trend
  • Low Margins and High Costs:
    In industries where profit margins are slim and operating costs are high, implementing a loyalty program can put additional strain on the business’s financials. Loyalty programs often involve offering discounts, rewards, or other incentives to customers, which can eat into already tight profit margins. If the business cannot afford to offer compelling rewards without jeopardising its financial viability, a loyalty program may not be feasible.
  • Poor hygiene factors:
    If a business has poor customer service or a subpar product offering, a loyalty program is unlikely to make up for these shortcomings.
  • Small Customer Base:
    If a business has a small customer base, the cost of implementing and maintaining a loyalty program may outweigh the benefits
  • Unique or Exclusive Products:
    Businesses that offer unique or exclusive products may not need a loyalty program to retain customers. Customers may already be drawn to the business due to the exclusivity or novelty of its offerings, making a loyalty program less necessary. Instead, these businesses may focus on maintaining product quality, customer service, and creating a unique brand experience.

It’s important for businesses to carefully assess their specific industry, customer behaviour, and business model to determine whether implementing a loyalty program would be beneficial or compatible. Strategically working through a range of design options will help ensure the framework adopted by a company is well-considered and appropriate.

What if a loyalty program is not the right solution for you?

While a traditional loyalty program may not be the best fit for every business, such businesses may wish to opt for a loyalty strategy or incorporate loyalty elements as an effective alternative to stimulate customer loyalty.

Loyalty strategies or elements can include (but are not limited to):

  • Gamification:
    Implementing gamification elements in your customer experience can create a sense of engagement and fun. By incorporating game-like features such as challenges, competitions, collectibles, badges, leaderboards, and rewards, businesses can encourage customers to interact more with their brand and build loyalty through a playful experience.
  • Experiential Rewards:
    Instead of traditional points-based programs, consider offering experiential rewards. This involves providing customers with unique and memorable experiences related to your brand. Examples include exclusive events, backstage passes, VIP treatments, behind-the-scenes tours, or personalised consultations. These rewards can create a sense of exclusivity and emotional connection, enhancing customer loyalty.

  • Social Responsibility Initiatives:
    Many customers value companies that are socially responsible. By aligning your brand with a cause or supporting a charity, you can attract and retain customers who share those values. Implement initiatives such as donating a portion of sales to a specific charity, organising community service events, or supporting environmental sustainability. Customers who feel connected to your brand’s purpose and values are more likely to remain loyal.
  • Surprise and Delight:
    Random acts of kindness and unexpected rewards can create positive surprises for customers, strengthening their loyalty. This strategy involves surprising customers with unexpected perks, gifts, or personalised offers. For example, a coffee shop might occasionally offer a free upgrade to a larger size or provide a complimentary pastry. These unexpected gestures make customers feel valued and appreciated.

  • Referral Programs:
    Encourage your loyal customers to become brand advocates by implementing a referral program. This involves incentivising customers to refer friends, write reviews, or share positive experiences on social media. By rewarding customers for their advocacy efforts, you can amplify your brand’s reach and build a community of loyal advocates.

  • Personalisation:
    Offer personalised services or experiences to customers by capturing relevant, individual data and educating them about the products or services that may interest them. Encourage your sales team to get to know your products and share personal experiences, which can create a stronger connection between the customer and your brand

Case Studies: Successful loyalty programs in action

Loyalty programs and strategies are a great way for businesses to retain customers and increase sales. While larger businesses have been using these programs for years, medium and smaller businesses are now seeing the benefits as well. By offering rewards and incentives, businesses can increase customer retention and generate incremental sales.

  • My Mcdonalds (Global)
    The introduction of My McDonald’s Rewards has contributed to the company’s two-year same-store sales growth of 14.6% in the third quarter (within the US alone). Global sales increased by over 12% in the quarter compared to the previous year, and by nearly 11% on a two-year pre-Covid comparison.

  • Starbucks (US)
    Starbucks announced that 90-day active membership in the United States rose 13% in the quarter to 27.4 million members with Starbucks Rewards members driving 53% of the U.S company-operated revenue.

  • Greggs on Tap (UK)
    Greggs on Tap in the UK has also seen great success with over 1,150,000+ app downloads across the country with an average 35% reward redemption rate.

  • Oz Hair and Beauty: Oz World (AU)
    Within the first three months of launch, the Oz World program has captured over 10,000 member sign-ups with currently over $100,000 credits accumulated across the member base with a 30% redemption rate. The brand also saw increases in average order values by up to 16%, with the average member placing approximately double the number of transactions during their active lifecycle period.

  • Bakers Delight: Dough Getters (AU/NZ)
    In one month, the Dough Getters program witnessed over 200,000 sign-ups across its 500 stores, which saw the business achieve 30% more program adoption than originally targeted. Members were also observed to spend an average of 25% more per transaction.

<a href="" target="_self">Amy Gavagnin</a>

Amy Gavagnin

Amy is a Senior Strategy Consultant at Loyalty & Reward Co, the leading loyalty consulting firm. Loyalty & Reward Co design, implement and operate the world’s best loyalty programs for the world’s best brands. She has worked in various areas of marketing, previously supporting departments at Westfield Scentre Group and Harvey Norman Commercial Division. Amy applies her skills across all aspects of the business, including promotional campaign management as well as loyalty program design, strategy development, and market research.​

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