A Practical Playbook for Customer Loyalty Programs

In the next era of eCommerce, you have two options: lose your hard-earned customers to the competition, or invest in building a brand that customers truly love.

The brand loyalty landscape

We all know how the story goes: the retail world is changing, and Amazon is the new sheriff in town. Big box retailers are shutting down stores, while digitally native brands are opening pop-up shops.

As the chasm between Amazon and the rest grows, brands are split into two camps. On one side, you have companies like Sears and Macy’s. They are Amazon’s casualties: old-school retailers who weren’t able to keep up with a quickly changing landscape.

On the other side, direct-to-consumer brands like Bonobos and Glossier continue to sustain growth at a crazy pace despite a tidal wave of rising acquisition costs.

This is the story we all know about the state of retail today. And it would be all well and good, were it not for one major snag …

If D2C brands are the future, then what happened to former “next big thing” brands like Nasty Gal, Fab, and Gilt? And how have established retailers like Ulta and Sephora not only weathered the storm, but thrived in the face of crushing competition?

These questions bring to light a key element that’s often overlooked: In a world where brands can no longer compete on price and functionality alone, loyalty is the most powerful tool you have for furthering your brand.

How retail brands are re-thinking loyalty

Retailers like Sephora and Nordstrom are pioneering a quiet revolution. They’re forgoing old-fashioned approaches and cookie-cutter programs, and re-focusing their efforts on understanding what drives loyalty for their customers.

They’re proving that despite the rise of new competition, it’s possible to not only survive, but to thrive in a quickly-changing retail landscape. 

“Although price and convenience are important for our customer, they are increasingly table stakes. More and more, consumers are looking to premium brands to provide value beyond the transaction,” explains Erica Richey, ThirdLove’s Head of Retention Marketing.

In order to keep customers in a loyalty loop, brands need not only to meet rising consumer expectations, but also to develop a deeper understanding of their customers and to seek out opportunities to add value beyond points.

How to future-proof your loyalty strategy

This playbook gives you a framework to identify the right program for your brand and business objectives. It doesn’t prescribe a plug-and-play answer, because the myth of a “one size fits all” program is what’s killing traditional loyalty programs in the first place. Rather, it’s designed to be flexible and dynamic, so you can adjust your strategy as your needs change.

Too many brands either fail to build a program that works because they don’t invest in finding the right formula for them, or they take a “set it and forget it” approach that doesn’t adapt to changing business needs and consumer behaviors.

The myth of the “one size fits all” program

The loyalty programs of the past were too complicated, transactional, and homogenous for the digital consumers of today. That’s why, in recent years, programs have evolved away from focusing exclusively on behavioral loyalty — getting that next incremental transaction — to include emotional loyalty drivers like experiences. But blindly prescribing emotional loyalty drivers as the ultimate solution is still a “one size fits all” mentality. 

While loyalty programs are made up of more or less the same ingredients (discounts, points, VIP tiers), how they are engineered varies depending on what you want to achieve.

Take points and discounts, staples of many loyalty programs, as an example. While both aim to incentivize purchases, points are more effective for targeting spending habits and engagement behaviors, while direct discounts offer the opportunity to popularize new product streams or achieve price discrimination.

The elements that make up a loyalty program vary based on aspects like your business model and industry. A subscription box needs a very different program than a wholesaler — but even among two retailers, like Nordstrom and Target, factors like margins and target audience create different needs.

While all loyalty programs share a few universal goals, the best programs incentivize the actions that matter most to your brand.

If you’re building a VIP program and want to boost lifetime value, it would be most effective to base tiers on spending behavior, like the total amount a customer spends or the number of times they purchase. But if you want to incentivize brand engagement, you’ll be more likely to choose actions like the amount of friends they refer.

Whether you need to decrease time to second purchase or promote new product lines, a loyalty program tailored to your business objectives will get better results than a one size fits all approach.

Finding the right program for you starts with two simple questions: what makes your business unique, and what are your goals? In the following chapters, we’ll outline a framework that will enable you to identify your needs and build the right program to target them.

As J.Crew’s former CEO said about their core customer: “She’s loyal as hell until we go wrong, then she wants it all on sale.” A customer’s relationship with your brand is constantly changing, and your approach to loyalty needs to be dynamic enough to adapt.

The new blueprint for loyalty

This flexible and dynamic framework takes into consideration the motivation and context of why a customer is buying from your brand in the first place. It’s comprised of three approaches to loyalty, each of which tackles different consumer needs and business goals: Transactional, Functional, and Emotional.

To understand the difference between the approaches, think about why you love your favorite coffee shop. Most likely, you’re loyal for one of the following reasons:

1. Good value for money (Transactional)
2. Convenience or quality (Functional)
3. Just love it (Emotional)

Brands don’t necessarily need to be excellent at everything to win a customer’s loyalty. They can choose an approach that brings the most value to their customers and addresses their specific business goals. 

The Transactional Approach focuses on lowering the barrier to entry in the early stages of a brand’s relationship with a consumer. 

The Functional Approach creates value above and beyond the purchase to turn occasional buyers into loyal customers.

The Emotional Approach caters to customers who love the brand for reasons that go beyond price and functionality. These are the customers who are willing to pay more because of their emotional connection to a brand.

The following chapters will hone in on how you can find the right approach to loyalty for your brand. We’ll dive deeper into the three different approaches of the framework and look at how real brands like MVMT, UNTUCKit, Thirdlove, and Soko Glam put them into action.

There’s an old saying that false love can be bought, but true love is priceless. You may not be able to buy loyalty, but financial incentives are a powerful way for bringing in new customers.

Overview

The Transactional Approach focuses on the early stages of a brand’s relationship with a consumer. It’s focused on offering real monetary value to lower the barrier to entry and improve acquisition.

What does it achieve?

1. Improves acquisition via referrals
2. Lowers the barrier to entry for the first purchase
3. Builds long-term loyalty via initial retention
4. Builds and sustains the relationship post-purchase (making additional purchases/reducing time to second purchase)

Transactional loyalty is most powerful in the early stages of the customer relationship. When a customer is first hearing about your brand, monetary incentives (like 25% off first purchase) provide the extra push to purchase.

Why does it work? Customers are price-conscious and enjoy getting a good deal: 71% say they want to be rewarded with discounts for their loyalty.  This will pay off later on, once your customers have had the opportunity to grow attached to your products. 39.4% of consumers are willing to spend more on a product for brands they love (even if there are cheaper options elsewhere).

This approach may be for you if:

• You generally have high LTV
• You want to focus on lowering the barrier to entry for new customers
• You need to show why your product is better than your competitors’

What type of brands is it best for?

The Hero Product

Brands with solid product lines that get people hooked are confident that once someone buys, they’ll stick around. They generally have high LTV and want to focus on getting people in the door. To do that, they need to give a little extra push to customers who are teetering on the edge of making a purchase. See UNTUCKit’s blueprint below for best practices for “hero product” brands. 

The Full Suite Brand

For brands that sell a wide range of high-end products, getting a customer who is already on site to make a first purchase is less of a challenge than it is for other brands that sell at high price points. These brands should focus on decreasing time to second purchase, because customers that make purchases across product lines are generally significantly “stickier” than customers that purchase a single product. The best strategy for full suite brands is offering immediate value to shoppers to encourage repeat purchases, coupled with a referral program that creates an integrated experience for top shoppers. For an in-depth example of a full suite brand, see Lauren James’ example.

The Lifestyle Brand

Lifestyle brands typically have high confidence that once a customer buys, they’ll stay loyal. Their goal is to attract more customers by decreasing the acquisition threshold with transactional appeal. From there, they rely on the product and brand to promote advocacy and grow the business. See MVMT’s example below for best practices for lifestyle brands. 

These include high-value perks beyond price cuts, like early access to new products or two-day shipping. These perks bring you closer to your most loyal customers and ensure they feel additional value from each new purchase they make.

Overview

The Functional Approach focuses on all the ways you can give tangible value to customers beyond monetary incentives. This approach is designed to inherently create value above and beyond the purchase.

What does it achieve?

1. Deepens relationships with closest customers
2. Prevents churn to other brands
3. Boosts perceived value without relying on transactional benefits

How do you continue to show value to customers without offering a discount every time? How do you make sure customers pick your brand over a competitor who offers a coupon?

You can only reduce prices so much. Eventually, you’ll need to find a way to increase the perceived value of purchasing from your brand. This is where functional loyalty comes in.

Functional loyalty programs allow brands to leverage perks beyond price cuts that leverage functional aspects like product (free samples, exclusive access to new products) or experience (free shipping).

This approach may be for you if:

• You sell products that people buy frequently
• You sell a variety of products and want to make sure they all get visibility
• You need an alternative to offering discounts
• You’re wary about reducing prices (e.g. premium or luxury brands)
• Your pricing model doesn’t leave room for promotions (e.g. subscription boxes)

What type of brands is it best for?

The Premium Brand

These brands need to prevent churn to the competition by consistently providing more value to loyal customers without reducing prices. By focusing on high-value functional perks, they’re able to deepen relationships with their most loyal customers while ensuring these customers feel additional value from each new purchase they make. See Thirdlove’s example below for best practices for premium brands. 

The Niche Brand

Brands with a very specific target market have likely built a strong emotional connection with their customers or developed a strong reputation. For these brands, the challenge is how to consistently provide more value to loyal customers without reducing the perceived value of their products. See FIG’s blueprint below for best practices for brands with niche communities. 

The Trusted Curator

These brands have a wide variety of products and their customers trust them to curate only the best. They don’t necessarily need to encourage more frequent purchases, but do want to ensure all product lines are getting visibility while deepening relationships with their best customers. See Soko Glam’s blueprint for best practices for brands like this.

How do you continue to offer value among your most emotionally loyal customers? How do you create a legion of brand fans who recommend you to everyone they know?

Overview

Emotional loyalty is deep-seated allegiance to a brand based on intangible benefits that often outweigh price, convenience, or product. The Emotional Approach seeks to fundamentally shape what people associate with your brand and focuses on answering the question, “What kind of brand is X?”

What does it achieve?

1. Creates opportunities for customers to engage with the brand beyond purchases
2. Builds a community of vocal brand advocates
3. Develops lifelong loyalty

Consider brands who’ve developed diehard loyalty, like streetwear brand Supreme: their customers are willing to line up for every new product drop and collaboration, and then share their purchases unprompted across every social channel. 

Emotionally loyal customers feel that your brand is a part of their lifestyle. The emotional approach is all about communicating your brand story and rewarding the customers who are dedicated to it. This approach also gives customers a reason to engage with the brand even when they aren’t buying, strengthening the connection between shopping sessions. 

This approach may be for you if:

• Your goal is to remain top of mind for customers
• You’re a wholesaler or sell products made by other brands
• You need to educate customers on your brand story
• You leverage inter-purchase engagement to drive repeat purchases

What type of brands is this best for?

The Retailer

When you sell products made by other brands, you need to build a name for yourself that goes beyond products. For wholesalers and resellers, branding is a constant challenge. To build a brand that’s not defined by products alone, driving social media activity can create engagement beyond purchase and build stronger customer relationships. See Best Choice Products’ blueprint for best practices for retailers. 

The Storyteller

Brands need to grow and nurture a community of advocates that identify with their cause and connect with their brand emotionally. For these brands, repeat purchases may be few and far between, so a loyalty program should focus on communicating your brand lifestyle and incentivizing customers to engage with the brand even when they aren’t shopping. See Sand Cloud Towels’ blueprint for best practices for storyteller brands. 

The Best Friend Brand

Brands aligned with a social mission target specific group of consumers who not only want the products but also care about the cause. These brands have added value built in, but still need to reach a critical mass of purchases. To reach the loyalty tipping point, a punch card campaign or another program geared toward incremental purchases is ideal. These brands should focus on points programs that offer rewards not only for buying, but also for referring like-minded friends. See Thrive Causemetics’ blueprint for best practices for brands in this category.