This comprehensive guide explores loyalty programs from fundamentals to advanced strategies. Did you know that 81% of consumers say loyalty programs influence their buying decisions? A well-designed program can increase customer lifetime value, reduce acquisition costs, and provide invaluable first-party data to optimize marketing efforts.
Who should read this guide: Marketing leaders, loyalty strategists, and business executives looking to enhance customer retention and drive sustainable growth.
What it is: A loyalty program is a marketing strategy designed to encourage customers to continue to shop or use the services of a business associated with the program.
How it works: Customers receive an incentive(s) for making current purchases and use this incentive(s) to help customers plan for future purchases with a business. The program fosters a value-exchange relationship between the business and its customers (continued purchases from a customer in exchange for incentives to purchase).
Why brands want a loyalty program: Loyalty programs nurture customer loyalty, specifically they drive repeat purchases and expand customer lifetime value.
Often brands leverage loyalty management providers to design and execute against a loyalty program strategy.
Loyalty management refers to the services and software that assist businesses in fostering long-term relationships with existing customers by encouraging repeated business and building brand loyalty.
This software involves the implementation and management of loyalty programs, rewards, and incentives to motivate customers to make recurring purchases.
Market evaluations predict that the loyalty management ecosystem will surpass $24 billion by the end of 2029.
| Year | Market Size (USD Billion) |
|---|---|
| 2020 | 3.65 |
| 2021 | 4.54 |
| 2022 | 5.57 |
| 2029 | 24.44 |
Growth Rate: 23.5% projected growth, CAGR 2023-2030
Source: Statista
Globally, consumers are primarily motivated to participate in a loyalty program when they feel rewarded. Unsurprisingly, consumers prioritize receiving value in exchange for their participation above all else. Strong loyalty programs create opportunities for members to realize value early in the customer journey.
Top motivating factors (in order of importance):
Source: 2023 Kognitiv Global Research
When a loyalty incentive is offered, brands can expect to see their consumers change behaviors across desired activities. Consumers are most likely to upgrade their hotel room, followed by purchasing a product or ordering a menu item for the first time when the brand incentivizes the consumer with a loyalty benefit.
Behavior change with loyalty benefits:
| Activity | Without Loyalty Benefits | Increase With Loyalty Benefits |
|---|---|---|
| Dine at the hotel restaurant | 76% | +2% |
| Upgrade your room | 69% | +6% |
| Try a new hotel amenity | 64% | +1% |
| Purchase a number of products/place a number of orders, then get one free | 63% | +2% |
| Purchase a product/order a different menu item for the first time | 55% | +6% |
| Extend your stay by 1 day | 53% | +5% |
| Purchase/place an order of a minimum or specific value | 50% | +4% |
| Place a certain number of orders over a period of time | 48% | +5% |
| Sign up for a subscription | 48% | -1% |
Source: 2023 Kognitiv Global Research
With a strong loyalty program, brands can expect a gain in customer wallet share:
Source: 2023 Kognitiv Global Loyalty Research
On average, loyalty programs influenced buying decisions for nearly 8 of 10 U.S. consumers:
Source: Statista, April 2022
Loyalty leaders grow revenues roughly 2.5 times as fast as their industry peers and deliver two to five times the shareholder returns over the next 10 years.
Source: Harvard Business Review - Are You Undervaluing Your Customers
Most marketers are faced with 4 common challenges:
Awareness: How do I introduce my brand without increasing my acquisition cost, when consumers have an abundance of choice?
Engagement: How do I keep my product front of wallet to grow customer lifetime value?
Insight: How can I better understand the consumer and their preferences to prepare for the future?
Optimization: How do I better leverage data and marketing tools to optimize marketing spend and lower operating costs?
| Challenge | Loyalty Response | Common Industries |
|---|---|---|
| High acquisition costs | Increase ROI by getting more lifetime value from each acquisition; Insights on long-term value drivers to optimize acquisition | Telco/Subscription, Financial services, D2C |
| Commoditized products/services | Differentiation vs. competitors; Value personalized to customer; optimized discounts | Commodities (e.g., Fuel), Telco/utilities |
| Consistency of purchase | Use historical purchase patterns to market for target frequency | CPG/Consumables, High-frequency retail |
| Fragmented spend / low SOW | Earning on transactional value; Tiering | Commodities (e.g., Fuel), B2B, Financial services, Retail |
| Consumer's needs change by life stage / product sequence | Better understand consumer life stage/behavior; Personalization | Multi-category retailers, Financial services |
| Don't own the customer relationship | Direct customer-to-brand relationship via loyalty; Track customer behavior across channels/outlets | CPG, Brands reliant on distributors |
| Building an emotional connection with consumers | Customer insights, linked to transactions; Status/recognition benefits, and badging; Exclusive/emotional rewards | Premium brands, Travel |
| Margin difference across channels | Different earning rates by channel; some don't earn; Channel-shift promotions | Travel, CPG, QSR |
| Negative impact of discounts on brand / expectations | Non-discounting benefits/status benefits; Rewarding behaviors outside of spending | Premium brands, Retail, CPG |
| Maintaining relationships across long purchase decision cycles | Rewarding use/interactions; Rewarding tenure | Durables, Specialty retail, Telco/Subscription |
If your brand meets 2 or more of the following criteria, you should strongly consider investing in a loyalty strategy:
Regular purchases give brands a reason to communicate with their consumers consistently; additional variety of products across categories can help drive additional communication touchpoints.
Highly commoditized products must often compete through mass couponing and discounts. Loyalty allows for a small portion of that spend to be re-allocated to program members through personalized offers designed to get ahead of purchase cycles and prevent switching to competitors.
Where an additional purchase can drive significant revenue – for example, where a key product drives full-shop trips; the incremental margin of an additional trip is high compared to the price of the product. Loyalty can dramatically lift a customer's total value by increasing 'share of shops'.
Consumers who feel an emotional connection to a brand (high NPS, social engagement, etc.) are more likely to stay active over time. Loyalty drives even higher engagement by rewarding members for interacting between purchases; it can also be used to improve perceptions and reach new audiences by delivering new value.
Loyalty programs increase consumer's perception of product value; adding additional products, brands or partners over time can increase this further, as more products = more ways to earn rewards. Brand collaboration through a loyalty program can deepen the value a member receives from the program, increasing levels of engagement and growth.
| Aspect | Traditional CRM | Traditional Loyalty |
|---|---|---|
| Focus | Action- or communications-journey focus | Lifetime-journey focus |
| Value Timing | Transactional/value now | Stored value (currency, tier; future value) |
| Structure Visibility | Structure hidden from customers | Structure motivates customers |
| Touchpoint View | Broad view of touchpoints | Narrow view of touchpoints (unfortunately) |
| Channel Priority | Digital-first; interaction-first | Digital & physical; purchase-first |
Loyalty programs benefit most industries, and as a result, a variety of loyalty program constructs exists.
Most commonly a points program. Program members earn points for their purchases and interactions with a brand. Points can be exchanged for benefits such as $$ off a purchase.
Program members receive perks based on achievements. Typically, tiers are earned through engagement metric achievements (e.g., spend thresholds) and the higher the metric, the richer the perk(s) awarded.
After a predetermined number of purchases, typically indicated by punches/scans (a physical or digital card that is stamped with each purchase), program members earn a benefit, such as a free item.
Awards customers a % of their spend over a period of time back in cash. Cash can either be dollars toward a future purchase with the brand or can be digital cash that can be used anywhere digital payment is accepted.
Program members receive discounted pricing when shopping with a brand. This type of program often (but not always) requires a membership fee (one-time or recurring).
A fee-based loyalty program that requires members to pay in exchange for transparent, typically always-on, benefit(s). Participating in a subscription program can take the form of a one-time membership fee or a recurring subscription.
Example: Amazon customers pay $14.99 per month and get free shipping and streaming of Amazon Originals.
Provides program members benefits upon purchase/engagement emphasizing customer excitement around "what will I get next". Benefit distribution often appears random to the member but can have business logic "behind the scenes" for qualification.
Provide program members access to published, exclusive benefits and perks on a frequent or always-on basis.
A multi-brand program that allows customers to earn benefits by shopping across all participating brands. Earning benefits typically is enabled through a single form of currency across all participating brands.
Tiering involves categorizing customers into different memebership levels based on their spending or other criteria. Each tier may offer specific incentives, recognition, and customer experiences.
This mechanic encourages customers to increase their loyalty and spending in order to move up to higher tiers and enjoy greater benefits – and to maintain their spending so they don't lose the benefits they have.
Loyalty allows a program to treat different customers differently and vary customers' experience by channel and across time. Tiering is one way to do this – with the goal of stretching and retaining members and their value.
Stretch: Tier thresholds set a target that members can stretch their value to reach – with well defined rewards if they do.
Retain: Customers work to maintain benefits once they're achieved, leveraging consumers' aversion to losing something once won.
Status & Recognition: If status is important for your members, tiers can communicate members' importance to your brand – and show their elevated status to their peers.
Gates & Badges: When an action or achievement is needed to qualify for a part of the program, gating communicated through tiers can be effective.
Step-Changes: Rewards often progress in line with members' activity. If there are step-changes in value that we want to reflect, or distinct value groups you'd like to keep within a single program, tiers can provide this differentiation.
Allocating Benefits: For key benefits that aren't appropriate or feasible to award to all members, tiering can provide the rules & reasoning for why they're being restricted.
To decide, take a similar approach to other design decisions:
Quantitative: Are customers different enough in a relevant way to justify tiering? Do I have enough customers to make tiering worthwhile?
Operational: Can I manage the ongoing operations to update customers' tiers and deliver them differentiated experiences?
Motivational: Will tiers motivate customers to change their behaviors? Do I have a variety of benefits to offer to differentiate tiers?
Expectations: Would tiering differentiate my program from competitors'? Is it a 'table stakes' expectation?
Alignment: Does tiering align with my program vision, objectives, and brand promise? If your brand is about simplicity, equality, or everyday value, for example, providing some customers elite status may not be a good fit.
This decision framework will help you decide, step-by-step, whether you should launch a tiered loyatlty program or a non-tiered loyalty program.
Step 1: Assess Customer Variance What level of variance exists between your customers?
Step 2: Evaluate Benefit Variety Do you have a compelling variety of benefits to offer members at each incremental program tier? (Variety of benefits should be used to finalize count of tiers)
Step 3: Cost-Benefit Analysis
Tiers rules & conditions can make a program over-complicated for customers. For the broadest engagement, keep them simple.
Evaluating, communicating, and delivering tiers and their benefits can be complicated and costly.
Tier rules and benefits are a promise to customers; changes perceived as negative can impact a brand & members' engagement.
The measure chosen to decide tier achievement (e.g., spending) can distract you and your customers from other valuable behaviors.
New and lower-tier members' benefits need to be engaging, and tier requirements shouldn't discourage them. They may have the most potential to grow.
Customers may see no advantage in progressing further once they've reached a tier criteria, especially if the next benefit level seems unachievable.
Balance spending on tiers with other incentives – particularly targeted and personalized offers.
Gaming tier rules may benefit customers, but not your brand. Watch also for ways your program's short-term promotions/tactics may impact your tiering.
Other program elements can be used in place of or alongside tiering:
Rewards for reaching milestones below or between tier thresholds. These can provide more frequent & achievable targets for customers to stretch for, a sense of progress, and a taste of what higher status would offer. Used by American Airlines and other travel programs who have large distinct member segments.
Members can earn status signifiers for transactions or other activities they accomplish. These badges may not provide tangible incentives, but they signify progression, expertise, brand engagement, and status to other members of the brand community and to members themselves.
Not all tiers need to be publicized or their criteria clearly explained. Making tiers secret increases their perceived exclusivity and status. It gives brands more control over tier size and the flexibility to use criteria that are more complex or not well-aligned with branding.
As with tiers, subscriptions support giving different treatment to some customers and give a justification for doing so. Subscriptions give benefits proactively rather than retroactively. They can be offered to allow "earn into" or "pay to get" tiers. Be aware that paying members may have a different value, expectations, and profile to those who 'earn' their way to status.
Gamification is a strategic approach that incorporates game elements and principles into traditional loyalty programs to engage and incentivize customers, ultimately encouraging them to be more loyal to a brand. This innovative technique leverages the motivational aspects of games to drive customer behavior and create a more enjoyable and rewarding experience.
Gamification allows programs to leverage elements such as points, rewards, challenges, leaderboards, personalization, and feedback to create an interactive and engaging customer experience. By incorporating these features, businesses can motivate customers to participate more actively, make repeat purchases, and foster a stronger sense of loyalty and brand affinity.
All loyalty has traces of gamification. But there are some key distinguishing features.
Emotional & Irrational: By tapping into psychological & emotional triggers, gamification can draw significant customer engagement for relatively little reward.
Reward Loop: By prompting customers to take an action and offering a variable reward, customers will be incentivized to invest time or money – increasing likelihood of re-engaging with an activity.
Behavior Simulation: By creating simulated environments for customers to interact with (e.g., games, surveys) – customers may indirectly provide valuable behavioral data.
Artificial Context: Creating an artificial context in which customers may interact with the program; rules which may not be logical, but that members will follow.
CX: A strong CX complements the believability of the artificial context, and it too can be perceived as a reward (e.g., coloring, reward graphics/animations).
Creates motivation and fosters an emotional connection.
Builds competition & establishes a natural segmentation.
Rewarding spend & engagement activities keeps customers hooked.
Integrates and helps members associate the brand with daily routine.
Creating time & inventory limits on rewards & challenges can drive "grinders".
Leveraging interactions & shared data to create more personalized experiences & offers.
Incentivizing data sharing with interactive visual content and points earning.
Keep things exciting with diverse method of attainment, scale & prize type.
A customer is charged an upfront fee that then grants the customer access to benefit(s), regardless of ongoing purchases/engagement.
Examples of benefits:
Example: Amazon, customers pay $14.99 per month and get free shipping and streaming of Amazon Originals.
A customer commits to a recurring value of payment of a specific product or service, in exchange for access to benefit(s).
Example of benefits:
Example: Pampers, customers save 15% on Amazon when they pay for 5 or more products in one auto-delivery to one address (delivery can range from every 2 weeks to every 6 months).
Note: There are some companies (e.g., Amazon) who may combine these models, however it often requires additional funding models. For example, with Amazon, their "subscribe and save" feature is funded by the merchant NOT Amazon.
Keep in mind that it's possible to have multiple membership types within one brand's ecosystem.
| Objective | Recurring Payment Membership | One-Time "Pay to Play" Membership | Unpaid "Free to Join" Membership |
|---|---|---|---|
| Acquisition & Enrollment | ◑ | ◑ | ● |
| Trip Frequency | ● | ◕ | ◕ |
| Spend & Margin Upsell | ◑ | ◕ | ◕ |
| Cross-Sell | ◕ | ◕ | ◕ |
| Brand Engagement | ◔ | ◑ | ◕ |
| Retention | ● | ◕ | ◔ |
Key for the above table: Low ○ → ◔ → ◑ → ◕ → ● High
Free is a great tactic to drive attention and immediacy for enrollment but doesn't always lead to quality acquisition. This can mean programs over-award benefits to unengaged "one and done" members. Depending on the impact of this on a business and customers' annual spend and frequency, paid memberships can be considered for cost-benefit management.
For businesses with a higher usage/compliance sales cycle, recurring memberships (often considered subscription membership programs) can be leveraged to lock in member activity/share of wallet. Annual recurring memberships can also be a way to keep the program top-of-mind – reminding members to get their money's worth.
Free or low-barrier-to-entry programs are a great way to get consumers into the brand with a product/service that they know and upsell them as their tenure grows. Upsell-focused programs often rely on "goal setting" and may leverage tiering as a richer value exchange between a brand and a customer.
Free or low-barrier-to-entry programs can be used to build a larger base, whose lower engagement means there is more opportunity to cross-sell them additional products. However, because first-time cross-sell take-up often requires a transparent incentive, paid programs can be used for this goal.
When engagement vs. spend is the primary business objective, membership fees are harder to justify. This is primarily because the consumer may see a clear case at the time of enrollment for the fee "to pay for itself" – making enrollment and retention harder to manage.
Requiring payment in exchange for a benefit is a leading way to boost long-term retention. The key to success: make sure that the benefit is consistently delivered, and the perceived/monetary value is worth the one-time or recurring fee – and have a plan for renewal experience & marketing management.
Subscriptions, while growing in popularity, still make up the minority of online shoppers globally.
Share of online shoppers who have tried shopping via subscriptions in selected countries worldwide in 2022:
| Country | Percentage |
|---|---|
| United States | 31% |
| United Kingdom | 27% |
| Spain | 24% |
| France | 18% |
| Germany | 17% |
Source: Statista 2023
According to 2023 Kognitiv research:
A 2022 survey from the Kearney Consumer Institute found:
This puts more pressure on brands to ensure they have the right strategy in place prior to launching a subscription program.
Leading reasons consumers canceled product/service subscriptions worldwide in 2023:
| Reason | Percentage |
|---|---|
| I no longer had a need for this subscription | 39% |
| Too expensive | 39% |
| There were unexpected/increasing fees | 31% |
| It did not suit my lifestyle | 26% |
| Product quality was inconsistent | 25% |
| I did not like to be tied to a contract | 25% |
| I was unable to customize subscriptions (e.g., frequency, size of order, contents) | 23% |
Source: Statista 2023
90% of companies currently employ a form of customer engagement or loyalty program.
Source: Accenture - See Beyond the Customer Loyalty Illusion
Despite widespread adoption of loyalty programs, true customer loyalty remains elusive:
In order to deepen customer loyalty and build long-term value, brands need to transform how they listen, understand, and show value to the consumer:
The majority of brands struggle to connect data and activate against consumer cues.
57% of companies worldwide don't have a strong ability to listen for behavioral signals from their customers; making it challenging to focus on the customer and cultivate loyalty.
How companies rate their ability to listen for behavioral signals:
| Rating | Percentage |
|---|---|
| Terrible | 7% |
| Not Very Good | 17% |
| Just Okay | 33% |
| Good | 39% |
| Exceptional | 4% |
Source: eMarketer - Customer Experience 2020 Part 2: Personalization and Data-Driven Experiences
61% of executives ranked personalization as a high priority – more than any other loyalty activator.
63% of brands increased loyalty budgets during the last planning cycle, and more than half of CMOs plan to increase their budget again despite market challenges and spending constraints.
Source: PwC - What's important to CMOs in 2025
Three major trends support the evolution of loyalty management:
Loyalty management software across retail and consumer goods, transportation, IT & telecommunication, BFSI (Banking, Financial Services, and Insurance), media & entertainment, and hospitality (both developed and emerging economies) continues to see a rising demand.
Advances in technology and the growing adoption of omnichannel and multichannel programs are also playing a vital role in driving the growth of the loyalty management market.
Ability of loyalty management platforms to facilitate enhanced analytics to reward customers intelligently while also catering to the growing customer preference for personalization is requiring loyalty management solutions to advance offerings with ML and AI.
Source: Grand View Research
With a global team of loyalty experts, Kognitiv delivers cutting-edge AI-powered solutions that elevate traditional loyalty programs, ensuring long-term customer retention and business success.
Kognitiv's Impact:
| Metric | Value |
|---|---|
| Stores / Locations | 28,000+ |
| Revenue impact per year | $20 BN |
| Registered members (first-party data) | 230 MM |
| ROI from omnichannel personalization | 615% |
AI/ML-powered insights and activation to maximize customer lifetime value. Understand your customers and get intelligent recommendations that are easy to action.
Quick-to-deploy, scalable loyalty system with 200+ connectors for easy omni-channel activation. Our loyalty platform that binds brands and their customers more tightly together.
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