Loyalty Rewards Program: Key Learning from 5 Industry Giants with Case Studies and Examples

Ever wondered how a company like LEGO, the world's largest toy manufacturer, came out on top in the era of the internet and the time when virtual recreational activities have taken over?

One answer: Customer loyalty reward program. In the early 2000s, LEGO faced financial difficulty due to video games and the internet which pushed the company to the brink of bankruptcy. However, LEGO staged a remarkable comeback, as it surpassed Mattel to become the world's leading toymaker by embracing its customer base.

For over 75 years, the company designed toys with minimal customer input. This approach needed an overhaul. Over the past decade, LEGO learned the value of collaboration and began building a strong relationship with its fan community.

The traditional model of companies controlling customer interactions was fading. Today, interactions happen in a variety of online spaces: Twitch streams, social media groups, and online forums. LEGO recognized that this shift was crucial to LEGO's success. 

In 2008, LEGO launched a revolutionary platform called "LEGO Ideas." This platform empowered fans by allowing them to submit concepts for new LEGO sets. Other fans could then vote on these ideas, with the most popular ones receiving a review by LEGO staff. Winning concepts were transformed into official LEGO sets, with the fan designer receiving 1% royalty. 

"LEGO Ideas" has seen tremendous growth. The platform boasts over a million users, with a staggering 26,000 submitted ideas. This collaboration has resulted in the creation of 28 unique sets, including a set honoring the "Women of NASA" and a playable LEGO piano. Through "LEGO Ideas," the company transitioned from simply building toys for customers to building them with an engaged and passionate community. 

One can say that by fostering genuine connections and empowering passionate individuals, companies can build thriving communities that will contribute to their long-term success. Therefore, in this blog, we will share our tips on how to build customer loyalty by learning from the biggest enterprises. 

What is a loyalty rewards program? 

A customer loyalty program refers to a marketing approach that recognizes the efforts of customers and rewards their continuous preference for their brand over competitors. This strategy encourages customers to keep coming back as these programs typically dole out points, discounts, or other special perks to customers for making repeat purchases.  

The more a customer spends or the more frequently they shop, the more rewards they earn. Although this strategy might make many wary, there is a psychological allure that rewards have which makes such programs worth the investment.  

With psychologist Norbert Schwarz revealing that even a small gesture, like a 10-cent reward, can create a sense of obligation (reciprocity) between people, a company can implement these programs without significant expense. To corroborate this, an Accenture study has revealed that customers enrolled in loyalty programs tend to spend up to 18% more compared to non-members. 

If done right, a customer reward loyalty program can easily: 

• Retain customers as these shoppers make purchases based not on just the price points, but the shared values, engagement, and the overall experience they have had of your brand. 
• Gain more referrals. If your customers are enjoying your brand, they will talk about you to their friends and family.  
• Be cost-effective. According to Harvard Business Review, it is 5 to 25 times more expensive to acquire a new customer. However, 65% of the business is driven by repeat customers. 
• Get authentic content that works as your products' testimonials and instill trust. They will ultimately be the ambassadors for your brand. 

Let’s go through some mind-blowing facts about customer loyalty programs. 

Doing your due diligence for customers incorporating a customer reward loyalty program will determine multiple aspects of your business, including the retention rate, and CAC. However, to gauge the loyalty of a customer, you can choose to implement multiple ways. Let's discuss the different types of customer reward loyalty programs that you can run. 

Types of loyalty reward programs

Loyalty rewards programs encourage customers to return and make repeat purchases. These programs offer various rewards for customer engagement and generate brand loyalty. Here's a breakdown of some popular loyalty program structures: 

1. Points-based programs

Customers earn points for actions like purchases, reviews, or referrals. These points can be redeemed for discounts, free products, or exclusive experiences.  

2. Value-based programs

Rewards are personalized based on a customer's past purchases and preferences. This fosters a sense of exclusivity and caters to individual needs.  

3. Tiered programs

Customers progress through tiers based on their spending or engagement. Higher tiers unlock increased benefits like exclusive discounts, priority access to new products, or personalized customer service.  

4. Subscription-based programs

Customers pay a subscription fee for ongoing benefits. This can include free shipping, access to exclusive products, or early access to sales.  

These programs are important because they: 

• Increase customer retention. 
• Boost customer engagement. 
• Gather valuable customer data.  

Let us share with you five case studies to showcase how a customer loyalty rewards program has the mettle to alter the course of your business.  

Case studies

Following are five case studies on which we will base our key findings on customer loyalty rewards programs.

1. Starbucks reported a substantial 7% increase in sales with three major loyalty programs 

Starbucks is a well-known and successful beverage brand around the world. While their delicious drinks are a factor, a major reason for their popularity is their loyalty program. However, Starbucks, amidst stark competition, wanted to drive customer loyalty and spending. Moreover, Starbucks aimed to create a more engaging experience that goes beyond just a cup of coffee. So, the beverage mammoth implemented three customer loyalty rewards programs to enhance the overall Starbucks experience. 

Solution

The Starbucks loyalty programs began on December 26th, 2009. There were three loyalty programs driven toward one single aim: to increase sales, improve retention rate, and significantly redefine the customer experience at every given touch point. Let's stretch more on how each type of retention tactic worked out for Starbucks.  

Earning Stars: Starbucks Rewards used a tiered system to award Stars, their points currency. Members earn Stars for purchases made with a registered Starbucks Card or the mobile app. The program encourages different ways to participate, creating a more rewarding experience for customers. Through this campaign, you, 

• Earn 1 Star for every $1 spent when paying with cash, credit, or debit cards. 
• Earn 2 Stars for every $1 spent when using a preloaded digital Starbucks Card. 
• Earn bonus Stars through special promotions and offers. 
• Earn double Stars on certain travel days and promotional days.

Redeeming Stars: Stars can be redeemed for various rewards at different levels. This structure caters to individual preferences, allowing customers to choose between smaller, immediate rewards or save Stars for more valuable items. This program allowed its customers to:

• Redeem 25 Stars for a free drink customization, like an extra shot of espresso or a different type of milk. 
• Redeem 50 Stars for a complimentary hot beverage, tea, or a bakery item. 
• Redeem 150 Stars for a handcrafted drink, hot breakfast sandwich, or parfait. 
• Redeem 200 Stars for a lunch item, such as a salad, sandwich, or protein box. 
• Redeem 400 Stars for packaged coffee beans or select Starbucks merchandise.

Coalition Loyalty: Starbucks and Delta Airlines partnered to offer combined benefits for frequent flyers and coffee lovers. It was a rather strategic yet refreshing take on loyalty schemes as they linked the Delta SkyMiles® and Starbucks® Rewards accounts of the customers. This allowed them to earn Stars and miles simultaneously and unlock exclusive perks. The Coalition loyalty allowed the customers to:

• Earn double Stars on days you travel with Delta. 
• Earn 1 mile per $1 spent at Starbucks when you link your accounts. 
• Gain access to special offers for earning additional Stars and miles.

Result

It was a wide-out customer loyalty program designed by Starbucks to gather customer data and leverage that data to turn it into a strategy. As a result,  

• These customer loyalty programs amassed over 30 million active members 
• The reward loyalty rewards program contributed to nearly 60% of the brand's total revenue.  
• Starbucks reported a substantial 7% increase in sales primarily attributed to the efficacy of its rewards program.

2. Costco’s net sales increased by 9.7% to $138.4 billion owing to its revolutionary membership program 

Costco is one of the most influential multinational retailers which has a record of 94 million Costco membership cards worldwide. However, the wide network of people preferring Costco over other retailers isn't the reason why it is influential. It is because of its unique business model and operational philosophy.  

The company operates an international chain of membership warehouses under the "Costco Wholesale" name. What is more scintillating is that it offers quality, brand-name merchandise at lower prices than conventional retail sources. This factor has led many to turn to Costco.

The membership plan turns enthusiasts into fans

To ensure that Costco remains a fan-favorite amidst the growing competition, Costco implemented a unique membership loyalty model. Costco's membership-based approach fosters customer loyalty and repeat business. The company offers three types of memberships - Executive, Business, and Gold Star. Each membership has various benefits and discounts. 

This strategy focuses on retaining members and driving sales through exclusive offers and services. Moreover, this membership enthusiasm extended to social media platforms which Costco leverages fully to keep the customers hooked. It has dedicated Instagram accounts like @costcodeals and websites like CostcoInsider.com. 

The reach of Costco's influence goes beyond shopping, becoming a travel destination for some fans, with one visiting 70 stores, and even a wedding venue for at least one couple.  This level of devotion to a grocery store might seem unusual to some, but not to Costco shoppers.

Costco Membership is 'THE STRATEGIC PLAN' your company needs

Costco creates a deliberate strategy to cultivate loyal customers. One key element is the membership fee.  Costco requires customers to pay an annual membership fee to shop at their stores. This fee creates a sense of exclusivity. Customers feel they are part of a special group with access to unique benefits.

There's also a psychological aspect at play.  Since the membership fee is already paid which is a sunk cost, members feel motivated to get their money's worth by shopping at Costco frequently and buying more items each time.

This is according to a study on club shopping by Kusum Ailawadi. Costco's strategy is effective.  The company boasts a high membership renewal rate and many paying members. So, as a result, it has a very loyal customer base.

Costco offers the best value to members by selling high-quality items at low prices and providing excellent service. They carefully select top-notch products and negotiate with suppliers for savings passed on to members.

Popular examples include their $4.99 rotisserie chicken and $29.99 sheet cake. Costco prioritizes low prices over maximizing profits, and its generous return policy reflects its commitment to customer satisfaction.

The commitment pays off

Several factors contribute to Costco's success. 

• Customers appreciate the enjoyable shopping experience, the value they receive for their money, and the bulk-buying options.   
• Membership fees became another source of revenue for Costco 
• Costco's financial performance in fiscal year 2018 was strong.  
• Net sales increased by 9.7% to $138.4 billion. 
• Membership fee revenue grew by 10.1% to $3.1 billion, and profits rose by 17% to $3.1 billion, according to the company's annual report. 

 3. Lego records a staggering 3,280% rise in loyalty transactions after implementing its own loyalty program

Lego, a well-known and beloved toy company, has always found success with its innovative and fun products for all ages. However, in today's competitive business environment, having strong customer relationships is essential.  According to a Salesforce study, many customers appreciate personalized offers and rewards programs. 

LEGO not only understood that it had to change its retention tactics but required new ways to significantly increase revenue and strengthen customer relationships. So, to cultivate lasting customer loyalty in a competitive marketplace, Lego decided to create its own loyalty program. 

A tailored loyalty program drawn carefully to drive results

Lego decided to create a loyalty program to encourage customers to keep coming back. They partnered with ZAP, a company that specializes in creating loyalty programs for other businesses. The tailored LEGO loyalty rewards program offered benefits such as points and exclusive discounts for members. 

The program was easy to integrate with LEGO's existing operations and provided full control over branding and customer experience. This allowed Lego to maintain control over the program's design and keep its brand at the forefront of all customer interactions.

ZAP also helped Lego integrate the program with their existing systems quickly and efficiently, reducing costs and ensuring a speedy launch. This resulted in a program that customers were excited to join. 

 Astonishing results

LEGO's loyalty program achieved remarkable results within its first year. 

• The number of customer visits increased by 3,691% 
• New members joined at a rate of 2,310% higher 
• The value of loyalty transactions rose by a staggering 3,280%.

4. The Prime Effect: Amazon converts 72% of trial users to paid users using a unique loyalty program 

Introduced in 2005 as a paid subscription service offered by Amazon, Amazon Prime has become one of the most sought-after services worldwide. It has reached over 200 million subscribers worldwide by 2021, with its constantly expanding features. Prime members get to access a range of perks that cater to different needs and preferences of the consumer. 

Their benefits start from free and fast shipping, and access to streaming services like Prime Video and Prime Music, to exclusive deals, and more. Amazon Prime has become a highly successful loyalty program in recent years, even without relying on points or basic predictions of customer behavior. This case study explores how Amazon Prime has managed to garner the attention of millions, and exceptionally, retained its consumers through the market shift. 

The Problem

Although a favorite in the market, Amazon recognized significant hurdles for customers completing purchases. Their analysis revealed the slow shipping speeds and minimum order amounts for free shipping to be the source of the problem. Understanding the impact of the loyalty program, they set out to implement one without including the traditional approach. As there are already too many customer loyalty reward programs with points and rewards, Amazon knew people wanted real benefits now, not something they had to wait for, so they looked for a different solution.

So, they developed a paid yearly membership, Amazon Prime, which directly addressed customer pain points by providing fast and free shipping on eligible items. This eliminated the need to worry about minimum order amounts or waiting for deliveries. In essence, Prime offered immediate and tangible value to customers, bypassing the drawbacks of programs that relied on points and delayed gratification.

Solution Amazon sought

Amazon Prime understands that customers want fast and convenient shopping.  To address this, they created a membership program that offers fast, free shipping and exclusive benefits like early access to deals and new products. Prime members benefit from fast, free shipping on their purchases. It eliminates a major hurdle in the online shopping process.  This focus on convenience extends beyond delivery speeds, as Prime also grants exclusive access to deals and new products before they hit the general market.

Prime membership also allows the consumer a library of streaming videos as it provides entertainment for members while simultaneously generating valuable data for Amazon to use in future content development. This creates a win-win scenario: members gain access to a vast content library, and Amazon gathers insights to refine its offerings.

Astonishing results

Unlike programs that rely on cash-back rewards, Prime focuses on providing a better customer experience. This strategy has paid off in spades as Amazon noticed:

• Rapid adoption rate, with 40% in subscriptions year on year even though the loyalty program is nearly 12 years old.  
• In 2020, Amazon reported that its global Prime membership base had grown to 200 million, up from 150 million at the end of 2019. 
• There were about 167 million Amazon Prime subscribers in the United States in 2023, and around 71% of U.S. Amazon shoppers were Prime members that year.  
• In Q1 2023, 72% of Amazon Prime trial users converted to paid subscribers, up from 67% in Q1 2022.  
• The same study shows, 97% and 99% of members renewed their memberships for the first and second years, respectively.

This shows that many people find Amazon Prime to be a valuable service. 

5. Sephora records industry-leading 6% rise in the Client Loyalty Index with new CLI in place 

Sephora is a widely recognized cosmetics retailer. It is renowned for its cutting-edge products and unwavering commitment to customer satisfaction. However, to stand apart from its competitors, Sephora implemented a customer feedback program. This initiative reflects Sephora's dedication to continuous improvement. Moreover, it ensures that their already exceptional customer experience remains at the forefront of the industry.

Problem with the existing system

Management required a clear view of customer experiences at individual stores to pinpoint areas for improvement.  However, the lack of a user-friendly system led to employee disengagement with customer feedback. Additionally, there was no existing system to gather customer insights on new products and initiatives.

CLI as a Solution

Sephora uses a metric called the Client Loyalty Index (CLI) to gauge customer loyalty. To improve this score, Sephora implemented a comprehensive customer feedback program. This program aimed to give managers a clearer understanding of customer experiences at individual stores, pinpoint areas needing improvement, and train employees more effectively. Sephora sought a flexible solution that would not only uncover potential new products and retail strategies but also allow them to track the effectiveness of their innovations. As a result: 

• They enabled a user-friendly interface with customizable dashboards.  
• Access real-time data analysis that allows Sephora to swiftly test and implement initiatives and products. 

Result tracked

Sephora's focused on enhancing the customer experience and it paid off tremendously:

• Since its launch in 2008, the company has observed continuous improvement across nearly all customer experience metrics.  
• They noticed a significant increase in customer loyalty, a 6% rise in the Client Loyalty Index. 
• The average user logs in two to three times more compared to before. 
• Sephora now rapidly evaluates new ideas by gathering customer feedback in real-time. 

Key Learning on how to hack the loyalty reward program

Based on our review of successful loyalty programs from various industries, let's explore the key learnings that we can incorporate into our program design. 

1. From Starbucks, we learned to 

• Incentivize the customers via rewards and loyalty points 
• Leverage multiple communication channels including a dedicated landing page, mobile app, emails, blogs, and social media to ensure widespread awareness and engagement. 
• Maintain consistent updates and transparency in front of the consumers 
• Consider going into a coalition loyalty program to expand the program's reach. It creates a more integrated customer experience. 

2. From Costco, we learned to 

• Offer high-quality products at low prices would prompt customers to choose Costco over other retailers. 
• Consider including an enjoyable shopping experience, bulk-buying options, and a generous return policy. 

3.  From Lego, we learned to 

• Offer tailored loyalty programs that offer rewards tailored to individual customer preferences can be even more effective. For such an instance, you can choose Giift's GiiftStudio empowers businesses to create personalized and interactive experiences that keep customers actively engaged and loyal. 
• Have control over brand experience. Ensure a consistent customer experience that aligns with their brand identity. 
• Keep tracking the metrics to measure the success of your loyalty programs. Analyse, adapt, and change accordingly. 

4. From Amazon, we learned to 

• Understand the customer's pain points and provide immediate and tangible value. 
• Leverage the data curated from the analysis to optimize the search engine for a better customer experience. 
• Provide a better customer experience by offering what the customers desire to enhance the overall shopping process. 
• Provide solutions that offer immediate value and convenience. 

5. From Sephora, we learned to 

• Consider implementing a well-designed customer feedback program as it can go a long way.  
• Get valuable insights into customer needs and pain points to identify areas for improvement and develop ideas.  
• Have a user-friendly system.  When customers find it easy to collect and analyze feedback, they're more likely to be engaged in the process. 
• Have an agile system in place. Sephora implemented their personal CLI to get real-time data. Getting real-time data analysis allows businesses to quickly adapt and implement changes based on customer feedback. This agility is crucial for staying ahead of the competition. Consider Giift for real-time data analysis. Giift's loyalty software provides comprehensive data analytics and reporting capabilities. Businesses can gain insights into customer behavior, purchase patterns, and program effectiveness.  

These data-driven insights help refine strategies, optimize the customer experience, and make informed decisions to boost sales and brand value. 

Conclusion

Customer loyalty rewards programs can encourage repeat business and boost customer engagement. By rewarding customers, businesses incentivize them to return and become more invested in the brand. This can lead to increased sales, customer lifetime value, and valuable data collection for marketing purposes. Implement a loyalty reward program to differentiate your business from competitors and show appreciation to customers.