CRM technology

How Do Loyalty Programs Work?

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When we talk about loyalty programs we are talking about the specific tactics to be applied in a strategy based on promotions, discounts or rewards. 

This strategy has a curious characteristic: 

Despite not having a very good reputation (in fact, in this article we recommend others ahead of this one), they have existed for about 40 years now. 

Moreover, far from disappearing, more and more people are joining them. 

Therefore, we have to answer two questions first:

  1. Why this strategy has a bad reputation.
  2. Why companies continue to join it.

Why loyalty programs have a bad reputation.

Short answer: Because they don't work for most companies. 

Long answer: Because to make them work, you have to understand how they work, who to target and design these programs carefully. 

Applying a strategy without understanding it (and having it not work for you) is one of the oldest business mistakes there is:

  • An eCommerce sees that Amazon offers 24 hour shipping and wants to offer 24 hour shipping.
  • A hotel sees that American Express gives away hotel nights for expenses and wants to give away hotel nights for expenses.
  • One brand sees Nescafé raffling off a salary among its customers and starts drawing a similar one among its customers.

And so on. 

The problem is that these strategies are complex, and if you don't apply them carefully, it's very easy that, at best, they don't work, and at worst, they don't work and you lose money. 

Now, if you do it right, you can achieve great results just like Amazon, American Express and Nescafé do.

Why do companies continue to join a strategy with a bad reputation?

For one simple reason: they are very easy to implement. 

Other expectation-based customer loyalty strategies require profound structural changes to provide a service or product well above the market average. 

But loyalty programs can be as simple to implement (poorly implemented) as giving your customers a carton and giving them a dinner every time you stamp them 10 times. 

And how to build customer loyalty is cool, companies stick to the one they believe (wrongly) is the easiest to implement. 

That's why, in this article, we're going to talk about how to implement a loyalty programs that really works.

What to consider when implementing a loyalty programs?

For your loyalty programs to work you have to understand:

  • How much the rewards will cost you.
  • How much you will earn thanks to the programs.
  • Which clients you are going to direct it to.

The first two points are beyond the scope of this article: depending on the type of company you are, the type of program you design and the mathematical model you use to do the maths, it will vary a lot from case to case. 

However, let's get down to the last point.

Which customers should you target with a loyalty programs?

Most programs fail on this point. Which clients should we target with our programs? 

One of my favourite ways of segmenting clients for this purpose is that proposed by Harvard Business School: 


Customer loyalty Matrix

The purpose of the matrix is not only to analyse the loyalty of a particular customer, but also its profitability in order to give a specific treatment to each customer:


These are customers who are not very profitable or loyal. It is best not to focus on this segment.


These are customers who are not very profitable, but are very loyal. The recommendation of the authors is to find out if they are not very profitable because they do not have more budget or because they do not want to spend more budget. 

If it is the second case, it is worth trying to make them more profitable.



These are the customers who are very profitable, but not at all loyal. According to the authors, the possibility of making these customers loyal is around 10%, so it would not be worth trying too hard and it would be better to try to get the most out of them in the transactions they want to make with us.

True friends

Very profitable and loyal customers. These are the real deal. These ones must be taken care of with all the love in the world. 

Based on this matrix, your loyalty programs should be dedicated to True Friends and Butterflies.

How should we ever focus on a loyalty programs?

The worst way to approach a loyalty programs (and the most common) is the opposite:

The most painful examples of this are The Fork or Groupon. 

Many companies use these platforms trying to attract new customers at the cost of reducing their margins on a first transaction. 

The idea behind this is that the client tries out the service, discovers that it is incredible and becomes loyal

But this hardly ever happens. 

In the end, the only company to which the customer is loyal is the company that offers him daily discount prices.

If you want to implement a serious loyalty programs you have to start segmenting the customers.

And the best way to do this is, of course, with a CRM. 

efficy is not the only one, with which you can do it, but the best :) 

Try it yourself! 

Find out if efficy is the best option for your business 

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