Loyalty programs have moved from paper punch cards at the corner café to sophisticated systems of automatic reward points. They can help keep customers coming back and give you insight into what buyers really value. To appreciate why these programs work (and why they sometimes don’t), businesses need to understand them from the customer’s point of view. Below, we’ll explain what makes a loyalty program succeed and how to measure its impact.

What’s in this article?

• What are loyalty programs in a business context?
  
• How do loyalty programs work?
  
• What are the advantages of loyalty programs?
  
• What are the challenges or downsides of loyalty programs?
  
• What types of loyalty programs are most effective for different businesses?
  
• How do businesses measure the success of loyalty programs?
  
• How Stripe Billing can help
  

What are loyalty programs in a business context?

A loyalty program is a way for businesses to encourage customers to return by offering members points, discounts, or special access when they shop again. It’s a tool for deepening relationships, increasing repeat purchases, and learning more about customers’ preferences.

Loyalty initiatives come in many forms such as points schemes, paid memberships, subscription services, and partnerships across multiple brands. They all promise value in exchange for continued engagement. That value can be transactional (e.g., discounts, cash back) or relational (e.g., exclusive access, personalized offers, alignment with shared values). Businesses design their programs to match their customers’ needs and their own goals.

Loyalty programs are everywhere. In the US, 85% of online adults participate in at least one retail loyalty program, and the loyalty market is expected to increase from $23.57 billion in 2024 to $44.73 billion by 2029.

How do loyalty programs work?

Most loyalty programs follow a similar rhythm, even if their rewards differ.

Here’s what that looks like:

• Joining: Customers sign up online, in a store, or via an app. Businesses often offer a sign‑up bonus, such as extra points or an instant discount, to encourage enrollment.

• Earning perks: Members accumulate points, credits, or other rewards when they make purchases or take specific actions, such as writing reviews and referring friends. The Loyalty and Rewards app on the Stripe App Marketplace, for example, automatically awards points when customers spend money. Paid programs skip the points and provide ongoing benefits in exchange for a subscription fee.

• Tracking progress: The program’s system records points and rewards automatically. Members can check their statuses through an app or website and see how close they are to their next rewards.

• Redeeming rewards: Once a member reaches a threshold, they can exchange points for discounts, products, or upgrades. Some programs use tiers or VIP levels to provide additional benefits as customers spend more.

• Keeping members active: Customers tend to participate in many programs so brands need to keep theirs relevant. Personalized reminders, special discounts, and gamified challenges help maintain enthusiasm.

• Refining the program: Behind the scenes, companies analyze purchase data to understand which rewards shape behavior, then adjust incentives and communication strategies accordingly.

What are the advantages of loyalty programs?

Building a thoughtful loyalty program can pay off in several ways.

Here are the key benefits:

• Better retention and bigger lifetime value: Keeping a current customer is typically cheaper than finding a new one, and even a small lift in retention can drive substantial profit gains. Customers who stick around to make additional purchases and redeem points can lead to higher customer lifetime value (LTV).

• Stronger brand loyalty and advocacy: Top programs cultivate devotion—members might not even consider other brands. Many buyers choose where to shop based on a program’s perks, and enthusiastic members become brand advocates who refer friends and family. As customers make more purchases, the likelihood of their bringing others along grows as well.

• Higher order values and more frequent purchases: Tiered rewards, targeted upsells, and gamified challenges encourage bigger baskets. Time‑sensitive offers motivate members to return more often.

• Valuable customer insight: When people enroll, they share contact information and allow the company to track what they buy and how often. Many customers are willing to share details if it leads to a better experience, and that insight can drive everything from smarter marketing to new advertising revenue streams.

• Pricing discipline and effective segmentation: Loyalty programs help direct incentives to the customers who matter most, instead of discounting across the board. Targeted rewards can keep loyal shoppers interested without eroding margins.

• Attracting new customers: Sign‑up bonuses, referral perks, and exclusive offers can also entice first‑time buyers. In a crowded market, a distinctive program helps a brand stand out.

What are the challenges or downsides of loyalty programs?

Even the best loyalty program can come with trade‑offs.

Possible challenges include the following:

• Knowing who really cares: Not every repeat buyer is a true fan. Some customers will chase whichever program gives the biggest discount and leave as soon as a better deal appears. Tracking advocacy behavior such as referrals and reviews helps identify genuine loyalty, but sometimes a business will end up rewarding deal seekers rather than true fans.

• Balancing cost and profit: Building and running a program requires technology, marketing, and ongoing administration. Misjudging the level of incentive can erode margins quickly, and brands need to be careful not to give away discounts to people who would have purchased anyway or to promise perks they can’t sustain. Once customers get used to a benefit, rolling it back can cause backlash.

• Standing out in a crowded field: Customers are inundated with loyalty programs. Without a compelling value proposition or personalization, a new program risks being ignored. Keeping members engaged requires continual investment in data and creative experiences.

• Not seeing the whole picture: Loyalty data captures activity within your own business, but it says nothing about what happens elsewhere. Without context, a big point balance might reflect one large purchase rather than ongoing engagement and it won’t reveal what customers are spending with competitors.

What types of loyalty programs are most effective for different businesses?

The most effective loyalty program structure depends on how often customers buy, what they’re buying, and what motivates them.

Below are some common formats:

• Points‑based: Members earn points for every purchase and trade them for products, discounts, or experiences. Because progress is visible and immediate, this approach works well for businesses that handle high-frequency transactions, such as cafés, grocery stores, and beauty retailers. Starbucks’s Stars and Sephora’s Beauty Insider points are well‑known examples.

• Tiered: Customers earn better benefits as they spend more or interact with the brand more often. Airlines and cosmetics brands use tiers (e.g., gold, silver, bronze) to encourage incremental spending and create a sense of status. Tiers work best when there’s variation in purchase levels and a clear path to move up.

• Cash back: Customers receive a percentage of their spending back as cash, credit, or store currency. Credit card issuers and some retailers favor this model because the value is straightforward and it has broad appeal. It’s effective when margins can support the rebates and when shoppers appreciate simplicity.

• Paid memberships and subscription tiers: Customers pay a fee for ongoing perks such as free shipping, exclusive content, and early access. Amazon Prime is the most famous example of this type of program, but smaller businesses can use this model too. Paid programs require benefits that clearly exceed the fee. They work best when there’s steady demand and the recurring revenue from memberships can fund richer perks.

• Visit‑based or punch cards: The classic format of “buy 9 coffees, get the 10th free” still has value. This model is ideal for local businesses such as cafés, salons, and fitness studios, where loyalty is measured in visits rather than spend.

• Coalition or partner programs: Airlines, hotels, and retail chains sometimes pool their rewards and let customers earn and redeem points across brands. These programs broaden the appeal by increasing earning and redemption options, but they demand tight coordination among partners.

• Value‑based: Some brands let customers direct a portion of spending to charitable causes. These programs resonate with socially conscious customers and reinforce brand values, although they might not appeal to deal seekers.

• All‑in‑one or hybrid: Larger enterprises often combine points, cash back, tiers, and paid memberships. This can differentiate a brand and cater to different segments, but it requires sophisticated technology and clear communication to avoid confusion.

When you choose a model, look closely at customer behavior. A coffee shop benefits from a simple visit‑based program, while a cosmetics brand can use tiers to reward higher spend. The best programs give customers a clear sense of progress and meaningful rewards without overwhelming them.

How do businesses measure the success of loyalty programs?

Counting sign‑ups or total points in circulation alone doesn’t tell you whether a loyalty program is working. Enrollment peak might reflect only a generous joining bonus, and a large points balance could mean members aren’t redeeming. To really understand impact, measure both financial outcomes and customer sentiment.

Here’s what you should be tracking:

• LTV: Estimate the total revenue a customer will generate over their relationship with your brand. A forward‑looking LTV helps you focus on high‑value customers, although calculating it accurately requires strong data.

• Revenue contribution: Evaluate what portion of total sales comes from members. Compare it against program costs to determine return on investment.

• Repeat purchase rate: Measure how many customers make multiple purchases within a given period. Rising repeat rates signal that your program is driving ongoing engagement.

• Retention and churn: High retention and low churn indicate that your program is keeping customers from drifting to competitors. Sudden drops suggest your rewards aren’t resonating or the experience is too complicated.

• Participation rate: How many members are actively earning and redeeming rewards? Low participation suggests customers don’t understand or see value in the program.

• Customer feedback: Are members excited about your rewards? Do they talk about their experiences with friends? Combine quantitative metrics with qualitative insight for a full picture of how well your program is performing.

How Stripe Billing can help

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