Customer Loyalty Programmes: How They Work, How to Create One

Published Thursday 8 January 2026

Table of contents

• How loyalty programmes work
• Benefits of a loyalty programme
• Types of customer loyalty programmes
• Customer loyalty programme rewards
• How to create a customer loyalty programme for a small business
• How to market your customer loyalty programme
• Tips for creating a loyalty programme
• Running a successful loyalty programme
• Managing loyalty programmes with the right tools
• FAQs on customer loyalty programmes

Key takeaways

• Start with simple loyalty programmes like punch cards or email discounts to avoid administrative overwhelm, then scale up as your programme proves successful and profitable.
• Focus your programme design on the "three Rs" framework: provide tangible rewards, ensure relevance through personalised benefits based on customer preferences, and offer recognition that makes loyal customers feel valued and special.
• Integrate your loyalty programme with existing point-of-sale, CRM, and accounting software to automate tracking, reduce manual errors, and measure programme performance through metrics like incremental sales and customer lifetime value.
• Research your best customers' motivations and buying patterns before designing rewards, ensuring your programme benefits align with what actually drives their purchasing decisions and engagement with your business.

How loyalty programmes work

At its core, a loyalty programme is a simple exchange. You reward customers for choosing your business, and they reward you with repeat business. The process is straightforward and designed to be easy for both you and your customers.

Here's how it generally works:

1. A customer signs up for your programme, often with just an email address at the point of sale or on your website.
2. They earn rewards by making purchases or engaging with your business in other ways, like leaving a review or referring a friend.
3. The rewards, such as points or stamps, accumulate in their account.
4. Once they reach a certain threshold, they can redeem their rewards for discounts, free products, or other perks.

Benefits of a loyalty programme

Loyalty programmes deliver measurable business benefits by strengthening customer relationships and driving revenue growth:

• Customer retention: Keeping existing customers costs less than acquiring new ones, and rewards make customers feel valued
• Increased sales: Programmes motivate customers to purchase more frequently and spend more per transaction
• Referral generation: Satisfied members recommend your business, providing low-cost customer acquisition
• Brand advocacy: Valued customers become vocal supporters, enhancing your reputation through word-of-mouth
• Purchase insights: Programme data reveals customer preferences, enabling personalised recommendations and targeted upsells
• Stronger relationships: Rewards and personalised experiences build trust and loyalty over time
• Competitive advantage: A well-designed programme differentiates your business from competitors

Types of customer loyalty programmes

Four main types of loyalty programmes suit different business models and budgets. Choose based on your customer behaviour, technical capabilities, and programme goals:

Points-based programme

Customers collect points to redeem for rewards such as free products or services, discounts, cash, and other perks. The moment of redemption can also be a key event for tax purposes; for example, New Zealand law allows operators to defer the imposition of goods and services tax (GST) until loyalty points are redeemed to ensure the correct tax rate is paid.

They may earn points from purchases, referrals, subscribing to emails, sharing your content on social media, leaving reviews, celebrating a birthday, and other activities.

Tiered loyalty programme

The business offers a programme with ranked membership. The higher the membership status, the better the perks are, which is an attractive goal for repeat customers.

The aim is to encourage customers to strive towards the top tier by spending more, or engaging with the business in other ways. Some businesses also allow their customers to move up through the tiers based on points earned.

Paid membership loyalty programmes

A paid membership or subscription programme lets customers get instant access to benefits. The membership may be set up as a one-time or recurring subscription fee. Businesses might also offer ranked membership in this model with customers paying a larger fee for the higher status and exclusive offers.

Value-based loyalty programme

The business offers to donate a percentage of sales to a charity or social cause. This gives the business a chance to build stronger connections with its customer base by supporting community or global initiatives together.

Because this approach rewards a cause rather than the customer directly, you can combine it with another type of loyalty programme. For example, customers can choose between redeeming their points for a reward or donating the monetary equivalent of those points to charity.

Customer loyalty programme rewards

Effective rewards drive programme participation and must provide clear value to customers. Popular reward types include:

• Free shipping: Reduces customer costs, especially effective when tied to minimum purchase amounts
• Early access: Gives members exclusive access to sales and new products before general availability
• Free trials: Allows customers to test products risk-free, building confidence in purchases
• Discounts: Percentage or fixed reductions that can be tiered based on spending levels or special occasions
• Points and cashback: Accumulated rewards customers can redeem for products, gift cards, or experiences
• Free merchandise: Branded items or gifts earned through purchases or loyalty milestones
• Free products: Classic "buy X, get one free" system tracked through punch cards or digital systems

How to create a customer loyalty programme for a small business

A successful loyalty programme balances customer value with business benefits while remaining simple to use and manage.

Key success principles:

• Mutual benefit: Programme rewards customers while driving business growth
• Easy signup: Multiple enrollment opportunities throughout customer interactions
• Simple operation: Straightforward rules and redemption process for customers
• Manageable administration: Minimal complexity for business owners to maintain

Start with customer research to design rewards that motivate your specific audience:

• Identify your best customers: Focus on highest-value and most frequent buyers
• Understand their motivations: Survey or interview customers about why they choose your business
• Analyse buying patterns: Review purchase frequency, timing, and spending amounts
• Match rewards to preferences: Align programme benefits with customer values and behaviours

Consider which type of loyalty programme may be best suited for your business model and where you add value for customers with your perks. Researching your competitors may also offer some insight into popular loyalty programmes for your industry.

Start simple to avoid administrative overwhelm, then scale your programme as it proves successful.

Administrative considerations:

• Points tracking: Automated systems reduce manual calculation errors
• Redemption management: Clear processes for reward fulfillment
• Customer communications: Automated emails for different membership tiers
• Integration needs: Choose software that connects with existing POS or CRM systems

Having customer relationship management (CRM) software is important for managing a loyalty programme because you need to know your customers’ details and track their behaviour.

In some countries, businesses may also need to follow specific financial regulations. For instance, in New Zealand, a business's eligibility for certain goods and services tax (GST) rules on loyalty points can depend on whether the provision of zero-rated goods or services makes up at least 25% of their business.

Some simple customer rewards programmes for small businesses to start with are:

• Offer a punch card that gives a free product or service after a set number of purchases
• A punch card system to offer a free product or service after a set number of purchases - a physical card is easy to manage if your business is face-to-face
• Creating an email sign-up list and offering subscription-based discounts and a first look at new products or services
• A free gift for customer birthdays or membership anniversaries
• Discounts on customer purchases for following and sharing posts from your business on social media
• Offering a discount when your customer refers a friend

How to market your customer loyalty programme

Programme promotion drives enrollment and participation through multiple customer touchpoints:

• Email campaigns: Direct communication to existing customer database
• In-store signage: Visible displays and website messages about programme benefits
• Point-of-sale prompts: Staff training to mention programme during transactions
• Social media posts: Regular reminders and programme highlights on business accounts

Tips for creating a loyalty programme

The three Rs framework (rewards, relevance, and recognition) guides successful loyalty programme design by focusing on customer value and personalisation.

Rewards

Your programme should:

• clearly define the value of points and rewards; they need to be tangible, understandable and provide true value
• set reasonable milestones for members to earn those rewards and be transparent about any expiration date; these milestones ensure customers stay incentivised and keep your profit margins safe

Relevance and recognition

Your customers want to feel recognised and valued. They join a loyalty programme because they want to feel special. Look at how you can:

• personalise rewards based on individual customer preferences and their purchase history
• reward customer behaviours beyond just spend to encourage different types of interactions with your business and appeal to different customers; for example, giving points for referrals and social media engagement
• create a buzz by organising special events, exclusive previews or unique experiences for members

Running a successful loyalty programme

Monitor programme performance through specific metrics to ensure positive business impact and customer engagement.

Key success metrics:

• Incremental sales: Track revenue increases from programme members
• Customer lifetime value: Measure long-term spending from loyal customers
• Repeat engagement: Monitor whether customers return after receiving rewards
• Referral retention: Track whether referred customers become regular buyers
• Return on investment: Calculate programme costs versus revenue generated

Managing loyalty programmes with the right tools

With the right tools, running a loyalty programme can mean less admin. The right tools can automate much of the work, saving you time and helping you focus on your customers. Many modern loyalty solutions are designed for small businesses and integrate with the software you already use.

Look for tools that connect with your:

• Point-of-sale (POS) system: Automatically track purchases and award points without manual entry.
• Customer relationship management (CRM) software: Get a clearer picture of your customers' buying habits and personalise their rewards.
• Accounting software: See how your programme impacts sales and profitability, giving you a clear view of your return on investment.

By connecting your tools, you can run your business, not your books. It’s that easy with Xero, and it helps you create a seamless experience for your loyal customers.

Ready to streamline your business operations? Try Xero for free and see how easy it is to manage your finances alongside your customer loyalty programme.

FAQs on customer loyalty programmes

Here are answers to some common questions about customer loyalty programmes.

How much does a loyalty programme cost for a small business?

The cost can vary. A simple punch card system is inexpensive and may only require printing the cards. Digital loyalty programmes that use software often have a monthly subscription fee, but they also offer more automation and data. It's best to start with a budget you're comfortable with and choose a solution that matches.

How do I measure the success of my loyalty programme?

You can measure success by tracking a few key numbers. Look at your customer retention rate to see if more customers are coming back. Check your repeat purchase rate to see if they are buying more often. You can also look at the average customer lifetime value to see if loyal customers are spending more over time. Your accounting software can help you track these changes in sales and profitability.

What are the 'three Rs' of customer loyalty?

The 'three Rs' are a simple way to remember the key elements of a good programme. They are Rewards (the value you give back to customers), Relevance (making the rewards personal and meaningful), and Recognition (making your loyal customers feel special and appreciated).