Customer loyalty programs for small businesses

A customer loyalty program is a great way to retain the customers you have, boost sales and bring in new customers.

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December 2023 | Published by Xero

What is a customer loyalty program?

A customer loyalty program is a method of offering rewards to new and repeat customers so that they continue purchasing from your business.

These rewards can come in the form of discounts, privileged access to new or limited products, and free products, merchandise or services.

Benefits of a loyalty program

There are several key benefits to having a loyalty program. These include:

  • Customer retention: Keeping current customers happy and returning is less expensive than trying to get new customers. Loyalty programs make customers feel appreciated, which encourages them to stick around.
  • Increased sales/spend: Loyalty programs motivate customers to make more purchases. When customers return regularly, it boosts sales and increases the amount they spend.
  • Referrals from repeat customers: Customers who are enjoying the extra perks will recommend you. These referrals are a low-cost way to attract new customers, as the trust established with existing customers gives confidence to first-time buyers.
  • Brand advocacy: Customers who feel valued by your business will advocate for it. They spread positive word-of-mouth about the brand, which can significantly impact your reputation and attract new customers.
  • Information on purchasing preferences: Loyalty programs give insight on what customers buy and prefer. With this information, you can offer personalised recommendations, upgrades, or upsells that match their preferences.
  • Strengthened customer relations: By offering rewards and personalised experiences, businesses build trust and loyalty with customers over time, enhancing the overall service experience.
  • Staying competitive: A well-executed loyalty program will set your business apart from its competitors by becoming an additional reason for customers to choose you over competitors offering similar products or services.

Customer loyalty program examples

There are many types of customer loyalty programs to choose from. But there’s also a lot of freedom to design one that’s unique to your business.

Choosing a loyalty program ultimately depends on your business, your budget, and how creative you want to be.

Here’s some examples of loyalty programs to consider:

Points-based program

Customers collect points to redeem for rewards such as free products or services, discounts, cash, and other perks. 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 program

The business offers a program 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 programs

A paid membership or subscription program 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 program

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 doesn’t reward the customer directly, this option can be combined with another type of loyalty program [US/CA: program]. For example, customers can choose between redeeming their points for a reward or donating the monetary equivalent of those points to charity.

Customer loyalty program rewards

Without the right rewards you won’t have a loyalty program. Some common types of loyalty program rewards include:

  • Free or expedited shipping: A popular option for ecommerce stores, this can be tied to a minimum purchase amount, encouraging customers to spend a little more to qualify for this perk.
  • Early access to sales and new products: Some businesses give loyal customers early access to sales events or new product launches, before they're available to the general public.
  • Free trials: These allow loyal customers to experience products before making a purchase.
  • Discounts: These can be tied to the customer's spend, encouraging them to spend more in one purchase to unlock a higher discount tier. Discounts on special occasions such as birthdays or anniversaries also allow a business to show appreciation on a personal level.
  • Redeemable points or cashbacks: Customers earn points or cashback rewards based on their spending, which they accumulate and later redeem for various benefits - like products, gift cards, or exclusive experiences.
  • Free merchandise: Some loyalty programs offer free merchandise or gifts based on a customer's accumulated purchases or loyalty points.
  • Free product: The classic ‘Buy X, get one free’ punch card style perk is often seen in cafes or retail stores. Customers earn a free item after purchasing a certain number of products, which is tracked through a punch or stamp card system.

How to create a customer loyalty program for a small business

A successful customer loyalty program is one that finds fun and special ways to benefit both your business and the customer, and encourages customers to come back.

It should be as easy as possible for the customer to sign up at various points in their interactions with your business. And it should avoid being too complicated or time-consuming to use – for both you and the customer!

To create a customer loyalty program, you should find out as much as you can about your current customers – and especially your best customers. What motivates them to purchase from you instead of your competitors? What are their buying habits – and what does this tell you about the kinds of rewards they might find attractive?

Consider which type of loyalty program 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 programs for your industry.

Some programs may require extra admin to keep track of, such as tallying customer points and managing their redemption, noticing which customers are making referrals, or sending tiered email marketing to different membership groups. So be sure to start with something manageable. Look for a software solution that integrates with your point-of-sale (POS) or customer relationship management (CRM) software.

Having a CRM is pretty crucial to managing a loyalty program as you need to know your customers’ details and track their behaviour. Leaping straight into an app-based loyalty program might not be the best method when you’re starting out, but an app could be a long-term option.

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

  • 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 program

Once you’ve decided on a loyalty program that suits your business and will be attractive for your customers, it’s time to let people know about it.

Some low-cost ways to start spreading the word include:

  • sending emails to customers
  • putting up in-store signs and/or messages on your website
  • prompts during the point-of-sale process
  • posting regular reminders on your social media pages

Tips for creating a loyalty program

The three ‘Rs’ of a good loyalty progamme are rewards, relevance and recognition.


Your program 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 don’t want to be just a number. By joining a loyalty program 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 program

Pay attention to the outcomes of your loyalty program and be prepared to adjust as you go. Measure the success of it by looking at incremental sales and customer lifetime value – are people coming back after getting a reward? Are referrals sticking around? What’s your ROI?

Developing your loyalty program alongside your business, and ensuring it fits with the values of your business – and your customers – will offer a well-rounded customer experience and support your overall business growth.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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