The Pros and Cons of Customer Loyalty Programs

Customer loyalty programs have become a staple for businesses looking to enhance customer retention, increase brand advocacy, and boost sales. But while they offer many advantages, they also come with challenges that businesses must navigate carefully. This guide explores both the benefits and drawbacks of loyalty programs to help you determine if launching one is the right move for your business.

Note: All insights and data presented without citation are sourced from the Building a Business Case for Loyalty with Omnivy masterclass.

Pros of loyalty programs:

1. Increasing Customer Retention
2. Increasing Customer Lifetime Value
3. Boosting Average Order Value
4. Increasing transaction numbers
5. Attracting new customers
6. Getting more data from your customers
7. Reducing the number of unprofitable customers
8. Brand advocacy

Cons of loyalty programs:

1. Distinguishing between loyal customers and frequent shoppers
2. Breaking even
3. Market saturation
4. Limitations of loyalty data
5. Managing the loyalty program
6. What if you decide to end the loyalty program?
7. Cost considerations
   

Let's dive in.

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Learn more: Explore Voucherify's Open Source Loyalty Accelerator

Why are there both pros and cons of loyalty programs?

A well-designed loyalty program can turn occasional buyers into lifelong fans, making customer retention significantly easier and more cost-effective than acquiring new customers. Research from Harvard Business Review shows that acquiring a new customer can be 5 to 25 times more expensive than retaining an existing one. However, while these programs can drive repeat business, they also require careful planning and execution to avoid potential pitfalls.

Pros of customer loyalty programs

1. Increasing customer retention

Loyalty programs encourage repeat business by rewarding customers for their continued engagement. When customers feel appreciated through discounts, exclusive offers, or points-based rewards, they are more likely to stay connected with a brand and make additional purchases. Research highlights the impact of loyalty: a 5% increase in customer retention can boost profits by 25% to 95%, making it a highly effective strategy for long-term growth.

Beyond retention, loyalty programs significantly influence consumer behavior. Studies show that 79% of consumers are more likely to recommend brands with strong loyalty programs, while 85% are more likely to continue purchasing from those that offer rewards. A well-designed program fosters brand trust and reduces the likelihood of customers switching to competitors.

Loyalty initiatives are also powerful tools for re-engagement. Heathrow Rewards, for example, successfully revived dormant customers through a targeted bonus points campaign, reactivating 20% of inactive members after six months. This demonstrates how strategic incentives can bring lost customers back into the fold.

Retaining and reactivating customers is far more cost-effective than constantly acquiring new ones. A well-executed loyalty program not only drives repeat business but also strengthens brand connections, ensuring customers feel valued and engaged.

2. Increasing Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is the net profit attributed to the overall relationship you will maintain with a customer. It measures how valuable the customer is to you now and the projected value of all your interactions with them in the future.

Why do reward programs increase the Customer Lifetime Value? People are psychologically more likely to return to something if they feel that they have made progress towards a goal. It is called the endowed progress effect. Existing customers are 50% more likely to try new products and spend 31% more compared to new customers. Go here to learn more about the Endowment Effect.

• You can calculate your current CLV rate and other loyalty metrics with Voucherify Loyalty Calculator.
• If you'd like to learn more about other crucial loyalty metrics, visit this post.
  

3. Boosting Average Order Value (AOV)

Loyalty programs have a direct impact on increasing the average order value (AOV). By offering personalized promotions, businesses can encourage customers to spend more per transaction. Smarter offers, such as bundling products or providing incentives for upselling and cross-selling, make customers more likely to increase their purchase size. Additionally, brands that create a seamless loyalty experience make customers feel valued and recognized. 

For instance, Target revamped its Target Club in 2023, emphasizing personalization and offer relevancy. As a result, their personalized promotions for loyalty members had three times better conversion rates than mass offers, and they gained over a million new members in just one quarter. Similarly, basket analysis techniques in wholesale membership clubs have led to a 12% increase in AOV, bringing it closer to $110 per visit and improving promotional campaign effectiveness by 20% through targeted, data-driven offers.

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4. Increasing the number of transactions

Loyalty programs play a crucial role in increasing transaction frequency by encouraging repeat purchases through strategic incentives. Businesses often use tiered rewards, similar to stamp or punch card systems, where customers unlock benefits after reaching a spending threshold. Time-limited promotions, such as double points on birthdays or exclusive daily deals, add urgency and excitement, further driving engagement.

A compelling example comes from a major fuel retailer that incentivized frequent fueling with progressively better deals. The campaign achieved an 85% redemption rate and a % return on investment by fostering habitual spending and offering tangible, incremental rewards.

Personalization also enhances transaction frequency. By analyzing shopping behaviors, businesses can deliver highly relevant offers that resonate with customers. Personalized challenges, interactive progress tracking, and targeted messaging create a sense of achievement and motivation, ultimately increasing customer spending and loyalty.

5. Attracting new customers

A well-designed customer loyalty program can help businesses attract new customers. If you offer points or discounts, the new customers will more eagerly join your loyalty program to take advantage of your offerings. The subconscious effect of reciprocity that customers may experience when receiving something for free can actually increase the sales intent. Once the customers give you their consent and some data, you can incentivize them to complete their first purchase with personalized offers.

Having a customer loyalty program can help distinguish your business from your competitors. Customers have an overwhelming number of choices for a single product or service. A rewards scheme can help them choose your business over another one that doesn’t offer any type of incentive. You can win the hearts of your future customers without the need to start a price war with your competitors. Having an incentives program in place might be a competitive advantage your business needs.

Visit this post to learn more proven ways to encourage customers to join your loyalty program.

6. Getting more data from customers

One of the most valuable aspects of a loyalty program is the ability to gather insightful customer data. Research shows that 56% of consumers are willing to share their personal data in exchange for a better service experience. This willingness allows businesses to collect a wealth of first-party data, including customer behavior, buying habits, and preferences.

In today’s MarTech landscape, every tool is striving to leverage AI for predictive analytics and personalized recommendations. However, AI is only as effective as the data it processes. A loyalty program provides businesses with high-quality, first-party data, which is essential for optimizing the customer experience and making data-driven decisions. Encouraging customers to identify themselves across all touchpoints further strengthens this data pool, ensuring consistency and accuracy in insights.

The impact of loyalty-driven data extends far beyond marketing. Walmart, for example, has seen a 41% year-over-year increase in advertising revenue through its retail media network (RMN), thanks to insights gained from its loyalty program data. Similarly, McDonald's CEO Chris Kempczinski highlighted how their loyalty program has enabled smarter pricing strategies and tailored digital offers, leading to increased repeat business.

7. Reducing the number of unprofitable customers

Through a loyalty program, you can reward the more profitable customer segments, instead of reducing prices for all customers. This is the most efficient way to focus your budget on the customers that generate the most profit for your company and stop burning money on unnecessary price reductions. Remember that the top 10% of your customer base spends 3x more than your average customer.

8. Brand advocacy

A rewards scheme could also encourage free referrals, as enthusiastic customers may share their experience with their family and friends either in-person or online. 70% of consumers would be more likely to recommend a brand with a good rewards program. Bain & Company’s research showed that repeat customers are more likely to refer others. After just one purchase from an online apparel retailer, an average shopper was likely to refer three other people to the site. A customer that made ten purchases from an online apparel retailer was likely to refer seven different people to the site.

Cons of Loyalty Programs

1. Distinguishing between loyal customers and frequent shoppers

Loyalty is the tendency of some consumers to continue buying the same brand of goods rather than competing brands. You might be mistakenly assuming that a frequent customer is a loyal one. It is not always the case. The customer might be buying from your company just because it is convenient or because they like the benefits of the rewards program you offer (even though they do not really care about the brand).

To make a frequent buyer become a loyal customer or to differentiate between frequent buyers and loyal customers, you should:

• Implement advocate marketing tactics.
• Reward customers for referring friends, writing reviews, and other “loyal” behaviour (not just for their frequent purchases).
  

2. Breaking even

Having a good customer loyalty program will cost you money and time. Beyond the actual cost of the rewards, you will have to track the cost and time dedicated to  running the program. Compared to the benefits you get from your rewards program, like returning customers, lower acquisition costs, higher CLV or free referrals, you might be breaking even, making profit or losing money.

There is no warranty that your loyalty program will be profitable. It depends on the rules and settings of your loyalty program. You might be giving away too much, by giving discounts or rewards to people that would have been buying your product anyways or by giving rewards they do not really want. You also have to be prepared for the possibility of fraud. Check out our article about how to prevent fraud in customer loyalty programs.

There are plenty of cases of businesses failing to conduct research properly before implementing their customer loyalty program and putting themselves in financial trouble as a result. You have to plan the strategy ahead, measure and optimize the program to make sure it is breaking even. If your discounts are well-chosen and personalized and your program is effective at increasing repeat purchases and average order value, you should be able to recoup any losses.

3. Market saturation

With so many rewards programs in the market, it can be difficult to stand out. Customers are overwhelmed with loyalty offers, and if your program does not provide unique value, it might get lost in the crowd. To create a competitive advantage, you need a well-designed program that aligns with your audience’s expectations.

Instead of trying to reinvent the wheel, focus on crafting a program that offers personalized experiences, tailored rewards, and relevant engagement. The right mix of rewards, gamification, and customer-centric incentives can make your loyalty program more effective than competitors’ generic offerings.

4. Limitations of loyalty data

Loyalty program data only provides insights into purchases made within your business. It does not track what customers are buying from competitors, which creates a limited view of their overall shopping behavior.

To address this limitation, some businesses incentivize customers to share additional data, such as their purchase history with other brands, in exchange for rewards. While this approach helps gather external data, it will never be as comprehensive as first-party data collected directly through your loyalty program. Companies should use loyalty data to complement other sources rather than relying on it exclusively.

5. Managing the loyalty program

Running a loyalty program requires ongoing management, optimization, and technical resources. You need at least one dedicated team member to monitor program performance, adjust incentives, and ensure the program aligns with business goals.

The complexity of management depends on your loyalty software. If you choose a flexible, easy-to-use platform with strong reporting and automation capabilities, you can reduce manual workload. However, if your system lacks adaptability or requires constant development work, it may become a resource-heavy burden.

Automation and AI-driven analytics can help streamline loyalty program management, reducing operational costs and improving overall efficiency.

6. What if you decide to end the loyalty program?

Closing a loyalty program can negatively impact your most valued customers. If you suddenly terminate the program, you risk frustrating loyal members who have accumulated points and rewards.

To avoid backlash, businesses should develop an exit strategy from the outset. A phased approach, such as gradually reducing program benefits while offering alternative incentives, can help mitigate customer dissatisfaction. Communication is key – be transparent with customers about any planned changes to avoid damaging their trust.

7. Cost considerations

The biggest expense in a loyalty program comes from the rewards, with businesses typically allocating 0.5% to 2% of total purchase value to incentives. While 1% may be sufficient for industries like retail, luxury goods and travel often require a higher budget to meet customer expectations.

A cost-effective strategy is reallocating part of the customer acquisition budget toward retention. Shifting even 30% of acquisition spending to loyalty efforts can improve retention while lowering overall acquisition costs.

Beyond rewards, technology expenses should be carefully managed. Many businesses face vendor lock-in, paying high fees for inadequate loyalty software. Choosing a scalable, cost-effective platform helps maintain efficiency. Operational costs also play a role – an integrated loyalty system reduces campaign management expenses, streamlines team coordination, and minimizes manual effort. Comparing the costs of manual campaign management with an automated system can reveal significant savings.

To optimize costs, businesses can leverage low-code integration and API-driven platforms like Voucherify, which offer flexibility without heavy development work. Launching a small proof of concept before scaling ensures a cost-efficient approach to program expansion.

Unsure how to calculate the profitability of a loyalty program?

Watch our masterclass and hear from industry experts Lukasz Sloniewski, CEO at Omnivy, and Julia Gaj, Product Marketing Manager at Voucherify, as they break down how to turn loyalty ROI guesstimates into solid data.

Is loyalty still worth it?

With so many brands offering loyalty programs these days, is it still worth having one? The real question isn’t if a brand should have a loyalty program, but how to make it work for maximum growth.

Loyalty programs have come a long way from just earning points and discounts. Now, they’re powerful tools for gathering insights that help create personalized experiences, smarter promotions, and stronger customer relationships. Even though loyalty programs are everywhere, well-designed ones still deliver big financial wins.

Just look at Walmart and McDonald's – both have used loyalty-driven data to boost ad revenue, refine pricing, and enhance digital engagement. Even brands with simpler programs see impressive results. Take Ulta Beauty, the largest cosmetics retailer in the U.S. They noted that loyalty program members spend approximately four times more than non-members. Ulta experienced a 25% increase in sales attributed directly to enhancements in its loyalty program offerings and personalized marketing efforts. Similarly, Chipotle grew by 15% in 2023 compared to the average industry growth of 8%, with much of this success driven by its enhanced loyalty program.

So, while the landscape may be crowded, a well-crafted loyalty program isn’t just worth it – it’s a game-changer.

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Summary

Considering these pros and cons, it’s clear that the benefits of loyalty programs far outweigh the drawbacks. Many potential challenges can be avoided with a well-planned and strategic launch. Understanding your target audience – their preferences, ideal rewards, and preferred communication channels – is key. The program should be simple to join and easy to understand, with clear messaging to ensure awareness. Most importantly, continuous testing, iteration, and optimization are essential, making tracking, reporting, and flexible loyalty software crucial to long-term success.

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