Case Study | Building an Effective Loyalty Programme

Serving as the ‘heartbeat’ for brands and retailers that deploy them with the right rewards, loyalty programmes incentivise repeat purchases, boost customer lifetime value and provide businesses with invaluable data for personalised marketing. But brands need to balance costs and benefits while creating a programme that supports their goals, maintains brand equity and keeps users engaged.

Key insights

The importance of loyalty programmes that help drive repeat purchases and provide customer data is growing as brands and retailer face a competitive market and rising costs to acquire new shoppers.

Effective loyalty programmes combine both tangible and emotional incentives to keep shoppers engaged, and brands need to find the right balance of rewards for their unique customer base.

Popular loyalty programmes with unique perks have become a subject of online buzz for consumers, driving user-generated content about free gifts and optimising points.

Ulta Beauty’s loyalty programme is practically synonymous with the retailer’s success.

Today, 96 percent of the company’s sales run through the programme, which has 43.3 million active members — 10.5 million more than the active members of awards-programme pioneer Starbucks. Ulta Beauty credits it with regularly drawing shoppers back to its stores, and with generating valuable data to help it recommend products and target its marketing.

The points-based programme is Ulta Beauty’s “heartbeat,” said Kelly Mahoney, the retailer’s vice president of customer marketing. It “really is the engine that drives our business. You will always hear it mentioned on our earnings call because it is seen truly as that strategic.”

Once seen as simple rewards systems designed to offer customers added incentive for making repeat purchases, loyalty programmes have become central to business models not just for airlines, credit cards and coffee but for beauty and fashion as well. These programmes, which almost always combine a system of points awarded for dollars spent and a hierarchy of tiers, are geared toward creating financial incentives through discounts and cash as well as forging emotional connections with consumers through special gifts and VIP perks.

They might be more necessary than ever. As customer acquisition costs fluctuate wildly due to changes to social media algorithms and advertising markets, companies are placing a premium on repeat purchases and the concept of “customer lifetime value.”

Loyalty programmes can be a useful tool in mitigating these pressures. According to a 2021 survey by McKinsey & Company, 65 percent of customers are more likely to up their frequency of purchases from a brand or retailer when they are a member of its loyalty programme. Brands can also use loyalty members’ data to target them with more personalised messaging, ranging from simple email campaigns to AI-driven product displays on a brand or retailer’s app.

Of course, not every brand can count on the same scale of membership as Ulta Beauty, described as an example of “best-in-class loyalty programme execution” by TD Cowen analyst Oliver Chen; by definition, they tend to attract a subset of particularly engaged customers.

But brands of all sizes are turning to loyalty systems as a way to keep their existing customers shopping or attract new ones. They’re becoming easier to set up than ever for direct-to-consumer start-ups as a range of new tech platforms have sprung up to integrate them into online checkout systems.

Accessories label Brandon Blackwood New York had signed up 300,000 members to its loyalty programme as of May 2024 after introducing it for Black Friday in 2023. Since the launch, purchases by loyalty members have increased overall sales by 15 percent, while the average order value of members has been 10 percent higher than non-members over that period.

“These are the people who are committed,” said Brandyce Pechillo, digital marketing manager at Brandon Blackwood New York. “They’re willing to spend a little more and to spend a little more time on the store in general.” But running a loyalty programme isn’t as simple as signing up members and offering them discounts. Different programmes can have different advantages, and brands need to be careful not to go overboard on discounts and have to rescind benefits later as the costs mount. They also need to keep customers engaged while preserving brand equity. Luxury brands averse to discounts might look for more VIP-focused incentives.

This case study will cover how to launch, run and grow a loyalty programme in beauty and fashion, looking at what drives sales, online buzz, membership growth and repeat customers. In addition to Ulta Beauty, the report features interviews with executives from independent brands that have launched their own successful loyalty programmes, including Merit Beauty and Brandon Blackwood New York.

This report aims to be useful to brands at all points in the process, whether they’re still considering launching one or have already founded a programme and are searching for best practices, success stories and unique features to help them stand out. The most effective programmes don’t just boost repeat purchases and order sizes. They can become the subject of conversations online, turning members into a brand’s biggest evangelists.