Acquiring new customers is great. But keeping them and growing your relationship with them is even better. One of the best ways to do that is to establish a loyalty program for your most loyal customers.

Loyalty programs can be as simple as a repeat buying program and as complicated as one that establishes a new form of currency. It could be executed with paper tickets and hole punchers, or with robust data capture, barcoding and other CRM techniques.

But if you aren’t careful, your loyalty program could be a giant waste of money. Here are 5 steps to creating a good loyalty program:

Step 1: Safeguard Against Fraud
The biggest thing to consider when creating a loyalty program is to safeguard against fraud. For every honest customer there are probably 10 dishonest ones. Failure to protect yourself could mean having to pay out offers without actually receiving the sale.

For instance: a local sandwich shop named Viga, near my office offers a loyalty card where every time you purchase a sandwich you get a hole punch in your card. Buy 8 sandwiches (and get 8 punches) and you get a 9th one free. Viga was smart. Instead of using a standard hole punch, they punch out a custom letter “V” in the card. By adding this small detail, they can significantly reduce the amount of fraud.

Step 2: Incent Loyalty Appropriately
It is important to offer your customers something appropriate, based on your product offering. One great way to do this is to do what Supercuts does. With their 8=9 Program, for every 8 haircuts you get your 9th free. With Supercuts offering a specific service , it makes no sense to offer anything else but another haircut.

Don’t get caught up in offering items that you may think is neat or cool without first thinking how relevant it is to your customer.

Step 3: Create Attainable Benchmarks
Nothing frustrates loyal customers more than seeing offers that are perceivably unattainable. Make sure you offer a range of redeemable offers so that those who want quick rewards can take advantage and those who want to save for bigger prizes have that option as well.

When I worked on the Reward Your Style Loyalty Program for DSW Shoe Warehouse, we strategized that a $25 Gift Certificate for every $250 spent would be our sweet spot. Research showed that customers were buying shoes in bulk and therefore the benchmark of $250 could be achieved in under 3 visits to the store. And even better, a $25 Gift Certificate was enough to buy another pair of shoes. This became so successful, DSW had an ROI of 700% within the first 6 months.

Step 4: The Offers Should Match the Effort Required
Another key point to think about is how a customer can accumulate points. Is it an automatic tabulation like standard credit card point systems? Or how about a behind the scenes type of accumulation like the popular instant savings programs at supermarkets.

With the My Coke Rewards Program, loyal customers can redeem prizes as low as 25 caps and well over 2500. This range creates an enjoyable and sustainable rewards program for every type of user. The only problem is the customer has to go online and key in each code one by one to redeem points.

You must make sure that the offers are worth the effort. I drink up to 2 Diet Cokes with Lime a day and those caps could accumulate quickly for me. But isn’t worth my time to key them into my computer. So I give the caps to a co-worker who every week takes time and keys in a barrel full of caps. Obviously, with the widespread distribution of Coke products it would be impossible to do a loyalty program any other way.

Step 5: Reward Loyalty, Don’t Punish It
If someone does take the time to key in codes online those prizes better be good. And the redemption process better be customer-centric. If your program doesn’t deliver, your customers will be disappointed, even pissed off.

The Pampers Gifts to Grow Program is a perfect example of a program basically punishing loyal customers. Customers are forced to key in codes found on Pampers diapers and baby wipe packages. But when you buy bulk boxes, every individual package is coded so a 6 pack bulk box gives you 6 codes to key in.

That’s fine. I can understand why Pampers needs to do this. It’s a pain, but not a deal breaker. But when you go and actually try and redeem your points, you are forced with a number of insults. First off, there are very few rewards to redeem. Secondly, the biggest rewards are sold out. And thirdly, you cannot redeem more than one reward per order and you have to pay for shipping! Now my wife and I feel like we wasted 2 years of time as we diligently keyed in codes from our diaper and baby wipe packages.

If Pampers upped the required points and covered postage one could deal with the sold out items and the lack of selection. But instead the customer is left feeling punished rather than rewarded.

When developing loyalty programs, think about these 5 steps and your customers could be profitable customers for many years to come.

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