Loyalty segmentation: how it works, and how it can improve your loyalty program (with examples)

Imagine a loyalty program that treats all its customers the same. They all get the same emails, perks and product recommendations. Sounds like a pretty average experience, right? That’s where loyalty segmentation comes in.

Loyalty segmentation is the process of dividing your customers into groups based on their loyalty behaviors and spending habits. It allows you to personalize the experience for each customer based on their engagement with your brand, turning a generic loyalty program into a dynamic one. 

In this article, we’ll explore why loyalty segmentation is beneficial, how to segment your own customer base, and how this knowledge can improve the performance of your loyalty program.

The benefits of loyalty segmentation 

Every single one of your customers sits somewhere along a spectrum ranging from one-time purchasers to enthusiastic brand advocates. A one-size-fits-all approach ignores these differences, resulting in missed opportunities for engagement or wasted resources on the wrong customers. By segmenting your customers based on their loyalty, you can develop targeted approaches that resonate better with each group. Here’s why it’s worth the effort:

Increased customer engagement: 70% of customers say they would be loyal to a brand if they got personalized offers. When customers feel valued and receive rewards relevant to their interests and behaviors, they’re more likely to keep coming back.

Boosted customer retention: Loyal customers are more profitable. Segmentation helps you identify your high-value customers and nurture those relationships to prevent churn.

Improved loyalty program ROI: By focusing your resources on high-value customers and segments that offer the best return on investment, you get even more bang for your buck with your loyalty program.

How to segment your customers based on loyalty

Now we’ve covered the ‘why’ of loyalty segmentation, let’s dive into the ‘how’. Here’s a step-by-step guide to get you started. 

Define your segmentation objectives

Before diving into the data, defining what you hope to achieve with your segmentation is important. Perhaps you’re looking to increase customer retention and boost sales through better-tailored loyalty campaigns. Or maybe you want to identify opportunities to acquire new customers through brand advocates.

Clear objectives will guide your segmentation strategy and help you measure success at the end of the process. Make sure that your objectives tie back to your wider business goals, with ideal timelines and outcomes stated from the get-go. 

Gather the data 

Effective segmentation starts with robust data collection. To truly understand and categorize your customers based on their loyalty, you’ll need comprehensive and accurate data. Here are some essential sources to collate: 

Purchase history

Purchase history provides insight into what your customers are buying, how often they make purchases, and their average order value (AOV). This data can help identify your high-value customers and frequent buyers, allowing you to target them with tailored messaging, promotions and product suggestions.

Loyalty program participation

Data from your loyalty program is invaluable. Track things like how often customers use their rewards, what types of rewards they prefer, and how often they open loyalty emails.

Engagement with your brand

Monitoring how often customers interact with your brand—be it through website visits, email opens, or social media engagement—helps you gauge their level of interest and loyalty. Highly engaged customers are often great candidates for becoming advocates. 

Zero-party data 

Zero-party data is information that customers intentionally and proactively share with you. Because it’s provided by the customers themselves, zero-party data is highly reliable and offers insights you won’t find elsewhere, making it incredibly valuable. 

You can incentivize your customers to share zero-party data with you by rewarding them with loyalty points for taking part in quizzes and surveys. A good example of a loyalty program that incentivizes data sharing is The INKEY List, which rewards loyalty members for taking their skin quiz, enabling personalized product recommendations based on customers’ skin types.

Once you’ve decided which data to gather, find a centralized CRM system or data analytics platform to store all of the information in one place. This will help you cross-reference and analyze your data points, leading to more effective segmentation. 

Throughout the data collection process, it’s important to respect your customers’ privacy and ensure compliance with regulations like GDPR and CCPA. Make sure you offer total transparency in how you collect, store, and use customer data. Finally, your data is only useful if it’s up to date. Regularly clean and update your data set to ensure it stays accurate.

Choose your segmentation variables and clusters 

Now that you have your data, you need to work out how you’re going to use it to categorize your customers. The variables that you choose should be relevant to your loyalty segmentation goals, with common variables including things like: 

• Recency: How recently a customer has made a purchase
• Frequency: How often a customer makes a purchase
• Monetary value: How much a customer spends
• Product preferences: The types of products a customer frequently purchases
• Demographics: Basic demographics like age, gender, and location. 

Once you’ve selected your variables, use clustering techniques to group customers into meaningful segments. Popular clustering methods that you might want to try include: 

• RFM analysis: A time-tested method that uses recency, frequency, and monetary value to categorize customers. Simply combine the three variables to identify your loyal customers, at-risk customers, and those who have churned.

• K-Means clustering: With this method, you define the number of clusters (or segments) you want beforehand. The algorithm then groups customers based on their data point similarity.
• Hierarchical clustering: This method creates a hierarchy of clusters by progressively merging or splitting them, allowing you to decide on the level of granularity that you want for your segmentation.

Don’t be afraid to combine different data types to create even more powerful segmentation clusters. For example, you could have:

• Discount-prone high spenders: Identify your customers who have a high AOV but are heavily influenced by promotions.
• Engaged budget buyers: Customers who frequently interact with your brand but tend to make low-value purchases.
• New high-potential customers: Recent buyers who show strong engagement and have the potential to become high-value customers.

Create segment personas

Once you’ve used clustering to define your customer segments, it’s time to build out some personas. 

Develop detailed profiles for each customer group based on their characteristics and behaviors, including things like demographics (are they of a similar age or gender?), motivations (are they much more likely to purchase when there’s free shipping or a double points event?) and purchasing patterns (do they buy frequently or seasonally?). To bring these segments to life, develop fictional characters complete with names and stories. These personas should represent typical members of each customer group, making it easier for your team to visualize and understand them.

Understand the profitability of your segments

Understanding the profitability of each customer segment will help you to tailor your marketing efforts and loyalty program rewards. Start by evaluating the revenue generated by each segment, considering metrics like AOV, purchase frequency, and customer lifetime value (CLV). This will help you identify which segments contribute most to your bottom line. 

Secondly, assess the costs associated with each segment, including customer acquisition costs, retention expenses, and any ongoing service-related costs. Weighing up the expenses against the revenue for each segment allows you to calculate profitability metrics like profit margin and return on investment (ROI). 

Based on these insights, allocate resources strategically by prioritizing investment in segments that offer higher profitability. For example, customers with a higher CLV might warrant more exclusive rewards and benefits.

Tailor your marketing to your segments

With your customer segments, personas, and profitability insights in hand, you can fine-tune your marketing strategies to better cater to each group. Personalizing your approach ensures that every segment receives relevant and persuasive messages, leading to better engagement and more conversions. Here are some examples of how you might tailor your strategies to different segments: 

• Create VIP loyalty tiers for your high-value customers, offering unique benefits such as free shipping, free returns, or invites to exclusive events. 
• Offer bonus loyalty points to less frequent buyers if they make a repeat purchase within a certain timeframe.
• Create bundled product offers to appeal to your customers who are motivated by the feeling of getting a bargain.
• Build habitual purchases with less frequent buyers by introducing subscription services for the products they buy.

Once you’ve tailored your strategies to your new segments, use a test-and-iterate approach to refine your messaging and drive as much engagement as possible. Use A/B testing to determine which messages and offers resonate most with each segment, regularly tracking and reviewing the performance of your campaigns.

An example of loyalty-based segmentation

Let’s dive into an example to illustrate the power of loyalty segmentation. Imagine you run an online store selling athletic wear— let’s call it “Stride & Thrive.” Here’s how you might segment your customers based on loyalty, using actual figures to make the process more tangible:

Segment 1: The active aficionados (high spenders)

• Definition: Customers who place orders at least once a month with an AOV exceeding $150. They represent only 10% of your customer base but contribute a whopping 40% of your total revenue.
• Value: These are your brand champions! They’re highly engaged and loyal and love telling people about your products.
• Engagement strategy: Create a VIP loyalty tier to continually reward them for their loyalty. This could include early access to new products, invitations to member-only events, or even a dedicated repairs or tailoring service. Send targeted referral emails inviting this segment to refer friends and family in exchange for loyalty points or rewards. 

Segment 2: The steady steppers (regular shoppers)

• Definition: Customers who make repeat purchases but with a lower AOV. They typically order every 2-3 months with an average order value of $75-$150. They represent roughly 30% of your customer base and contribute 35% of your revenue.
• Value: These are your reliable customers with the potential to become high spenders.
• Engagement strategy: Nurture the relationship with personalized product recommendations and encourage them to increase their basket size by rewarding them for reaching spending milestones.

Segment 3: The seasonal sprinters (discount seekers)

• Definition: Customers who are price-sensitive and primarily shop during sales periods or with discount codes. They might make infrequent purchases with a moderate AOV ($50-$75), but activity surges during sales. This segment represents 40% of your customer base but contributes only 15% of your total revenue.
• Value: While they might not be high spenders right now, this segment can become more profitable with the right engagement strategies in place.  
• Engagement strategy: Convert this segment into regular customers by offering targeted promotions (like double points weekends or limited-time free shipping) outside of sale periods, so they still feel like they’re getting a good deal. Send personalized communications to highlight the value proposition of your products beyond just price, such as product quality, performance benefits, and community feedback. This will encourage them to buy into your brand on a deeper level.

Segment 4: The new striders (first-time buyers)

• Definition: Customers who’ve made a single purchase, typically with a lower AOV of $25-$50. They represent 20% of your customer base.
• Value: These new customers offer a wealth of potential. It’s important to capture their interest early on. 
• Engagement strategy: Welcome this segment by automatically crediting their account with loyalty points to incentivize a second purchase. Provide educational content about your products and brand story as part of a tailored communication strategy, and offer them personalized recommendations based on their initial purchase.

Segmenting your customers with LoyaltyLion

While the above strategy is a solid method for segmenting your customer base, there’s an even faster way to achieve these valuable results. Enter LoyaltyLion’s loyalty dashboards.  

LoyaltyLion’s dashboards empower you to swiftly segment your customers based on the unique data collected from your loyalty program. Moreover, they give you the most valuable segmentation going for a loyalty program – insight into the difference in value between a redeeming loyalty program member and a non-member. Loyalty program members who redeem rewards have significantly higher CLTV, purchase frequency, and AOV than non-redeeming members or guest shoppers and as such they are the most important segment to track and understand. 

To elevate customers into this higher-spending redeeming member segment, increasing reward redemption rates is paramount. Simple yet effective tactics include reminding customers about available rewards, introducing more exciting and tangible rewards (think free products or exclusive experiences), and creating more earning opportunities, but we have a whole article dedicated to this topic so we won’t go into too much detail here. 

How does loyalty segmentation compare to other types of segmentation?  

When it comes to categorizing your customers, loyalty segmentation is just one of several methods you can use. By learning how loyalty segmentation compares to other options, you can make an informed decision about which method to use and when. 

Demographic segmentation

Demographic segmentation is a good starting point for understanding your customers at a basic level. 

Demographic segmentation divides customers based on quantifiable attributes such as age, gender, location, and occupation. This data is easy to collect and can be useful for broad-stroke marketing strategies but it doesn’t provide information about customer motivations or behaviors. 

While demographic segmentation gives you an overview of who your customers are, loyalty segmentation digs deeper into how they interact with your brand, offering actionable insights for building stronger relationships and better retention strategies. 

Psychographic segmentation

Psychographic segmentation categorizes customers based on psychological traits, including things like values, attitudes, interests, and lifestyles. While it unlocks the “why” behind customer behavior, loyalty segmentation focuses on the “what”—their actual buying habits and loyalty patterns. 

Combining these methods together provides a powerful 360-degree view, helping you to craft targeted marketing campaigns that truly connect with each customer segment.

Behavioral segmentation

To discover how customers behave and interact with your brand, behavioral segmentation can provide detailed and actionable data. This technique categorizes customers based on their actions, such as purchase history, website visits, or email open rate. 

As you may have already guessed, loyalty segmentation is a specialized form of behavioral segmentation that focuses specifically on loyalty behaviors and long-term engagement.

How to use loyalty segmentation to improve your loyalty program 

Loyalty segmentation isn’t just about understanding your customers: it’s about leveraging those insights to build a loyalty program that truly resonates with them. Everything you learn about your customers should be fed back into your loyalty program so that it becomes a finely tuned machine. Here’s how you can use loyalty segmentation to create a loyalty program that’s laser-focused on driving engagement and repeat purchases: 

Tailor rewards to motivate action

One-size-fits-all rewards are a recipe for loyalty program mediocrity. Tailor your rewards to inspire action in your different customer segments. For example, if a segment consistently has a low AOV, your loyalty program might need to focus on encouraging them to spend more per purchase. Consider implementing free shipping thresholds to incentivize them to reach a specific spending target. 

On the other hand, your loyal customers who buy from you frequently will be motivated by something else. They don’t need discounts or gimmicks because they already buy into your brand and products, but they do want to feel valued. Reward them with early access to sales or exclusive invites to events so that they feel like VIPs. 

Build loyalty tiers based on your segments 

A tiered loyalty program rewards customers based on their level of engagement with your brand, providing increasing benefits as they climb the loyalty ladder. 

Using loyalty segmentation insights, you can design tiers that closely align with your customers’ motivations. For example, Astrid & Miyu reserve their ‘early access to sales and promotions’ perks for customers in the Silver and Gold tiers. To reach those tiers, customers need to spend a minimum of £200. This means that only the most loyal, high-value customer segment is rewarded with this VIP perk. 

Create a continuous feedback loop 

To get the most out of your loyalty program—and your marketing in general—feed the insights gathered from your loyalty program back into your customer segmentation. 

Loyalty programs are data goldmines, and the information they generate provides a wealth of insights that can enhance your segmentation efforts even further. By creating this continuous feedback loop, you can be confident that your segments are always accurate and relevant. 

Final thoughts

Loyalty segmentation is a powerful strategy that can breathe new life into your loyalty program. By understanding the unique needs and behaviors of different customer segments, you can tailor your rewards to motivate engagement, driving even more growth for your brand.

Learn how LoyaltyLion can supercharge your segmentation with data you can trust. Check out our loyalty dashboards.