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[case study] Build customer loyalty like Starbucks + Costco

Building customer loyalty is a primary way to increase conversions and multiply profits. Below we explore two case studies in how to build customer loyalty, featuring Costco and Starbucks. 

But first, we cover customer loyalty program basics, including how to define customer loyalty, why it is important, and ultimately, the types of loyalty you can build.

If you would like to skip the theory and head straight to the case studies , click here.

What is customer loyalty program marketing?

A customer loyalty program, often called a rewards program, is a customer retention strategy that focuses on repeat purchases.

Customer loyalty programs are designed to incentivize customer actions. Programs can offer many types of benefits such as rewards, points, cash back, gifts, free shipping and more.

Why is customer loyalty important in eCommerce?

Returning visitors dramatically increase profitability.

In our study on New vs Returning customers, we found that retained visitors

  • Added items to carts 65.16% more than first time visitors
  • Converted 73.72% more than first time visitors
  • Spent 16.15% more per transaction

Further studies confirmed these benefits of customer loyalty.

One study by Harvard Business School found that "Loyalty leaders - companies at the top of their industries in NEt Promoter Scores or satisfaction rankings for three or more years - grow revenues roughly 2.5 times as fast as their industry peers and deliver two to five times the shareholder returns over the next 10 years."

And another study by ZenDesk found that 75% of customers are willing to spend more from companies that give them a good customer experience, while 50% will switch to a competitor after one bad experience.

50% will switch to a competitor after one bad experience

Image Credit: Zendesk's 2021 Customer Experience Trends Report

How to build customer loyalty?

There are two major types of customer loyalty. The first is transactional loyalty, and the second is emotional loyalty.

How to build transactional customer loyalty

The first is transactional loyalty. This type of loyalty is rational in nature. Customers perceive it is in their best interest to stay with this company based on repeated past experiences.

For example, they may believe that the brand is the least expensive, most convenient, or least risky option. Famous brands who have built their business through transactional loyalty include Walgreens and CVS. In fact, certain industries compete primarily on transactional loyalty, including pharmacies, gas stations, and grocery stores.

There are many ways to generate transactional loyalty. Below are few principles.

  • Loss aversion: Customers value losing more than gaining. By incorporating rewards, points, and bonuses you can influence customers to continue shopping with you else they lose the points they have earned
  • Recency Bias: Customers overweigh what has happened most recently. Brands can take advantage of this by introducing daily deals or other tactics to boost
  • Reciprocity: Finally reciprocity is a well documented social norm where people respond to a positive action with another positive action. (link to Wiki). Brand can create transactional loyalty by leading with value, such as a gift or credit, which can spur customers to want to respond.

How to build emotional customer loyalty

The second type of loyalty is emotional loyalty. As the name implies, this type of loyalty is not based on a "rational" calculation that being loyal is better for the customer, but instead is based on an emotional connection.

Typically, this connection takes the form of status, the brand becoming part of the customer's identity, or the brand being used to express their identity. Because of this, they are much less likely to be influenced by competing offers and brands may enjoy higher price elasticity when they set their pricing strategy.

Again, there are a few principles at work that eCommerce stores may take advantage of to maximize customer emotional loyalty.

There are many famous examples of brands that have created emotional loyalty with customers, including Apple, Disney, Starbucks, Coke, and Pepsi.

We've covered how Starbucks creates loyalty through their omnichannel-retail strategy here.

Customer loyalty examples: tactics and strategies from top companies

Below we break down examples of customer loyalty programs, and call out specific tactics these companies make in a running list.

How Costco creates customer loyalty

Costco is a multinational company that operates membership big-box retail stores. The company has grown to 152.7 billion dollars annually, and makes for a fantastic case study on customer loyalty.

As their management states in their latest 10-Q filing,

"We believe the most important driver of our profitability is sales growth, particularly comparable warehouse sales growth.... Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket)."

“We believe the most important driver of our profitability is sales growth, particularly comparable warehouse sales growth.... Comparable sales growth is achieved through increasing shopping frequency from new and existing members and the amount they spend on each visit (average ticket)” - Costco 10-Q, 2021

1. Cross subsidizing with a membership model

Costco's loyalty program begins with their membership business model. 

Members pay an upfront cost to be able to enter the store and purchase goods. In return, Costco provides low, competitive prices, private label items, and other exclusive perks.

“Our membership format is an integral part of our business model and has a significant effect on our profitability. This format is designed to reinforce member loyalty and provide continuing fee revenue.” - Costco 10-Q, 2021

2. Using loss leaders to promote transactional loyalty

Part of Costco's loyalty strategy is to "provide members with quality goods and services at the most competitive prices." Instead of maximizing profits per transaction, they focus on maximizing each customer's lifetime value to the company.

This is exemplified most clearly in their gasoline service. 

"We believe that our gasoline business draws members, but it generally has a significantly lower gross margin percentage relative to our non-gasoline business."

Costco takes measures to ensure members will always save on their gas bill. They are able to do this because of their membership business model, which doesn't rely on profits in gasoline to fuel the business.

3. Using unique, private label products to increase loyalty

Private label products increase customer loyalty in a number of ways. 

First, it distinguishes Costco. Instead of competing in purely commoditized products, Costco can offer exclusive options for their members. 

Further, as customers become habitualized to these products, it improves their membership retention rate. If customers want to enjoy these products, they must continue shopping at Costco.

Because of the exclusivity and collapsing the supply chain, these product are often more profitable on a unit basis as well. 

4. Maxime loss leaders with creative financing options

Finally, Costco compliments their product offering with a branded credit card. They have tailored the rewards card to maximize customer loyalty, highlighting some of the biggest reasons to be a member.

  • 4% cash back on Costco gas
  • 2% cash back on Costco purchases
  • Costco membership is bundled with the price of the card

How Starbucks improves customer loyalty

Starbucks is another premier case study of how to improve customer loyalty.

5. Cross channel marketing

Starbucks does an incredible job driving customers into their loyalty program.

We've covered before in our case study of Starbucks' omnichannel strategy how they tie in different channels, all leading to subscribing to their renowned loyalty program.

Below we see a clear example. Once subscribed to their email list, customers receive member exclusive offers. If they would like to partake, they must enroll in the loyalty program.

Starbucks extends their Rewards program to lower margin grocery items as well. The rewards themselves help drive traffic to their in-store locations, increasing frequency, lifetime value,  and accessing a whole new group of customers.

6. New product development

Starbucks also drives repeat purchases through new product development. 

With a steady stream of new options, customers are nudged to come back and try their latest creations. These new products often embody other aspects of the business, in this case Starbuck's new relationship with OATLY.

“We recognize that we are a beverage-forward concept. Beverage is our key point of differentiation.” - Pat Grismer

7. Create urgency with limited time products

Additionally, seasonal holiday beverages create excitement in their customer base and provides a sense of urgency to come into the store.

In fact, there are now many seasonal beverages that customers pine for, including Pumpkin Spice Latte, Peppermint Mocha, and Irish Cream Cold Brews.

Further, Starbucks constantly rotates in limited run premium products. 

Combined, holiday and limited time products give a reason to return.

8. Unique experiences for Rewards Members

Finally, Starbucks routinely creates rewards member engagement campaigns. These often take the form of exclusive games and rewards Starbucks Rewards Members can participate in.

Below is just one example. In Starbucks For Life, Rewards Members collect game pieces that can earn them rewards ranging from a $500 gift card, Bose  Earbuds, and of course, the namesake grand price, free Starbucks for Life.

Next Steps...

Starbucks and Costco are great case studies in how to build customer loyalty.

At it's core, customer loyalty is about providing a better experience. While there are many ways to improve customer's experience in an eCommerce context, the primary ways revolve around creating personalized, relevant experiences and offers across all channels. Below are a few resources we have put together to help.

Lastly, we help hundreds of premier eCommerce stores generate customer loyalty and repeat purchases. If you would like to see if we can help your store, schedule a personal demo here.

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