What are Loyalty Programs?
Before explaining the many different types of loyalty programs. We have to make sure we know what a loyalty program is. All the types of loyalty programs can be loosely described under this one, easy definition:
A loyalty program is a marketing strategy meant to encourage customers to continue shopping at or using the services of your business. Businesses offer rewards in exchange for customer loyalty.
Loyalty meaning frequent and/or heftier transactions, engaging with the brand (i.e giving feedback, recommending the brand to others), and opting to do business with your specific brand rather than your competitors. This give and take provides long-term value for both the business and the consumers. Customers seemingly receive more bang for the buck, while businesses secure customer retention. To learn more about customer retention and why it’s arguably the most valuable goal a business should aim for, click here!
What is the purpose of loyalty programs?
Loyalty programs are a great way to aim for a more secure customer retention rate. With creating a more close-knit community comes the enhancement of the customer experience. This lowers the consumer churn rate and increases customer lifetime value. Which in turn, has the potential to maximize a business’s profits and ROI. A domino effect of positives! There’s a more extensive list of benefits that loyalty programs can bring to the table, just click here.
(Link benefits of loyalty programs when it gets uploaded)
Why does picking the right loyalty program matter?
Different types of consumers respond differently depending on the incentives and the process of certain loyalty programs. One loyalty program might pique the interest of a specific demographic, while another doesn’t do as well or is disregarded completely. This also has to do with the industry your business operates in.
For example, a refrigeration company specializing in refrigerators and freezers wouldn’t have a great outcome instilling a punch-card program—because nobody buys a fridge every week!
On the demographic note, a company whose majority of consumers are on the older side, who don’t like complex technological advancements, would respond pretty well to a physical program like this one. Whereas, if the company decided to install a more intricate program that requires an app to be downloaded, they might not get their desired results.
Knowing your customers, and knowing which program aligns best with your business, can make all the difference in your success.
What are The Different Types of Loyalty Programs?
There are loads of different types of loyalty programs, you’re bound to find one that compliments your business and your target audience, in whichever industry you’re in!
Here are 10 loyalty programs that businesses all around are currently using.
Point-Based Reward System
What is it?
When a “loyalty program” comes to mind, the type of program that is thought of first by businesses and consumers alike is the point-based reward system. It’s the most straightforward, easy-to-grasp, and common system there is.
How does it work?
A business gives a point-weighted value per transaction a consumer makes. These could be applied to online transactions, in-store transactions, or both. As the consumers spend, they rack up points. The business chooses how many points are needed to redeem certain rewards, and the customer spends with those incentives in mind. The more they spend, the more they’ll receive.
It’s pretty common for a point-based reward system to be intertwined with a tier-based program, punch-card system, or a premium system as well; they can easily go hand in hand.
It’s especially easy to incorporate with software companies that understand the goals of your business and can provide a simple template to get things up and running, such as Upzaar. To learn more about Upzaar and how to finally start your own point-based loyalty program to get the gears going, drop by this link and give it a go with their free trial!
Pros
Point programs are free to join, so you don’t have to spend loads of time trying to persuade customers to sign up. They have a low barrier to entry, and they’re super common to the consumers already, so it’s deemed a pretty low risk for both parties. With consumers being so quick to sign up, companies can acquire new customers and collect data a lot quicker.
Cons
Being easy to join has its positives, but also its negatives. With anyone signing up without a second thought, it gets harder to collect more data after the acquisition stage as in nature is not a very engaging program. Losing the interest of consumers who otherwise could be very valuable. It takes a while to reap the rewards, and we are in an instant gratification dependent age. With the many customers who don’t engage with the brand, there are the ones who signed up for the spread out, occasional transactional benefits which doesn’t equate to true loyalty, defeating the purpose of the program. It’s already such a common program to adopt, there’s a big chance you can’t differentiate yourself with it from your competitors either.
Tier Based
What is it?
Like point programs, customers gain points per transaction, but it doesn’t stop there. Consumers are able to reach different milestones–different tiers–depending on how much they spend indicating where they stand loyalty-wise and will redeem different, more exclusive rewards the higher they are. The more a consumer spends, the more valuable they’re deemed and they’ll be rewarded for it. Status is the highlight, and status alone can be enough of an incentive for customers to really commit to one brand over another.
We already have an in-depth article solely about tier-based programs, and all their glory, here.
Pros
Unlike the point system, tier-based programs are able to distinguish between valuable consumers and maintain a better engagement with them, shielding them from wanting to switch over to a different brand because they’ll have to start all over and lose the status they worked to achieve. This cultivates commitment. Being able to segment your consumers so cleanly, makes targeting the right incentives easier, increasing the chances of successfully reeling in more of the right customers.
Cons
They don’t provide much value for the lower-tier members, especially in comparison to higher-tiered members (although that is the point of this program, it’s still a negative nonetheless). It’s quite complex in comparison to just a points program, and if not communicated correctly can be too confusing to consumers and end up having less engagement. Its complexity can translate to being discouraging rather than sophisticated to consumers who are just starting out and can be a barrier to entry. By downgrading high-status members if they aren’t keeping up well enough, you can accidentally lose them altogether.
Premium (Paid)
What is it?
This fee-based program is a pretty different program in comparison to the rest. The goal here is to shed off any customers who wouldn’t have invaluable CLV and focus on maintaining and strengthening the right, most profitable customers. They do this by having a monthly or yearly subscription fee customers sign up for that opens up the doors to exclusive discounts, unique services, and earlier access or special opportunities immediately. This program thrives on society's evolving instant-gratification needs and is largely believed to be the most customer-centric approach.
Pros
This VIP program fosters a community of valuable customers. Attracting the right ones from the get-go, and honing them properly. Having a set of engaged customers means having a great deal of big-ticket data collected and stored that can be put to good use. You’d be able to offer rewards that are attractive, in turn, have more engagement. Membership fees can also be used as an ancillary revenue product.
Cons
Not all businesses would benefit from this type of program, you have to make sure the reward is worth the subscription, if not it’ll ultimately fail, execution is vital here. Like tier-based, there’s a higher barrier to entry for the lower-tier customers.
Cash-Back
What is it?
The name is pretty self-explanatory here. A customer spends a certain amount of money, and after a point, they’d receive it back in coupons, or, they’ll get the amount back in “Cash”.Cash is money back you can only use for their brand’s branches.
For example, Kohl’s is well known for this program, and they use “Kohl’s Cash”. For every 50$ you spend during a certain period, you’ll get 10$ back in Kohl’s Cash.
Pros
It’s really similar to using a points program, and so it’s quite easy to incorporate into your business. The signing up process for the customers is straightforward and simple. Great for retailers, especially those with an older demographic. By giving cash or coupons back, you can drive up your own sales when customers redeem them.
Cons
It doesn’t provide the instant gratification many are looking for. If a customer isn’t an avid shopper at your establishment, then it doesn’t really hold much merit. It’s a common program as well, so you wouldn’t have the differentiation leg up on your competitors.
Punch Card
What is it?
I’m sure at one point in your life, a little physical rewards card somehow hid snug and forgotten in your wallet for a good few months. Or, a bunch of used up ones from your corner-store mom-and-pop shop you visit frequently. Either way, this old-timey method is still used. Some companies no longer physically punch or stamp your card for each purchase, rather they have electronic versions to keep up with the times. This upgrade ensures less chance of losing it in your pants pocket and is more convenient all around.
Pros
Overall it’s a pretty low cost to maintain, it has the same positives of both the points program and cash-back as they’re all simple straightforward options.
Cons
Customer data isn’t collected, especially with physical cards. Electronic ones do have more of an opening to receive them, but overall aren’t the best option for customer acquisition data. With the physical cards, it’s simple to forge a stamp or a hole punch, so fraud is prevalent, causing your business to potentially lose money when already if not balanced correctly could be giving products or services away without reimbursement of loyalty or profit.
Value-Based
What is it?
Value-based is all about giving. Companies give back to society according to the values they share with their customers. Putting their business in a good light by helping out the causes they stand for. For example, planting a tree per share, giving a percentage of the individuals' transaction to feed the hungry, or donating a book per 10 purchased. Causes that relate to the consumer. This creates a tag-team type of bond between the consumer and the business, a deeper relationship connected by ethics.
Pros
Personifying your business to be more in touch with your human side, and showing care and empathy for the world outside your business can create a branch image consumers want to associate with. In turn, you’d be finding like-minded consumers who can become mutually devoted. You’ll have incredible word of mouth, and even develop brand ambassadors that spread your business with rich credibility you can’t buy.
Coalition (Partnered)
What is it?
Coalition is most likely the least customer-centric program out of the bunch. It focuses on the program itself rather than the brand and does so by partnering with another company to create a more unitary program, with increasing transactions as its purpose. Customers can earn points and receive their rewards from whichever company they chose between them.
Pros
Forming these strategic alliances can create positive business relationships that can grow both businesses involved. Your operational costs (Marketing, funding for rewards, etc.) would be reduced as it’s shared between both parties. Customers may opt for your program, as they have more chances to receive points and more choices on where to spend them. Since customers can redeem their points at both companies, you can receive access to each other’s clientele and have more customer data as well.
Cons
The “loyalty” aspect of this loyalty program is watered down, not the focus of it. Since you’re partnered in this program, you can’t differentiate yourself so there’s no competitive advantage there. Although you’re partnered, the risks and benefits aren't necessarily even. There’s the chance of many customers earning points at the other company, and only redeeming them at yours. Although there is more data to collect, the majority of the time it’s owned by the coalition and not the individual retailers.
Omnichannel
What is it?
In this day and age, and especially due to recent events, loyalty programs that only reward typical brick and mortar transactions are dying down. Omnichannel gives points to the consumers based on engagement and interaction with all their touchpoints as it emphasizes that all aspects of their business are one, not separate. Members of these programs can receive points by downloading an app, purchasing from their physical stores, or even shopping online.
Pros
Differentiation is a definite plus by using this program. Customers being rewarded for purchasing from any channel is a convenience that can drive them to your company. It also appeals to a wide range of customers of different demographics with different purchasing processes. Simplifies the experience for consumers, as they can interact with different parts of your company as one connected business.
Gamified
What is it?
Gamified loyalty programs are on the newer side. They are engaging customers to encourage repeat behaviors by making them as tasks in interactive games as their program. Consumers can win rewards through a series of challenges or tasks. Masked as a level, buyers would submit feedback or visit the website to continue their progress in the game, when really you’d be incentivizing the behaviors you want your consumers to get accustomed to.
Pros
It goes beyond transactions and encourages non-purchase related engagement as well. It’s a great way to incorporate other loyalty programs as well, especially tier-based programs where users can earn badges for status. Engagement in this fun way can associate your brand with the positive emotions evoked through gameplay.
Cons
Technology is ever-evolving, and if you’re not on top constantly with new upgrades and quality enhancements, it’ll decline. This can be pricey to do, so you have to make sure your demographic would respond well to this type of loyalty program, to begin with.
Hybrid
What is it?
Incorporating a hybrid program means taking favored elements of different programs and combining them to achieve the desired program. One program may not be enough on its own, or only one aspect is appealing to your business objectives and aligns well with your brand image. A really common example is merging a point program with a tier program, and even newer ones that are combining the more traditional types of programs with gamification.
To conclude, which one should you use?
Don’t get overwhelmed with all the choices! It’s pretty simple. We’ll give a short and sweet recap, to make sure you know which program is right for you. Keep in mind you can mix and match different programs and offer different options to your consumers, you’re able to adjust accordingly. It isn’t a one size fits all! That’s why Hybrid is an option in the first place, to drive those targeted KPI’s you want to ultimately maximize the benefits of.
If you want a simple program for your business that has a high purchase frequency with a pretty direct value proposition and a main goal of acquiring new customers, then point based programs are for you!
Do you want to try your best to isolate your most valuable, top customers from competition with your emotionally relatable services and products? All the while segmenting your less valuable customers? Tier based may be a great option.
To boost desired behaviors from your customers in a more stimulating way, gamified can be paired with any of the above to create a customer experience that propels progressive relationships and highlights your shared values.
Working with a diverse set of people, building new strategic relationships and getting involved with cross-brand journeys is what coalition loyalty programs are for.
Committed members of a premium/paid program want to consistently check and be engaged with your brand to reap the benefits of their monthly or annual payments. Fitting for a business with experience-driven consumers and you want to identify those golden customers to give them the highest-value experience, keeping it mutual.
Most brands do start off with one type, but tend to incorporate more as they grow!