5 best-for-retailers types of loyalty programs
1. Points-based Loyalty Program
Points programs are a great way to acquire customers and increase engagement.
When done right, they’re about engagement and providing value to your members.
If you regularly iterate a points program, it will remain fresh and top of mind for your members.
New businesses and simple purchases. Points systems work well for most business types, as long as your customers purchase from you frequently.
Example of points-based loyalty programs:
Companies like Starbucks have gone above and beyond to make their program more exciting and stand out from the competition by making it digital and by providing more unique rewards.
PROs of a points-based loyalty program:
- Free to join equals low barrier to entry for customer acquisition
- Excellent at collecting valuable zero- and first-party data
- The perfect entry point into your larger loyalty ecosystem – a great way to use engagement tactics to turn occasional customers into more frequent ones
CONs of a points-based loyalty program:
- More difficult to use for brand differentiation because rewards need to be funded
- May not provide the instant gratification that modern consumers want (i.e., need to collect points over time for rewards later)
- May not provide enough value to dramatically increase customer engagement
With points programs, customers must accumulate quite a few points for the value to be seen. While they’re great at getting people to opt-in, they’re not great at increasing engagement and spend levels. Therefore, the time to profitability can take a long time.
2. Tier-based loyalty program
Tiered programs are similar to point programs in that they usually allow customers to gain points with their purchases. The difference here is that the customer’s status will increase as they accumulate more points, and will access different rewards based on their status.
Typically, the more a member spends or interacts with the brand, the higher the tier they enter.
Businesses where purchases are infrequent, like companies in the travel industry
Some successful tiered loyalty programs also show members what percentage of the total members are in each tier. This allows members to see their status relative to others in the program and plays on the competitive desire for a higher social status.
Also, since the higher levels provide better benefits, these programs by nature make your most valuable customers feel the most valuable. They know they’re getting rewards not available to everyone.
Example of tiered loyalty program:
Bra and underwear brand ThirdLove uses a tiered system for its program, Hooked Rewards.
PROs of TIERED PROGRAMS:
- Easy to customize so your program stands out
- Adds levels of exclusivity to the program
- Focuses on higher-value customers, and makes those customers feel valued and appreciated with best rewards for best customers
- Enables gamification (things like progres bards and milestones, that keep customers coming back because the program is more fun)
- Encourages additional purchases as members want to achieve more exclusive status
CONs of TIERED PROGRAMS:
- Not as attractive for newer low-tier customers that feel higher rewards are unattainable and won’t spend as much
- Member relationships can be jeopardized if they are downgraded
- More complex, requiring more communication to members on their status
Avoid confusing your members (which leads to less engagement) with Loyal Guru’s powerful loyalty management software.
3. Cash Back Loyalty Program
How do cash back loyalty programs work?
Members spend a certain amount to get a certain amount back usually in coupons or “cash” that can be used exclusively at a retailer. They’re very easy to understand and maintain, since the concept is basically the same as points programs.
The catch is that there usually is a minimum spend by the end of an earning period, which means that it can be difficult for infrequent shoppers to realize the value.
Retail and e-commerce; any business where purchases are frequent.
Example of cash back loyalty program:
Pros of cash back programs
- Easy to sign up for and to understand: “spend more, get more back”
- Redemption can drive additional sales when redeeming “branded cash”
Cons of cash back programs
- Doesn’t provide instant gratification
- Not as compelling to infrequent shoppers
- All customers get equal rewards, regardless of how much profit they’ve brought to the retailer
- Hard to differentiate from the competition
4. Pay-to-join (premium) loyalty program
In the loyalty space, a premium loyalty program is simply a program where members pay a recurring fee for benefits they can use right away, rather than transactions first and rewards later.
More and more retailers are thinking about premium loyalty as the best way to increase loyalty with their best customers. Because these programs are so valuable, retailers see more engagement, higher-order frequency, and greater average order value. In addition, they collect valuable data about their best customers.
According to a McKinsey report on loyalty programs, members of premium loyalty programs are 60% more likely to spend more on your brand, while free loyalty programs only increase that likelihood by 30%.
Larger retailers with the scale to offer solid perks for a price
Example of premium loyalty program:
Pros of pay-to-join programs
- Easy to understand the program’s benefits
- Instant gratification with very attractive, upfront rewards
- For those willing to pay, rewards are easy to access
- The retailer enjoys more engagement, more order frequency, and higher AOV
- The retailer collects valuable data from their best customers
- The membership fee also becomes a recurring revenue stream (the loyalty program goes from margin killer to source of revenue source)
Cons of pay-to-join programs
- High barrier to entry if many think the cost outweighs the value
- Has more technical complexity
- Requires the most careful design to motivate the most signups and more resources dedicated to customer service
- Security and PCI compliance
When customers pay for membership, they want convenience and immediate value.
When people pay to join a loyalty program, they expect a great experience by design. The program needs to be painless to enroll in, provide ongoing value, offer exclusive benefits and show personalization.Borja Sanfeliu, co-founder and CEO of Loyal Guru
5. Coalition Loyalty Programs
Coalition programs are interesting in that they are operated by more than one business.
Shopping malls and department stores
Example of coalition loyalty program:
Dubai Mall and Emirates Skywards. The Dubai Mall shopping mall loyalty program has partnered with an already established rewards program with the famous UAE airline, Emirates.
Catering to tourists, The Dubai Mall allows shoppers to earn Emirates Skyward Miles when they purchase. These miles can be used to shop at retailers present in the mall itself, and all around the world with participating brands.
Additionally, the loyalty partnership allows customers to access travel-centric perks such as airline class upgrades, rental cars or hotel discounts.
The Dubai Mall loyalty app provides some extra convenience with an interactive map and a visit planner.
PROs of coalition loyalty programs
- Gives shopping malls the ability to increase footfall, understand their customers and foster loyalty, while adding value to tenants
- Customers can earn rewards more quickly and have more choice on where to use them
- Each brand gets access to an expanded customer base
- Many of the operational costs to run the program including marketing and the rewards funding are shared with other partners
- The rewards redemption liability is managed by the coalition itself rather than the individual brands
CONTRAs of coalition loyalty programs
- No ability for individual brands to differentiate their loyalty program
- Customers might earn points with one brand and redeeming them with a competitor
- The data collected is usually owned by the coalition and not accessible to retailers individually
In theory, these programs are appealing. They seem like they will elevate a brand’s transaction levels. However, they aren’t great at creating actual loyalty. The focus becomes on the program itself and not the retailers.
BONUS: Values-based Loyalty Programs
This type of loyalty program differs from others because it doesn’t offer any explicit rewards to customers, like discounts or other benefits.
Instead, value-based programs emphasize the retailer’s values and, ideally, also align with customers’ values.
With this program, a retailer pledges to donate a portion of its proceeds to one or more charities, sometimes even enabling customers to choose the charity that best aligns with their personal values. Retailers that use value-based loyalty programs aim to facilitate deeper connections with customers.
What to read next?
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Whether you’re looking to achieve increase sales or protect retail margins, it is important such efforts begin with knowing your customers and personalizing the shopping experience. Loyalty programs can be the key to ensure just that.
Retailers can use a loyalty program to stay competitive, add value to shoppers, and shape customer behaviour while nurturing loyalty.
If you’re a retailer and are interested in discussing the opportunities available to you through a loyalty management platform or loyalty app, please get in touch with our team – we’ll be happy to show you examples or talk through your company’s unique challenges.