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8 Types of Loyalty Programs: What’s the Best for You? 

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You must have been coming across “Loyalty Programs,” whether you are an entrepreneur or a consumer.

But, what exactly are these programs all about, and how do we identify them?

Loyalty programs, simply put, are attainable and desirable rewards, discounts, and other special incentives offered to loyal customers as a means to attract and retain them.

By definition, it is a marketing approach that recognizes and rewards customers who purchase or engage with a brand regularly. A company may dole out points or perks and graduate customers to higher levels of loyalty the more they buy.

Here are some prominent types of loyalty programs, a few examples of how to identify them, and their pros and cons.

 

1. Points

Points programs are the most common and successful loyalty program.

They let customers accumulate points they can redeem points for freebies, cashback, etc. Points programs date way back to the 17th century, when retailers rewarded their customers for purchasing items with copper tokens(the points) which would later be redeemed for discounts or merchandise. 

Sephora’s Beauty Insider rewards program is a good and widespread example of a points loyalty program. This is a traditional old-school points-based reward system where customers earn points for each purchase. The main reason for its success lies in letting members choose how they want to spend their reward points during future purchases.

Another typical example in our day-to-day lives is purchasing food items in supermarkets with the tags “Buy one and get one free!”

 

Pros

  • Boost profits of the brand as many potential loyal customers help the brand reach the target audience through customer referrals.
  • Improve brand reputation as many clients register and become conversant with the brand or company.
  • Get ahead of competitors in no time, as rewarding loyal customers break barriers and keep the company at a highly profitable level.
  • An excellent method to collect the personal and purchasing data of a customer to help with insights and chalking out better marketing strategies.
  • Free membership means a low barrier to entry.

 

Cons

  • Not much differentiation from the competition.
  • Purely transactional benefits don’t build true loyalty.
  • It is costly to build and maintain as well as fund benefits.

 

2. Cash Back

A cashback reward program is an incentive program operated by credit card companies where a percentage of the amount spent is paid back to the cardholder. 

They are like point programs. A customer is expected to spend a certain amount to get cashback worth a certain amount, usually in coupons or cash that can be used exclusively at a retailer.

An example of cashback as a customer loyalty program would be the Fave Cashback program, where customers get to earn Partner Cashback every time they pay using Favepay. The more they spend, the higher the cashback rate they earn.

 

Pros

  • Similar to points programs 
  • Easy to sign up for, provided a link is attached.
  • Redemption of exclusive store rewards can drive additional sales when redeeming cash.

 

Cons

Rewards both profitable and non-profitable customers alike.

  • Doesn’t provide instant results.
  • Not to the advantage of infrequent shoppers or customers.
  • Not much differentiation from competitors’ programs.

If you’re interested in the topic, you might find it interesting to read our article with biggest differences between cash back and points.

3. Punch Card

What is a punch card? A customer rewards loyalty punch card is a token of customer loyalty. A physical or digital hole is punched through its surface for every purchase made. 

After a predetermined number of purchases, the customer is then rewarded with a targeted gift, discount, or exclusive deal. Punch card programs require spending upfront to get value later, like points and cash back.

Perhaps the best-known example of a punch card loyalty program was the now-defunct Subway Club Card. When the card filled up with punches, the cardholder was rewarded with a free sandwich.

PS: if you’re thinking about implementing a loyalty card system for your business, maybe you should check out this article with some great loyalty card ideas!

 

Pros

A Punch Card Program is simple to launch. To launch a punch card program, you’ll need small, wallet-sized cards for your customers.

  • A Loyalty Punch Card Program is cheap to produce. Producing a punch card is inexpensive.
  • A Punch Card Program is easy to learn.
  • Value is easy for the customer to understand.
  • Low cost to the business.

 

Cons

  • A Punch Card Program is easy to counterfeit. All the punch card simplicity comes with a price.
  • A Punch Card Program is easy to cheat. 
  • A Business Punch Card Program is difficult to measure.
  • Rewards don’t do much to build customer loyalty.

 

4. Coalition

A coalition program is a loyalty card system that offers incentives to customers of two or more businesses to allow those businesses to collect user data. Such a program packages customer benefits into a single customer loyalty program. 

Also called “shared loyalty programs,” coalition loyalty is a concept in which many unrelated brands join together in a partnership. 

What makes these programs unique is that customers enjoy more freedom and a wider range of incentives. They can earn points at all participating brands and redeem said points at a different participating brand. 

A coalition loyalty program can promote products with a longer purchasing cycle by supplementing them with short-purchase-cycle products and brands. 

For example, bundling a monthly phone connection with an annual cable connection can drive greater sales for both businesses.

 

Pros

Benefits for program owners. 

  • Benefits for tenants.
  • Benefits for customers 
  • Customers can earn rewards more quickly and have more choices about 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 rather than the individual brands.

 

Cons

  • The data collected is usually owned by the coalition and siloed away from the individual retailers
  • No ability for respective retailers to differentiate their loyalty programs.
  • Coalition programs do not give you a competitive advantage or differentiate your company in the marketplace.
  • Risk of customers earning points with your brand and redeeming them with a competitor.

 

5. Tiered

A tiered loyalty program offers different benefits or discounts to specific groups of buyers according to their spending levels. 

Customers get rewards for every purchase, incentivizing them to spend more. At their simplest level, they offer rewards per dollar spent or purchase frequency.

A tiered program goes a step further and offers increasingly attractive benefits at higher levels of spending, brand engagement, or a combination of the two.

Some of the most well-known companies successfully using tiered loyalty programs include Southwest Airlines, Starbucks, and Sephora.

Hotels, airlines, and banks are not the only industries to find success with tiered loyalty programs. Among companies that offer tiered, Uber drivers also use this program. There might be a “target audience” as a result of this. People who can’t drive or people who don’t own their cars are the highest customers for Uber services.

 

Pros

  • Enhanced customer-brand relationships.
  • A tiered rewards system allows you to establish long-term stronger relationships with your customers.
  • Elevated competitive spirit.
  • Simplified customer segmentation.
  • Add the “Social” element to the loyalty program.
  • Opportunities to stay connected.
  • Focuses on higher-value customers.
  • It can offer better experiences and rewards to customers who are on higher tiers.
  • More opportunity for customization (and differentiation).
  • Encourages additional purchases as members want to achieve a more exclusive status.
  • Gives the best rewards to your best customers.
  • Doesn’t give away margin to every member.

 

Cons

  • Not as attractive for lower-tier customers that won’t spend as much.
  • Member relationships can be jeopardized if they are downgraded.
  • More complex, requiring more communication to members on their status – These programs can become confusing, which leads to less engagement.
  • Starting at the bottom tier may seem daunting and be a bigger barrier to entry than free points programs.
  • Market Saturation. Many businesses are using loyalty programs, and sometimes they may be identical.
  • Difficult to identify loyal customers. It is often difficult to differentiate brand loyal customers from repeat buyers.
  • Constraints of collected data.

 

6. Hybrid

A hybrid loyalty program combines more than one type of loyalty system. 

You may merge two different systems, such as the tier and the game program, where customers reach new levels of loyalty every time they complete a new level in your game. 

Participation in the game should, of course, entail a purchase. Some programs provide elements from several different loyalty strategies. 

For example, tiered programs with points combined with transactional and experiential benefits.

 

Pros

  • Improves Customer Experience: A hybrid loyalty program is explicitly designed to appeal to customers. When a customer is satisfied with the overall brand, it influences the customer experience. Improved customer experience can increase customer engagement, retention, and acquisition rate.

 

Cons

  • It could get confusing and complicated if you aren’t careful.
  • Since it’s so hands-on, results vary highly depending on how you design your program.

 

7. Threshold Rewards

This loyalty program is best suited for retail or ecommerce stores where customers purchase frequently. A threshold program is a bit different from tiered rewards. 

In a threshold rewards program, customers can advance through levels and earn VIP perks after making a certain amount of purchases in a given timeframe.

However, these perk levels aren’t permanent. They last for a short time (a few months to a calendar year) and require a certain number of purchases within a timeframe to obtain (or re-earn).

Threshold rewards are additional gifts given to Aeroplan Elite Status holders as they cross various Status Qualifying Miles (SQM) and/or Status.

 

Pros

  • Like tiered programs, threshold programs heavily focus on the highest-value customers.
  • Easy to track customer data
  • Easy to customize, so your program stands out.

 

Cons

  • Since rewards run out in a certain timeframe, it can be hard to keep lower-frequency customers motivated.
  • With the expiration date, higher rewards may feel even more unattainable to some.

 

8. Omnichannel

In an omnichannel loyalty program, customers are rewarded for any purchase they make from any channel—online, in-store, or otherwise.

By enabling your customers to accumulate points, rewards, and bonuses, whether they choose to buy from you online or in-store, they’ll be much more likely to join your program and keep coming back to buy more from you. 

Providing members with unique ways to amass and use loyalty rewards points will help your loyalty program stand out from the crowd and help drive growth and retention.

An omnichannel retail experience will include brick-and-mortar stores, app-based options, and online platforms. 

For instance, a clothing brand might sell its products on its website, app, Instagram’s “Shopping” tab, Amazon, and brick-and-mortar stores by using this program, customers will be able to gain points, no matter which point of sale they use.

 

Pros

  • Better customer retention rates.
  • Turnover increase.
  • Increase in client satisfaction.
  • Improvement of the number of references and recommendations.
  • Better efficiency. 

 

Cons

Omnichannel seems like it should command higher profit margins. However, each channel comes with an expense. Storage, packaging, and delivery of inventory from multiple sites cost money.

 

How to Choose the Best Option for Your Company

  • Great loyalty programs have a simple incentive structure that customers can remember if they can recall what they’ll earn and how they’re more likely to purchase and participate in your loyalty program.
  • Create an interface with your potential clients, know their likes and dislikes, and what makes them loyal to your brand. That way, you’ll be able to adjust to what suits your customers best at all costs.
  • The best loyalty programs have the longest duration of existence because they have greater pros than cons. Try not to balance the pros and cons. Rather the pros should outweigh the cons to have a good loyalty program.
  • Data insights to better understand your existing customer base. You’ll be able to analyze the most suitable loyalty program for your clients based on statistics.
  • Openness to make your rewards program stand out from the crowd.

 

Conclusion 

Loyalty programs are a strategy in which a company provides its customers with rewards and discounts for being loyal. Choosing a program is based on the business or retailer’s interests and the audience or clients they want to attract.

A value-based loyalty program helps in repeat purchases and brand loyalty and also increases how much the customer spends on your platform, thus, positively impacting the customer lifetime value.

It also encourages repeat customers who would further refer your brand to others and becomes brand advocates.

FAQs

Loyalty programs reward customers to encourage desired behavior, which usually means making another purchase. The most popular way to do that is giving loyalty points that can be spent as discounts on next purchases (so-called “delayed discounts”).

One of the more common loyalty program examples is the Starbucks Reward Program. It rewards customers with “starts” that can be exchanged for a free coffee and other products.

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