If you’re a retail marketer, chances are you’re thinking about types of loyalty programs.
Since the beginning of time, retailers have been using points schemes, tiered programs and even paid membership loyalty programs to try and retain loyal customers. But do these programs really create loyalty?
And how can you be sure which type of loyalty program is the key for your brand?
Don’t worry. We’re going to discuss the most popular types of loyalty programs, layout the pros and cons of each along with some examples, and help you figure out which type of loyalty program is right for your brand.
1. Points Programs
We’re going to set the stage by going back in time.
Hundreds of years ago, retailers began rewarding customers for purchases with copper tokens (the points) which could later be redeemed for discounts or even merchandise. The tokens later evolved into stamps, box tops, and plastic cards, but not much else about the programs have changed.
Points programs are largely the same today as they were in the 1700s. Customers are forced to spend upfront for rewards that come later. Transactions first, benefits later.
But customers aren’t the same now as they were back then. They have more choices than ever before and are less loyal than ever before. Points programs don’t offer nearly the value that modern consumers demand to stick with a brand.
Still, they do have their place. Since these programs are free to sign up for, there is little barrier to entry when it comes to membership joins. That’s why we all carry so many loyalty cards in our wallets and on our keychains.
Do people really use them though?
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.
Example – Petco Pals Rewards
Petco Pals Rewards is a typical points program. For every $1 spent, members earn 1 point. When 100 points are accumulated, a $5 coupon is given. Essentially, members must spend $100 to get $5 to use towards merchandise. It’s a pretty simple value proposition.
The points do expire 45 days after the issue date and if a member’s account is inactive for 180 days (meaning no purchase activity), the points balance is reduced to 0. This may make it difficult for infrequent shoppers to take advantage of the rewards.
Furthermore, if a member spends $100 on one purchase, the $5 reward cannot be used until the next purchase. In a time when instant gratification is so critical, that could be frustrating.
This is not meant to single out any one retailer. This is just an inherent shortcoming of free points programs in general.
So, to recap, here are the pros and cons of a points program.
- Free membership means a low barrier to entry for joins
- Great at acquiring members to start collecting data
- Members don’t need to be “sold” on joining
- Low risk
- Don’t provide enough value to attract more engaged, top-tier customers
- Don’t provide the instant gratification that modern consumers demand
- A lower engagement rate means fewer chances to collect data on customer needs and wants
- Not much differentiation from competition
- Purely transactional benefits don’t build true loyalty
- Costly to build and maintain as well as fund benefits
Points programs are great at getting lots of people to sign up, but not great at increasing engagement due to low differentiation and low value. These programs are all about acquisition and not much else. While there are some points programs that are successful and provide more value, these programs are best paired with a premium loyalty tier.
2. Cash Back Loyalty Programs
Cash back programs are like points programs.
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, there’s not much more to explain.
Example – CVS ExtraCare
In the CVS ExtraCare program, members earn 2% back in ExtraBucks Rewards every time they use their ExtraCare loyalty card. Those “bucks” can be used on just about everything at CVS.
The catch is that members who do not spend $50 in qualifying purchases or who do not otherwise reach a minimum of $1.00 in ExtraBucks Rewards by the end of an earning period will not receive rewards and will not have earnings carried over. That can make it difficult for infrequent shoppers to realize the value.
- Similar to points programs
- Easy to sign up for
- Redemption of store exclusive rewards can drive additional sales when redeeming “cash”
- Rewards both profitable and unprofitable customers alike
- Doesn’t provide instant gratification
- Not as compelling to infrequent shoppers
- Not much differentiation from competitors’ programs
Like points programs, cash-back programs have a lower barrier to entry, but they don’t provide differentiation and they reward everyone equally. There’s not a huge incentive for customers to engage more.
3. Punch Card Programs
With punch card loyalty programs, we still haven’t stepped into modern times.
Originally, companies would give members actual paper cards that were “punched” when they bought items or services. After the customer filled out the card, it could be redeemed for a reward. Do you remember going to the local deli and having the cashier punch a little circle in your paper card? After about nine or so punches, you would get a free sandwich.
While some small mom-and-pop shops still use actual paper cards, many brands have upgraded to electronic versions of them. While the technology makes it more convenient than carrying a paper card around, these programs are like points programs in that they don’t engender true loyalty.
Does earning a free sandwich after nine others really make your customers loyal? It seems a lot of small businesses feel they need these programs, but things like location, proximity to the office, or overall experience impact transactions more than the 10th sandwich free.
I belong to one of the sandwich shop punch card programs and I can honestly say the program has never even crossed my mind when I go there. Occasionally, the cashier will ask me if I am a member and sometimes I will have bought enough subs to get a free one.
It’s a nice feeling, but it’s one that is quickly forgotten. I just like that chain and its convenience. There’s no reason to give me a free sandwich. I’ll be back anyway.
Like points and cash-back, punch card programs require spending a bunch upfront to get value later.
Example – Subway Sub Club (discontinued)
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.
- Same as points and cash-back programs
- Value is easy for the customer to understand
- Low cost to the business (whether printed or digital)
- Difficult to prevent fraud, especially with physical cards
- May give discounts and free products needlessly
- Less opportunity to capture customer data
- Rewards don’t do much to build loyalty, the “good feeling” is fleeting
Likes points programs, punch card rewards programs have a low barrier to entry for joins. However, the value provided isn’t enough to create true loyalty. Customers are rewarded for purchases they are likely to make anyway.
4. Tiered Loyalty Programs
Tiered loyalty programs offer different rewards based on milestones that members cross. Typically, these milestones are measured in dollars. The more a member spends, the higher the tier he or she enters.
These milestones can be a great way to increase member engagement because they add levels of exclusivity to the program. Everyone gets the same thing with non-tiered traditional points programs. In tiered programs, it becomes a status thing.
With each tier comes better benefits. This adds a gamification element. Gamification incorporates addictive elements originally designed for video games into the loyalty program. Things like progress bars and milestones keep customers coming back over and over to earn points. Simply put, they make the program fun.
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 – Sephora Beauty Insider
Sephora’s Beauty Insider program is one of the most talked-about loyalty programs and for good reason. Members love it not only because of the tiered approach, but because it provides experiential rewards, unlike pure points programs.
Experiential benefits build emotional connections.
Customers that sign up for free get good benefits off the bat. Things like access to the Beauty Insider Community and beauty classes come without any spending required.
Members who spend $350 enter the VIB tier where they get free gifts and one makeover per year. A $1000 annual spend lifts them up to Rouge status with a private hotline and access to exclusive events.
- Focuses on higher-value customers
- Can offer better experiences across tiers than traditional points programs
- More opportunity for customization (and differentiation)
- Encourages additional purchases as members want to achieve more exclusive status
- Gives the best rewards to your best customers
- Doesn’t give away margin to every member
- Higher tier members are less likely to cancel membership
- 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
Tiered loyalty programs are essentially beefed-up points programs that add elements of gamification, play on exclusivity, and can introduce experiential benefits. They start to touch on premium loyalty territory because the best benefits require spending, but they still require purchases upfront for benefits later.
They do offer great value to top-tier customers and when customers feel valued, they’re more likely to become brand advocates. However, they typically don’t offer a lot of value for lower-tier members.
Related Content: Why You’re Looking at Tiered Loyalty Programs All Wrong.
5. Coalition Loyalty Programs
Coalition programs are interesting in that they are operated by more than one business.
In theory, these programs are appealing. They seem like they will elevate a brand’s transaction levels. However, they aren’t efficient at creating actual loyalty.
Coalition programs promote loyalty to the program itself rather than the actual partner brands.
Loyalty programs need to be customer-focused and brand-aligned. They need to be used to differentiate. Collation models lack delivery on that because they are one-size-fits-all programs. The focus becomes on the program itself and not the retailers.
That’s why coalition programs have been largely successful in the U.S.
Example – Plenti
Plenti was probably the most well-known coalition loyalty program in the U.S.
It was created by American Express in 2015 and allowed customers to earn points at one retailer and use them at others within the program. It wasn’t tied to any particular retailer.
Some of the participating brands were AT&T, Exxon / Mobil, Macy’s, RiteAid, Nationwide Insurance, Direct Energy, and Hulu. Over the course of its three-year run, brands started to pull out as they began investing in their own loyalty programs with Macy’s putting the final nail in the coffin. The program officially ended in July 2018.
- 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
- The data collected is usually owned by the coalition and siloed away from the individual retailers
- No ability for individual retailers to differentiate their loyalty program
- 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
In theory, coalition loyalty programs seem to make sense. Members can earn and redeem points at any of the participating member brands. However, these programs engender loyalty to the program itself and not the actual brands, which is why the Plenti program eventually fell apart.
Given that differentiation is crucial in today’s marketplace, brands are better off investing in their own loyalty programs to stand out from the competition.
Related Content: Why the Demise of Plenti was Inevitable
6. Premium Loyalty Programs (Fee-Based Loyalty Programs)
Premium loyalty programs are the future for retailers.
More and more retailers are thinking about premium loyalty as the best way to increase loyalty with their best customers. Completely opposite from the traditional programs above, these fee-based loyalty programs require members to pay upfront for instant benefits that they can use anytime.
This creates an “instant culture” where members can engage with the program 24/7/365.
Premium loyalty is instant gratification, and that’s more important than ever before. Because these programs are so valuable, retailers see more engagement, higher-order frequency, and greater average order value. In addition, they can 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%.
But premium loyalty isn’t for everyone.
Being required to pay a membership fee would likely be too big a barrier to entry for the average customer, but therein lies the point. Premium loyalty strengthens relationships with your best customers and makes them even better. Those are the customers that are happy to pay for it.
With premium loyalty also comes the need for specialized expertise in building, managing, and optimizing the program.
Things like billing, accounting, customer service, and retail store employee training are all much different and more complex than with traditional loyalty. After all, your best customers are paying for a membership, so that experience must be the best.
Not every company has the bandwidth to effectively manage such a program, and there aren’t many vendors that specialize in premium loyalty programs. From member acquisition and retention to enhanced benefits to billing and specialized customer service, these programs are a different animal than free programs.
A premium loyalty program can be the difference between being just another retailer to being ingrained in your customers’ daily lives.
Example – Amazon Prime
The most important trait that all premium loyalty programs have in common is customer focus. Amazon is certainly no stranger to this and that’s why Prime is the most well-known premium loyalty program.
For $119 per year, members know they are getting the best possible shopping benefits no matter when they shop. The benefits are not purely transactional, though. Experiential benefits like streaming video come with the membership. Members get a lot of value out of the program throughout their daily lives.
- Attracts your best customers
- Highly engaged customers see the value and engage more
- Benefits are easy to understand
- Member fees can be used to offset the cost of the program or as an auxiliary revenue stream
- Robust data collection on high-value customers
- Offer the most attractive rewards possible
- High barrier to entry for lower-tier customers
- Potential for a higher volume of customer questions and operational issues
- Takes a highly specialized skillset to build and manage effectively
Premium loyalty isn’t for everyone. Lower-level or casual customers may find the membership fee too much of a barrier to entry, but your most valuable customers will become even more valuable if the benefits are great.
The key is listening to what your customers are truly asking for and building the program around that. It may require hiring a very specialized vendor, but when executed properly, the results can be tremendous.
Related Content: 5 Loyalty Lessons From Amazon Prime [Webinar]
7. Hybrid Loyalty Programs
Some programs provide elements from several different loyalty strategies. For example, tiered programs with points combined with transactional and experiential benefits.
CVS CarePass is a great example of this.
CVS Extracare is a great free loyalty program that offers cash back and extra savings for members – And it’s free to sign up for.
For CVS’s top customers, CarePass was introduced for $5 per month.
This premium loyalty tier offers free delivery on eligible prescriptions, as well as fast, free shipping and instant discounts on certain CVS Health brand items and monthly rewards that can be used in-store and online. In addition, members have access to a live pharmacist chat line 24/7. It’s a great program for those who value those benefits.
And average CarePass members spend three to four times more than our average CVS customers.
The free program appeals to most of its casual customers with its low barrier to entry. The fee-based loyalty program is attractive to its best customers because of the great value proposition.
This allows members to move up and down without exiting the program completely.
According to our 2020 Premium Loyalty Data Study, 67% of respondents are likely to join a premium loyalty program if they already belong to that retailer’s free loyalty program.
If you’re simply trying to get as many consumers to sign up for your loyalty program as possible, then a traditional free program might be the best fit. These types of programs don’t have many barriers to entry, but by nature don’t do a good job at differentiating your brand on their own.
On the other hand, if you’re concerned about getting your most committed customers to engage with your brand, even more, premium loyalty could be exactly what you need to elevate those relationships to the next level.
Coming up with a hybrid loyalty program could potentially appeal to your customers at all levels. A free transaction-based program could get casual customers into your loyalty ecosystem. Once they’re in, it’s much easier to demonstrate the value that a premium tier could offer which will ultimately lead to increased engagement and brand love.
One thing is for sure with any type of loyalty program: It’s not going to be successful unless the customer is at the center of it.
Getting them to sign up is only the first step. It’s what you offer them as members of the program that will determine if they keep coming back. And the only way to figure out what to offer us by truly listening to what they’re saying.