Guide to the 8 Types of Loyalty Program & Examples of How They Work
Within the world of loyalty programs, there are endless avenues you can take. There are various different types of loyalty programs, and they each provide a very different customer experience. Not only this, but the type of loyalty program you opt to go for will have a large impact on what the program drives - purchase frequency, a brand community, purchase amount, and even partner brands or companies.
Amongst popular brands today, there are very different approaches to loyalty programs, which result in distinct customer experiences. Let's take a look at the various types of programs, along with some examples of how they can be employed within large & small business models.
1. Point Programs
One of the most popular options, point programs offer flexibility to your customers. Loyal customers can accrue points across purchases, and then choose to either save for larger rewards or redeem them on a more short-term basis for the dopamine hit. These programs are quite easy to implement in theory, but there are some small steps that can't be overlooked.
With point programs, you first of all have to decide the value of points. What's required to earn one point, five points, or one hundred points? This has to be clear for your customers to avoid frustration, but it's also essential to the financial planning of your loyalty program. Equally, the redemption value of your points should be clearly defined. What is one point equal to? This is particularly important when points can be used to offset the cost of a purchase, as a monetary value has to be clearly defined. In the event of points not being usable in this instance, defining the value becomes less rigid - although no less important - as points can only be redeemed for specific rewards.
The North Face - Straight to the Point (or peak)
The North Face has nailed it with the XPLR Pass loyalty program, with the introduction of its XPLR Pass and points. Not only are the program & rewards perfectly on-brand for The North Face, but they've been extremely successful. For every dollar or euro spent, members receive 1 point. Every point equates to €0.10 in spending power. Not only this, but the program gives members exclusive access, exclusive field testing, and dedicated customer service.
2. Tiered Loyalty Programs
Tiered loyalty programs are definitely a step up from point-based programs. Not only from a customer perspective but also from an administrative perspective. While tiered programs can be more difficult to manage at the beginning, the trouble is largely out of the way after set-up. This model can be used for various business models but works best for premium brands.
When it comes to customer experience, tiered programs are one of the options that stress the improvement and importance of prioritizing customer experience. The goal here is to incentivize customers to move up in tiers, so the benefits have to be clear. Often, the benefits lie in things like improved or more customized customer service, or perks such as free delivery.
Another integral part of tiered loyalty programs is gamification. Structuring your program like it's a game will increase engagement by no end. Gamification sounds like it will be difficult to implement, but it can come in simple forms. Think of simple things like progress bars, badges, icons, and awards to push employees.
Sephora - Insider, VIB, or Rouge
A great example of making a tiered program work is Sephora. Within the Sephora Beauty Insider program, there are 3 levels. Every level is free to join, but the deciding factor in terms of moving between tiers is a customers' spend in a given year. For the top-tier Rouge members, benefits include birthday rewards & treats, exclusive access to events, free beauty classes, and more. What Sephora has done well here is creating exclusivity in the VIB and Rouge tiers. Exclusive deals & perks give members in the first and second tier a great incentive to work towards becoming king of the loyalty hill.
3. Premium or Paid Loyalty Programs
Premium loyalty programs, like all programs, have their positive and negative sides. One main drawback of premium programs is the barrier to entry - customers have to pay in order to join the program. However, this also brings a positive. Due to the fact that customers have to pay to join the program, the level of commitment and engagement among the member customers will likely be much higher.
Premium loyalty programs are, however, fundamentally different in one sense - they're less focused on loyalty on the surface of things. Sure, there's always the near guarantee that customers that pay for program membership are already loyal customers, but that's not necessarily the case. Premium loyalty programs tend to be much more transactional than traditional loyalty programs in this sense, and customers tend to view it as though they're owed certain things upfront, rather than earning rewards through loyalty in a more traditional sense.
When it comes to paid loyalty programs, Amazon's name is always brought up. The scale that Amazon Prime has grown to is amazing, but there is one chink in the armor of this program - it's far more about customers paying for a service and far less about encouraging customer loyalty in a holistic sense. That being said, this still works for Amazon, as most customers view their Prime membership as a logistical investment as opposed to something they'll necessarily enjoy.
4. Punch Cards - Frequency Focus
This is a bit of a journey back in time. As opposed to talking about punch cards, it's better to talk about the underlying principle. Punch cards are essentially frequency rewards programs. Buy a certain item (or any item) 10 times, then receive a free item. These programs are simple but slightly narrow in their scope. The trouble with these is that they're often inflexible in rewarding high-value purchases more than less lucrative ones - which can be discouraging for customers.
Formatting a program in this sense is generally much more suited to businesses that supply staples - bakers, cafes, and even monthly subscription services. The reason is that there's a focal product that customers come for - a loaf of bread, a cup of coffee, a subscription box - which is much easier to reward, particularly when it's a case of the Nth item being free.
Subway's Sub Club
Although now a thing of the past, Subway's Sub Club was the perfect example of punch cards in action. They have a standard product, so it was easy for them to reward this. How did it work, you ask? Exactly as expected. Customers were given a card that was punched every time they bought a sandwich at a participating store, and were rewarded with a free sandwich once they had filled out the card. This is a far simpler, but more limited, implementation of a point program. However, in the traditional setup, it's very difficult to prevent fraud, so best to stick with a digital option if you opt for a punch card program.
5. Open Loop or Coalition Programs
Open loop programs are much rarer than the previously mentioned program types. This makes sense, as they're only appropriate in very specific circumstances. The essence of these programs is being able to use one loyalty card or identifier in multiple businesses, but it also means that the customers can redeem their points anywhere.
Open-loop loyalty programs are very good for giving customers extra options and flexibility in how they spend their points, but it also means that the points can be disproportionately redeemed relative to how they were awarded.
While it's difficult to draw upon an example of an open-loop loyalty program in action, there are many instances of them working well. Typically speaking, they can be very effective in smaller town centers or areas such as shopping malls. Another great option for open-loop loyalty programs is in the event of one company having multiple brands, but wanting a centralized loyalty program.
6. Value-Based or Charity Programs
The cynics reading this will be convinced that these programs don't work. They do. Not only that, but they can actually be one of the most successful program formats when it comes to creating an emotional connection with your program members.
The premise of these programs is not to reward customers with points, free products, or perks. Rather, the premise is to focus on contributing to their favorite charities as opposed to contributing to their points balance. A great idea that many companies are incorporating is having this as an option within a point program. This gives members the option to either treat themselves or donate them to a charitable cause.
Sephora - The Beauty of Rewards
While this isn't a very purist example due to it being incorporated within a point program, it's a great example of how to use value-based rewards. Sephora has given its loyalty members the chance to donate their points to a greater cause by partnering with National Black Justice Coalition. Other brands have already gotten involved in similar charitable initiatives, such as American Airlines giving members the option to donate their points to the Make-A-Wish Foundation.
7. Cashback Programs
These very much do what they say on the tin. Customers spend money and receive a small portion of the money back after the fact. One of the main pros of this program type is the feel-good factor it gives consumers - it takes the edge off post-purchase guilt, and provides a little instant gratification. However, the benefits almost stop there. Cashback programs are largely inflexible while offering very few opportunities or incentives for customer engagement.
It's very difficult - almost impossible - to make your program memorable, on-brand, or particularly engaging when all you can do is give them cashback. Additionally, it's virtually impossible to incorporate gamification or other tactics to get some momentum for your program.
One example where cashback can work well is in the banking and finance industry, where customers can typically earn anywhere from 0.5-5% in cashback.
Bank of America
Bank of America is an easy example here. As is typical for financial institutions, particularly with credit cards, they've opted for a cashback model of loyalty program. Customers can earn either 1%, 2%, or 3% when they make purchases, depending on the category of their purchase.
8. Employee Loyalty Programs
Employee loyalty programs are one of the most useful loyalty programs you can have within your business. Why? Employee loyalty programs that are built with the right software give you the opportunity to gear your rewards directly toward your business goals. Integrate your employee task and hour-tracking tools to base rewards on completed tasks, or take things further and create completely custom rewards.
Aside from this, employee loyalty programs have been proven to improve productivity and motivation within the workplace, while reducing employee turnover and absenteeism. You can even drive your culture and team spirit by rewarding the values that matter most to you.
That's right, we practice what we preach. We've used our own software to build our own employee loyalty program, where we reward what matters most to us. Piggy points can be used for anything from gift cards to Polaroid cameras, padel rackets to NYC trips for two.
Employees can earn points for supporting organizational values or partner charities, while they can also earn points for things like hitting goals or making sure we have a healthy office lunch!