Overview of Loyalty Programs

Brands launch loyalty programs in an effort to increase market share and try to:

  • Increase customer retention
  • Increase acquisition
  • Get more referrals
  • Get more sales
  • Build brand advocacy

Loyalty programs offer benefits to customers in the form of:

  1. Discounts
  2. Free shipping
  3. Free products
  4. Early access to sales
  5. Early access to new products
  6. Access to exclusive events/content
  7. Access to exclusive products

For a loyalty program to work, in addition to having a quality product, the program needs to deliver easy-to-understand value to the customer. Tailoring the program based on the audience and the stage/type of business helps make sure that incentives are aligned for the brand and the customer.

Types of loyalty programs

Loyalty programs can be set up as

  1. Points-based reward program
  2. Tier-based rewards program
  3. Paid rewards program

These programs can be mixed, for example, a brand can launch a point+tier-based program; a paid + tier-based program - or even a paid + tier + points-based reward program.

The most straightforward reward program for a brand to launch, and a customer to understand is a “point-based” reward program, followed by a tier-based rewards program, and finally the paid rewards program.

Point-based program

A Point-based program is easy to implement and understand as the levers are binary.

  1. Earn points for actions (transactional and non-transactional)
  2. Signing up for the program
  3. Making purchases
  4. Subscribing to newsletter
  5. Leaving a review
  6. Following/Liking content
  7. Referring others
  8. Providing additional personal information
  9. Burn points for benefits.

These work great for brands with high purchase frequency, and impulse purchase decisions; usually selling commodities, maybe competing on price. It does create switching costs as customers build up points, but reduces those switching costs every time they spend points.

Tier-based program

Tier-based programs use some quantitative value that helps customers progress and unlock tiers which might be opaque to the customer - this can be points earned, $ spent, orders placed, or some other quantitative value. Depending on the tier, rewards might be “fixed rewards” like birthday gifts, “behavioural triggers” like limited-time offers, or “surprise rewards” like event invitations. Unlike point-based programs, the value is not decreased on benefit redemption and as long as the customer is on that tier, they can continue to redeem those benefits; the benefits are largely similar to the ones mentioned earlier but can also include bonus point multipliers. Tier-based programs help segment customers more effectively and creates switching costs for the customer. Done right, treating the “VIP”s well can also strengthen the brand.

Paid rewards program

Another option is to have the customer buy into a program to enjoy the benefits that come with the membership. These can be annual memberships as well as lifetime memberships. As an example, Amazon Prime gets you free priority shipping on all orders and access to services like Prime Video. Barnes & Noble has a $40/year subscription program that gets you 10% off everything, free drinks in their store cafés, free shipping on all online orders, and a free tote bag every year. This however only works for certain companies; Amazon can take care of a lot of your everyday needs and wants for $140/year. Being seen to be a card-carrying Barnes & Noble subscriber with your exclusive tote bag is a little more high-status than being a paid-up McDonald’s subscriber would be. Customers are 60% more likely to spend more on the brand having paid to enter a subscription-based loyalty program. These are a bit harder to implement for new/smaller brands than the other programs, as the consumer will wonder if they are actually getting true value out of the program; for brands with customers who already order multiple times, understanding the value is easier, so making the value obvious helps close the gap. Paid reward programs can be single-tier or multi-tier. The benefits are again similar to ones mentioned earlier.