Types of Loyalty Programs

What’s better than acquiring a new customer? Keeping an existing one.

For brands across all industries, retaining existing customers and building strong brand loyalty is even more important than attracting new customers – and loyalty programs are a proven way of doing just this. 

In Australia alone, 12.2 million consumers make purchases that earn rewards.¹ Consumers buy more from companies whose customer loyalty programs they are a member of. In fact, according to Forrester Consulting’s research, a loyalty program can result in 3.5 times more transactions per member.²

In the National Retail Association’s 2022 research, 71% of members indicated a loyalty program impacts how much and how often they purchase - up from 56% in 2020.³ 

Another study by McKinsey found that top-performing customer loyalty programs can boost revenue from customers who redeem points by as much as 15-25% annually, either by increasing their purchase frequency or basket size, or both.⁴

If there was any doubt over whether customer loyalty programs work, the research gives a clear answer.  

For those that don't have a customer loyalty program, now’s the time to seriously consider one. And for those that do already have one, it's still worth reviewing how effective it is. 

Let's take a closer look at each of the various types of loyalty programs.

Table of Contents:

• What Is a Loyalty Program?
• How Do Loyalty Programs Work?
• Loyalty Program Best Practices
• The 6 Types of Digital Loyalty Programs
• 8 Benefits of Loyalty Programs
• Downsides of Loyalty Programs
• Become an Advertiser with Commission Factory
• References

What Is a Loyalty Program? 

A customer loyalty program or rewards program is a customer retention strategy that motivates customers to continue buying from a brand instead of its competitors. 

How Do Loyalty Programs Work? 

Loyalty programs enable brands to offer special discounts, gifts or other rewards to customers who make regular purchases. 

For customers, the appeal is simple: earn rewards or points to redeem products, gain discounts on purchases, and access special offers, pre-sale invitations or other member exclusives. 

When executed well, with the customer at the centre, loyalty programs can help customers feel good about buying products or services, which helps build brand trust and advocacy. In addition, loyalty program members interact and transact more, which means the business is rewarded with repeat business.

But customer loyalty programs are no longer just about discounts and perks. Customer expectations have changed, and many of the best loyalty programs now also reward loyal customers with experiences and rewards that are more meaningful. This helps the brand stand out from the competition and build a stronger emotional connection with its customers. 

Loyalty Program Best Practices

1. Clear Objectives 

Is the program supposed to motivate customers to spend more? Or how about improving customer retention? Perhaps it’s about increasing customer lifetime value (CLV)? Or is it simply about winning new customers?

By setting some concrete objectives for a loyalty program, it’s possible to target the right customers, design the right rewards, and focus on the right metrics. 

It’s important to know which customers are the target and what loyalty means in a broader context. Is it about encouraging customers to buy more profitable products? Spend more per transaction? Or will customers be rewarded for referrals?

2. Loyalty Program Type 

Each type of loyalty program works differently. For example, points-based programs allow customers to obtain points and redeem them for discounts or gifts, whereas subscription and paid programs reward customers with perks when they pay for their membership. 

Be careful to design a loyalty program that will be flexible enough to grow with the brand. Loyalty programs can be a significant investment, and it's essential to avoid outgrowing it. 

3. Offer a Value Add

Whatever type of loyalty program, make sure the rewards are something customers want. Invest in offering customers something that creates value without eating away at profits. Understand both the customer and what they want, to avoid becoming involved in the equivalent of an expensive wishing well. 

4. Measure the Right Data

Another key to a good loyalty program is collecting and measuring the correct data. This is where customer loyalty software is a worthwhile investment. 

The 6 Types of Digital Loyalty Programs

There are many different types of loyalty programs that can increase customer engagement and build customer loyalty. 

The choice depends upon the brand’s mission, customer base, and the reward program’s objectives.

1. Points Programs

When people think of customer loyalty programs, they typically think of points programs. These are one of the most popular types of loyalty programs and are used across retail, hospitality, travel, and more. 

They have a straightforward premise: customers earn points with purchases and can redeem points for credit toward their next purchase or a range of products. 

With some points programs, customers don't just earn points from purchases - they can also earn through actions such as sharing on social media, leaving reviews, referring friends, having a birthday or anniversary with the program, and more. 

Points programs work best when points are easy to earn and redeem. Ideally, customers should be able to track the points they earn using a mobile app or online account. 

Strengths:

• Low risk as it's a proven concept
• Customers are already deeply familiar with the concept
• Less barrier to entry as customers can join for free 
• Great way to start developing customer profiles.

Challenges:

• Don't provide enough value to attract top-tier, higher-value customers
• Tend to have a low engagement rate, which means fewer chances to collect customer data
• Point program fatigue - the wealth of similar programs means less differentiation from the competition. 
  
  

2. Tier-Based Programs 

A tiered loyalty program offers various levels of rewards to members. Think of tiered programs as skin to a video game. Customers that complete one level of spending, unlock a new level with access to better benefits - the higher the tier, the better the rewards. 

The idea is to motivate customers in lower tiers to spend more to get to the next level - the more exclusive the reward, the greater the customer motivation. This is why tiered programs work best for businesses with a higher price point and commitment, such as airlines, hotels, or insurance companies.

Strengths:

• Good for rewarding brand loyalty, as it tends to prioritise existing loyal customers over acquiring new customers
• Tiers can be a great way to increase member engagement because they add levels of exclusivity to the program and give something for customers to strive for
• Gamification can help engage customers
• Gives the best rewards to more valuable customers
• Higher-tier members are less likely to cancel memberships.

Challenges:

• Downgrading members carries an associated risk to that relationship
• Requires more communication and explanation to members about their status - confusion can lead to less engagement
• Climbing the ladder can seem daunting to new members.
  
  

3. Cashback Programs

Cashback programs reward loyalty by giving customers a percentage of their spend as in-store credit they can use towards future purchases. In other words, it’s a type of cashback marketing strategy. 

The model allows customers to earn points for shopping, which they can choose to convert to cash towards their groceries or other rewards. 

Strengths:

• Customers tend to understand how they work
• Easy to redeem rewards
• It’s a cost-effective model
• Redeeming "cash" can motivate customers to spend more.

Challenges:

• The program will reward both profitable and unprofitable customers 
• It doesn't stand out from other programs 
• It doesn't encourage deeper engagement with the brand.
  
  

4. Values-Based Programs

A value-based loyalty program focuses on building customer loyalty by giving back to causes that customers care about. 

To succeed, identify customer values - the causes or issues that are important to them, which are unrelated to money. This can create an emotional engagement, which is a powerful motivator for customers. According to a Capgemini survey (PDF download), 70% of emotionally engaged consumers spend up to two times or more on brands they are loyal to.⁵ 

Values-based programs can also be an excellent choice for eCommerce loyalty programs or for those brands with a strong environmental and social mission. 

Strengths:

• Build personal relationships with customers based on mutual values, driving stronger trust and loyalty
• Rewards benefit causes that are important to the brand and customers, such as the environment
• This program can align with the company's ESG objectives.

Challenges:

• No direct rewards for their purchase may drive customers to competitors if they don't care enough about the cause.
  
  

5. Subscription Program 

A subscription-based loyalty program asks customers to pay an upfront, monthly, or yearly fee to join the program. It creates a club feel where members can engage with the program 24/7 and access exclusive benefits and rewards.

Research by McKinsey on paid loyalty programs shows members of premium loyalty programs are 60% more likely to spend more on a brand, while free customer loyalty programs only increase that likelihood by 30%.⁶

Strengths:

• Paid programs keep customers engaged with ongoing perks
• They encourage customers to order more frequently and spend more
• Enables the brand to collect valuable data about their most profitable customers
• Membership fees can be used to offset the program's cost or to generate additional revenue 
• The paid membership opens the door to offering more attractive customer rewards.

Challenges:

• Membership fee creates a psychological barrier to entry for some customers
• Requires more resources to build and manage effectively
• Need to proactively demonstrate value to acquire and retain customers 
• A paid loyalty program typically generates higher CLV from those who sign up
• Higher risk of churn - McKinsey's paid loyalty program research reveals that 50% of cancellations occur within the first year of membership.⁶
  
  

6. Referral Program

A referral program rewards customers for referring or recommending the business to friends and family.

Some referral programs will reward all referrals, while others will only reward those referrals that result in a purchase. Brands can give rewards to both the referrer and the newly acquired customer, which delivers a great customer experience from the very start of the relationship. 

The purpose of a referral program is two-fold: it attracts new leads and rewards loyal customers. The best part is the leads are more likely to be a good fit for the business, and therefore more likely to convert because existing customers will think about people who would benefit from the product or service.

Strengths:

• Referral programs help acquire new customers while rewarding existing customers - it's win-win
• Referred customers are 18% more loyal, have a 16% higher lifetime value rate, and spend 13% more than their non-referred counterparts, according to Finances Online⁷
• Referrals are likely to lead to new customers – 65% of Gen Z adult respondents in a 2021 survey said friend and family recommendations were the two most trusted sources for product recommendations.⁸ 

Challenges:

• The referral can be undermined if people know the referrer is being rewarded for recommending the brand
• Referring takes time and effort - something only some customers are willing to expend for a brand. 
  
  

8 Benefits of Loyalty Programs 

If executed well, loyalty programs can deliver exceptional rewards to a brand, both in the short term with increased sales and in the long term with customer retention and growth. There are also some more surprising benefits, such as the amount of data they provide.

Let’s take a look:

1. Retain Customers

The primary goal behind a loyalty program is to keep customers coming back instead of choosing a competitor. 

In the 2022 edition of the Loyalty Report, 78% of those surveyed said loyalty programs made them more likely to do business with brands.⁹

2. Increase Customer Lifetime Value 

As well as retaining customers, the loyalty program can be used to increase customer lifetime value (CLV). 

Using the collected data, it’s possible to cross-sell and up-sell relevant products and services. Indeed, around two-thirds of shoppers decide which brands they buy from in order to maximise the benefits they receive.⁹

3. Discover the Most Profitable Customers

A good loyalty program helps identify a brand’s profitable customers, allowing it to spend more time marketing to those most likely to spend.

4. Data Goldmines

One of loyalty schemes' top benefits is that they can provide a direct source of valuable personal data, including a customer's shopping activity, online behaviour, and more. 

This can be used to improve the ROI of marketing efforts, design new products and services, create targeted offers, and gather direct feedback - the possibilities are endless. 

5. Improve Personalisation

Many loyalty programs offer exclusive discounts and rewards to members based on their purchase history (which comes from the data goldmine). 

This helps to create a sense of loyalty and encourages customers to keep coming back.

6. Customer Engagement

The more engaged customers are, the more likely they will stay loyal. 

For example, a customer who is a member of a loyalty program is 74% more likely to recommend that brand to others.⁹ 

7. Stop Competing on Price 

Reward programs stop you from falling into the trap of competing on price alone. By finding out what matters to customers, and rewarding them with things they value, brands can create a deeper emotional connection and set themselves apart. 

8. Create Brand Advocates

A loyalty program allows brands to build a community of advocates - people who will proactively recommend them to others. As a result, brands can acquire more customers, as well as keep their regular customers happy.

Downsides of Loyalty Programs 

Even the best laid marketing plans can have some downsides, and loyalty programs are no exception. Before investing in a loyalty program, it’s important to consider the disadvantages and how to mitigate them with good strategy and planning. 

1. Difficult to Determine True Loyalty 

It becomes harder to know who's just a frequent buyer and who is truly loyal to the brand? Often a regular buyer is also a loyal one, but sometimes it might be a matter of convenience and price that keeps them true. For brands looking for customers with a real emotional connection, a loyalty program may not be able to determine this. 

2. Can Be Expensive

Loyalty programs are not only an investment to set up and manage, but giving away discounts and rewards can also hurt the bottom line. 

3. Market Saturation

Hundreds of thousands of loyalty programs already exist, and to customers they can all appear the same. Designing a unique program that stands out and speaks to this audience is essential for success. 

4. Inconsistent Profitability

Loyalty programs can drive revenue, but they might not be a consistent stream of income. 

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References 

1. Australia Loyalty Programs Market Report 2022: Market will Increase from $3,691.1 Million in 2021 to Reach $6,452.3 Million by 2026
2. Loyalty Marketing & Rewards Programs – Global Market Report 2022
3. Australian loyalty programs shine as members make the most of their rewards and benefits
4. Next in loyalty: Eight levers to turn customers into fans | McKinsey
5. Loyalty Deciphered
6. Coping with the big switch: How paid loyalty programs can help bring consumers back to your brand
7. 50 Significant Referral Marketing Statistics: 2022 Data Analysis & Market Share - Financesonline.com
8. Gen Z prefers people over marketers for product information eMarketer Insider Intelligence
9. Pathways to Growth Guide powered by The Loyalty Report 2022