7 Types of Loyalty Marketing
Loyalty marketing is strategy businesses use to gather and keep loyal customers thru incentives like rewards and discounts. Marketers use loyalty marketing strategies, inclusive of social media campaigns and referral applications, to make consumer trust with and maintain regular customers interested. By retaining consumer loyalty with a centered strategy, entrepreneurs might find increased income from referrals or consumer engagement on social media. Marketers can also use loyalty marketing to engage with current customers to continue enhancing the strength of the business relationship.
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If you're a retail marketer, you're probably considering different forms of loyalty programs.
Retailers have used point systems, tiered programs, and even paid membership loyalty programs to try to retain loyal clients since the beginning of time. Do these programs, on the other hand, actually foster loyalty?
And how do you know which kind of loyalty program is best for your business? Don't be concerned. We'll go over the most common types of loyalty programs, their benefits and drawbacks, as well as some examples, to help you decide which sort of loyalty program is best for your business.
Today's point systems are substantially the same as they were in the 1700s. Customers are compelled to spend money up front in order to receive rewards afterwards. Transactions come first, followed by rewards.
Customers, on the other hand, are no longer the same as they were in the past. They have more options than they ever have and are less loyal than they have ever been. Points schemes don't provide nearly the value that today's consumers require in order to stay loyal to a company.
They do, however, have a place. There is little barrier to entry when it comes to membership joins because many programs are free to sign up for. That's why we have so many loyalty cards in our wallets and keychains.
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.
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The Petco Pals Rewards program is a standard points system. Members receive one point for every dollar spent. A $5 voucher is offered after 100 points are accumulated. To put it another way, members must spend $100 to receive $5 in items. It's a straightforward value proposition.
Points expire 45 days after issue, and if a member's account is dormant for 180 days (meaning no purchasing activity), the points balance is decreased to 0. This could make it tough for infrequent customers to reap the benefits.
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
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 wonderful for getting a lot of people to join up, but owing to the minimal differentiation and low value, they aren't ideal for increasing engagement. These programs are mostly focused on acquisition. While some point programs are successful and provide greater value, they work best when combined with a premium loyalty tier.
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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.
When members of the CVS ExtraCare program use their ExtraCare loyalty card, they receive 2% back in ExtraBucks Rewards. Those "bucks" can be used at CVS on almost anything.
The catch is that members who do not spend $50 in qualifying purchases or earn a minimum of $1.00 in ExtraBucks Rewards by the end of an earning period will not be rewarded and their winnings will not be carried over. Infrequent shoppers may find it difficult to appreciate the deal.
Similar to points programs
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
Cash-back programs, like points programs, offer a lower entry barrier, but they don't differentiate and reward everyone equally. Customers don't have much of an incentive to participate more.
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Companies used to provide members physical paper cards that were "punched" when they purchased goods or services. The card could be redeemed for a prize after the customer completed it. Do you remember going to the deli and the cashier punching a small circle in your paper card? You would get a free sandwich after around nine punches.
While some small mom-and-pop shops still use paper cards, many brands have switched to digital versions. While technology makes it handier than carrying around a paper card, these schemes are similar to points programs in that they do not foster true loyalty.
Is it true that giving your clients a free sandwich after they've eaten nine others makes them loyal? Many small businesses appear to believe they require these programs, although factors such as location, closeness to the office, and overall experience have a greater impact on transactions than the free 10th sandwich.
I'm a member of one of the sandwich shop punch card programs, and I can honestly say that I've never thought about it when I go there. The cashier will occasionally inquire if I am a member, and in some cases, I will have purchased enough subscriptions to receive a free one.
Like points and cash-back, punch card programs require spending a bunch upfront to get value later.
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
Punch card rewards systems, like points programs, feature a low entrance barrier for new members. The value supplied, however, is insufficient to inspire true loyalty. Customers are rewarded for purchases that they are almost certain to make.
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4. Tiered Loyalty Programs
Members who reach certain milestones are rewarded differently in tiered loyalty programs. These milestones are usually measured in money. The more a member's spending, the higher the tier in which he or she will be placed.
Because they add layers of exclusivity to the program, these milestones can be a wonderful way to promote member engagement. With non-tiered traditional points programs, everyone gets the same thing. It becomes a status issue in tiered programs.
Benefits improve as you progress through the tiers. This adds a gamification factor to the process. Gamification is when a loyalty program includes addictive aspects that were originally created for video games. Customers return to gain points because of things like progress bars and milestones. Simply, they make the show enjoyable.
Some successful tiered loyalty programs additionally display members how many people are in each tier as a percentage of the total membership. This allows individuals to view their social status in comparison to other members of the program, which plays on the competitive drive for 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.
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For good reason, Sephora's Beauty Insider program is one of the most talked-about loyalty programs. Members enjoy it not only because of the tiered approach, but also because, unlike straight point programs, it offers experience benefits.
Emotional bonds are formed because of experiential benefits. Customers that sign up for free receive a number of benefits right away. Access to the Beauty Insider Community and beauty classes are both provided free of charge.
Spend $350 and you'll be upgraded to the VIB tier, which includes free gifts and one makeover every year. With a $1000 annual purchase, they can upgrade to Rouge status, which includes a private hotline and invitations to special 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.
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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.
In the United States, Plenti was probably the most well-known coalition loyalty program.
In 2015, American Express introduced a program that allowed customers to earn points at one shop and use them at others inside the program. It wasn't linked to a certain retailer.
AT&T, Exxon / Mobil, Macy's, RiteAid, Nationwide Insurance, Direct Energy, and Hulu were among the brands that took part. Brands began to withdraw during its three-year lifespan as they began investing in their own loyalty programs, with Macy's striking the final nail in the coffin. The program came to an end in July of this year.
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
Coalition loyalty programs appear to make sense in principle. Members can earn and redeem points at any of the member brands that participate. These programs, on the other hand, foster loyalty to the program rather than to the brands, which is why the Plenti program eventually failed.
Given the importance of distinction in today's market, brands would be well to invest in their own loyalty programs to differentiate themselves from the competition.
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6. Premium Loyalty Programs (Fee-Based Loyalty Programs)
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.
Instant satisfaction is more critical than ever before in premium loyalty. Because these programs are so helpful, retailers notice increased engagement, order frequency, and average order value as a result of them. They can also gather useful information about their best customers.
According to a McKinsey analysis on loyalty programs, premium loyalty program members are 60% more inclined to spend more on your brand, but free loyalty program members are only 30% more likely.
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.
Premium loyalty requires specific knowledge in program development, management, and optimization.
Billing, accounting, customer service, and employee training in retail stores are all far more complicated than with traditional loyalty. After all, your greatest customers are paying for a membership, so it has to be the best experience possible.
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.
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A premium loyalty program can be the difference between being just another retailer to being ingrained in your customers’ daily lives.
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.
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7. Hybrid Loyalty Programs
Some programs incorporate components from a variety of loyalty strategies. Tiered schemes, for example, that mix points with transactional and experiential benefits.
CVS ExtraCare is a fantastic free loyalty program that rewards members with cash back and additional savings - and it's completely free to join.
This premium membership tier includes free prescription delivery, as well as fast, free shipping and instant discounts on select CVS Health brand items, as well as monthly prizes that may be utilized in-store and online. Members also have access to a live pharmacist chat line that is available 24 hours a day, seven days a week. For individuals who value those advantages, it's an excellent program.
On average, CarePass members spend three to four times more than non-CarePass 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.
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Retailers have used point systems, tiered programs, and even paid membership loyalty programs to try to retain loyal clients since the beginning of time. Do these programs, on the other hand, actually foster loyalty? And how do you know which kind of loyalty program is best for your business? Don't be concerned. We'll go over the most common types of loyalty programs, their benefits and drawbacks, as well as some examples, to help you decide which sort of loyalty program is best for your business. Cash Back Loyalty Programs Cash back programs are like points programs. Pros: Same as points and cash-back programs Value is easy for the customer to understand Low cost to the business Cons: 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 Summary Punch card rewards systems, like points programs, feature a low entrance barrier for new members. Tiered Loyalty Programs Members who reach certain milestones are rewarded differently in tiered loyalty programs. Coalition Loyalty Programs Coalition programs are interesting in that they are operated by more than one business. 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 is by truly listening to what they’re saying