10 Loyalty Program Types to Increase Customer Retention

Intensifying competition and rising costs of acquisition have shifted the industry's focus away from marketing and towards retention. Retention is now widely considered the ultimate goal for any business operating in e-commerce, as a result businesses are rushing to implement loyalty programs as a central part of their marketing strategy. 

Loyalty programs are unique in e-commerce for their ability to capture your most interested customer base and to leverage them to scale your operations. Furthermore, just having the ability to capture your most interested customers can be an excellent source of insight in their desires. 

This article will explore the many types of loyalty programs, weighing up their strengths and weaknesses, giving you a comprehensive take on what you should be using for your own ecommerce business.

What is a Loyalty Program

Loyalty members represent your ideal customers that deliver the most value for your brand long-term, emphasizing the importance of a relationship with your customers. This is precisely where loyalty programs work their magic as active tools to capture, incentivize, and establish communication with these crucial customers. 

Customers typically see something in your brand which is what substantiates the potential for loyalty, however with the presence of competition it could be difficult to capture these high value customers. Loyalty programs are retention oriented strategies designed to enhance the customer’s experience or incentivize engagement in order to sustain customer interest and foster opportunities for relationship building.

It’s important to visualize the scaling process to understand the effect customer accumulation has on loyalty programs. Successfully retaining customers allows you to expand your program, with the addition of automations and high degree of personalization it is possible to use your loyalty program as a source of continuous value. 

The modern state of loyalty programs make them easy to implement and leverage as a source of highly targeted insight into customer behavior. Beyond the highly concentrated information, loyalty members are also highly constructive to a brands reputation and aid in scaling marketing channels with their interactions. This will be further explained in further sections.

Types of Loyalty Programs

Points accrual

Points programs are one of the most popular types of loyalty programs due to their easy of use and high degree of personalization. They employ permanent in-store points that customers earn through purchases and re-ordained actions. These storable points can be accumulated and spent on discounts at the customer's own discretion. Each point carries financial value which is structured by balancing earning and reward values. 

These types of loyalty programs are renowned for their ability to motivate customer engagement, which is particularly valuable in a competitive environment. They are very similar in principle as standard discounts as they utilize are a form of incentive. However, they are used primarily for customer retention by prioritizing the accumulation of points and leading towards engagement over longer periods of time.

Modern point based loyalty programs are far more versatile to their predecessors as they are able to reward more than just purchases. It's often encouraged to utilize point rewards for additional actions like social media follows, user-generated content and reviews. This can have the unique effect of scaling your e-commerce store and generating leads organically.

How customers earn rewards also varies greatly from standard discounts because of the versatility of these types of loyalty programs. It's common to see point programs offer free points on first purchases, free customer registration, and ways to earn points without making a purchase first. Furthermore, these points are inherently forward facing, meaning they are typically rewarded on future purchases.

Strengths

• Point programs are versatile allowing for rewards for important customer actions like social media engagement and reviews
• Points can give customers a personalized experience with the ability to spend accumulated points as they wish
• Point programs can integrate with your other marketing functions to deliver a unified
• Persistent points create an highly impressionable and interactive experience 

Challenges

• Loyalty members are treated equally without consideration of their extent of loyalty
• Value awarded from point programs may not significantly motivate customers
• Point programs cannot replace your core functions like customer service, fulfillment, or 

Example: Lego Insiders

Lego understands and respects the fact that their direct audience is mainly children or their parents. It was absolutely critical that they aligned their loyalty program with their brand identity and made it engaging and rewarding for all their customer personas. A point loyalty program gave them the simplicity, versatility, and messaging to be able to craft the perfect loyalty program for them.

Lego represents a beloved children’s toy with a strong brand identity and resilient customer base which has gone unrecognized for so long. The introduction of a loyalty program enabled them to reward their most dedicated customers and as a result enhance their experience. It also limited factors such as brand switching and maintained the focus of interested customers.

Loyalty levels

Loyalty levels or otherwise known as loyalty tiers are another common type of loyalty program employed in e-commerce. They possess many of the qualities of the previous example with the addition of structured tiers that reflect the degree of a customers’ loyalty. They work by tracking a given customer's history and grouping them in tiers according to their contribution.

From a strategic perspective loyalty levels and point programs are very similar with loyalty levels emphasizing long-term retention through segmented tiers. These tiers possess their own criteria and grow more rewarding as customers progress through them, thus increasing in value the longer a customer remains loyal. This carries the same principles that you would see with point accrual programs only with a preference toward retention as opposed to incentivization. 

Tiers use factors like point multipliers, threshold bonuses, and exclusive rewards to differentiate the many levels that may exist. Entry levels are typically free to join and may employ any of the rewards or strategies used in point accrual programs. While later tiers often focus on status or exclusivity to elevate the customer experience.

Strengths

• Rewards are progressive suggesting that customers are rewarded according to the duration and magnitude of loyalty
• They possess all the strengths of standard point programs but with the addition of segmented tiers with stronger retention factors
• They are effective in scaling a businesses operations by incentivizing important customer interactions
• They create a sense of exclusivity and status which can help customer feel emotionally attached

Challenges

• Brands may find it difficult to motivate customer towards higher tiers despite the process of tiers
• Higher tiers have greater reward values that could bite into your margins
• Customer expectations increase the more loyalty they’ve demonstrated

Example: Nordy Club

The Nordy Club is a more contemporary example of a loyalty program that segments loyalty members into spending groups. They manage their resources by balancing their rewards, giving those customers with a history of greater contribution superior benefits. This has the effect of motivating customers towards greater tiers, creating a sense of exclusivity, and limiting the spending on rewards. Nordstrom caters to a broad market segment and this type of loyalty program is ideal for their customer base.

Loyalty programs with cashback and discounts

These types of loyalty programs are typically seen in supermarkets as low impact loyalty programs. They are most commonly seen in physical stores with low cost - high frequency products but are known in recent years to be used in hybrid models. Customers typically receive cards onto which storable rewards are kept which suggests no exchange of value occurring outside the business.

Cashback and discounts are some of the easiest loyalty programs to use and have their utility as a low impact retention strategy. We see some of the lowest resistance for these types of loyalty programs as they typically require no registration cost and give value to customers through the accumulation of benefits.

They are highly effective because these benefits are granted in small increments and are only rewarded after purchase. These types of loyalty programs are also known to give customers discounts on certain products, which can be effective for meeting managerial goals like boosting turnover while granting exclusive rights to loyalty members.

Strengths

• These type of programs have some of the most attractive reward types and are often highly motivating to customers
• Where such rewards are used most is what truly differentiates this type of loyalty program from the rest
• Depending on how often the customer uses the product in their daily life, this reward can become a very strong retention factor
• As opposed to standard rewards cash back is known as the highest form of reward type

Challenges

• Rewards are committed to all members regardless of their degree of loyalty or profitability
• Cashbacks are often considered a highly committed type of reward which requires the customer continues to use the product
• Competition may have a heavy affect on these type of rewards as they are often used amongst major brands

Example: Paypal

When it comes to these types of loyalty programs it is essential that they fit the actual business model. Fortunately for PayPal, they’ve found what is most likely the most ideal type of loyalty program. The idea that customers can earn cashback on their day to day purchases suggests that they save big on almost everything they spend on. Rewards are typically awarded from the business or service and not financial service providers, which makes this type of loyalty program universal and highly influential.

Punch card programs

Punch cards are another very easy type of loyalty program to implement, it's common to see them in coffee shops or ice cream parlors. They work by tallying up a customer's visits with a card and rewarding them once they reach a certain number of orders. The most basic example uses simple paper cards as a hand out with more sophisticated tools automating the process with POS systems and e-commerce.

Many would consider the classical punch card to be outdated in today’s digital world. Modern punch cards have their place in e-commerce as a straightforward tool ideal for generating repeat purchases. These programs give customers a goal and are often responsible for some of the strongest retention rates because of their ability to persuade customers. 

Businesses typically enjoy the simplicity of these programs, as they are both easy and inexpensive to implement. These types of loyalty programs have an observable effect on competition and are seen through returning customers. While these types of loyalty programs do have their limitations, namely their fit into very specific types of business models. They are known to help businesses reach their sales goals by retaining customers with a very simple and rewarding system. 

Strengths

• These programs very simple, easy to implement, and universally accessible to customers
• They are amongst the most inexpensive to implement with a real result based on purchase rate
• Rewards are only granted after the number of purchases are fulfilled, not requiring any immediate reward
• They are a very secure way to reward customers as its structure requires a criteria

Challenges

• Reward goals must be reasonable enough to be obtainable else they will fail to generate engagement
• It is possible that these rewards are not perceived highly by customers and may create a free reward without any loyalty
• Customers expect instant gratification which is difficult to prove with a punch card

Example: Starbucks

Punch cards are easily some of the most practical ways to generate repeat purchases, that much is for sure. They fit the motif perfectly for Starbucks because they enrich the customers' experience and make it rewarding to remain consistent. The safe structure of loyalty programs ensures that these rewards are only redeemable after the criteria is fulfilled making it both competitive and secure. These types of loyalty programs can both speed up repeat purchases and retain customers. It is also possible that customers will grow attached and try more products. The main pitfall is that this type of loyalty program is highly replicable and competitors can also utilize these loyalty programs with relative ease.

Subscription programs

Subscription programs top some of the most effective strategies in all of e-commerce. In exchange for a monthly fee, customers received access to special benefits, discounts, or services. These benefits can be very precise and thus be highly persuasive to customers. We know that recurring income programs such as subscriptions are some of the most reliable and profitable.

Subscriptions are unique as they can accumulate and become a substantial source of value for a business. The power of recurring income is one of the best indicators of businesses potential. The main battle for subscription programs is reducing churn rates and meeting customer expectations.

It’s important to understand that through the retention process, which subscriptions are excellent, is the highest goal in e-commerce. Subscriptions programs demonstrate some of the most reliable qualities but the real challenge is proving value for customers.

Strengths

• Subscription programs are amongst the easiest programs to scale being relatively easy to accumulate members
• They create recurring income which can be a stable source of value for a business
• Subscriptions are value based suggesting that its possible to retain customers by enriching their rewards
• The additional benefit can customize the customer's subscription creating personalization

Challenges

• There must be substantial value in order to persuade subscription members
• Managing churn rates can be challenging for a business and may require adaptation
• These types of loyalty programs fit a very specific type of business and may prove impossible to sustain

Example: Birch Box

The Birch Box encompasses one of the most unique loyalty programs out there. They give their loyalty customers the ability to design their monthly subscription from a variety of their products, constructing the perfect monthly good bag. They make sure to give customers the freedom to choose from an abundant selection of goods, allowing them to try as many of their products as they wish, and eventually finding their favorites. They deliver some of the most engaging loyalty programs because they utilize personalization as the foundation to their subscription. 

Coalition loyalty programs:

The defining difference of coalition loyalty programs in comparison to other types of loyalty programs is the cooperation between multiple businesses. They are often seen sharing rewards between each other, sharing their customer base, and using their partnership to enhance the customers experience.

Coalition loyalty programs depend most of all on the cohesiveness between partners, as much of the value from any type of loyalty program is derived from acute customer targeting. Thus coalition programs are best utilized between businesses with a similar audience and relatable products. 

Another important consideration in the argument for coalition loyalty programs is the sharing of customers. The marketing expenses have already been spent and there are often limitations to market reach, sharing reachable audiences is an effective way to potentially bolster reach. Furthermore, a vote of confidence expressed by partners can alter a brand's image and even create brand equity.

Strengths

• Coalition loyalty programs are known to share their endorsements and relay quality
• They tap into the unique audiences each partner being able to generate organic traffic from mutually interested customers
• The proceeds from each partner can be shared to create a mutually beneficial effect from shared audiences
• Strategically picked partners can build brand identity and enrich perception

Challenges

• These types of loyalty programs are often codependent making it difficult to take full control over its direction
• Differentiating your brand beyond the basis of the coalition can limit your options
• Coalition loyalty programs can adversely affect competitive factors with the limited control and non-standard rewards

Example: Ray Ban x Meta

Ray Ban and Meta came out not too long ago with an innovative idea that took elements from both brands. The wayfarer sunglasses come equipped with some of the raddest tech out there and sleekest design to produce a coalition between two powerhouses. Each of these mega brands have their own loyal following and reputations and their work together encourages customer confidence and assures quality. This demonstrates how a business can quickly acquire reputation and new customers through coalition loyalty programs.

Gamified loyalty programs

Gamification is a great choice for when engagement is a priority for your brand. These types of loyalty programs can give your business a sense of character and with strong engagement. Gamification can be a fun way to attract customers while incentivizing their purchase.

Gamified loyalty programs have a niche purpose for brands that wish to embody the spirit of games. When exercised correctly these loyalty programs can make your business stand out amongst competitors in an interactive way. In fact, gamified programs have some of the highest engagement rates in comparison to the many different loyalty program types.

However, these types of loyalty programs have been known to have a down side. The first downside is that they fit in a very specific niche, making them almost useless in most industries. The second is that while they are effective in generating customer engagement, they have been known to grow less effective over time and may require adaptation.

Strengths

• Gamified programs encourage customer interaction and increase your chances of engagement
• They align perfectly with brand for a few niches and enrich brand perception in a fun way
• They facilitate loyalty by making easy and fun to earn rewards paving a path for future purchases
• These loyalty programs can be a foundation for loyalty given you find your core audience

Challenges

• Gamified loyalty programs are amongst the more complicated loyalty programs to implement with the most sophisticated requiring substantial investment
• Gamified loyalty programs may not appeal to all demographics and their rewards may not be convincing enough to generate engagement certain audiences

Example: DODO Pizza

DODO Pizza is a brand that embodies youthful and vibrant qualities to attract their customers and is especially popular with children. Gamified loyalty programs fit into this type of branding and business model perfectly as a form of customer engagement, which can also produce strong retention. Their strong quality assurance and brand identity are only further enhanced by their gamified loyalty program. This particular game encourages customers to play for free points which they can redeem for free discounts. It features a clever pizza themed design and makes these discounts available to anyone will to engage.

Paid loyalty programs

Paid loyalty programs charge a fee in exchange for access to their advanced benefits. Contrary to point programs that offer incremental points for purchases or interactions, these programs grant access to their loyalty benefits for a fee. These gated rewards can vary depending on a business but somehow provide an elevated experience for members in comparison to ordinary customers.

Paid programs can be highly attractive to customers if rewards are crafted effectively. It is possible to set the initiation fee as high or low as you wish which reflects your brand and loyalty services. This would suggest that both low cost and luxury businesses can both use these types of loyalty programs.

There is the expectation that the fee for loyalty services are justified by their value, which is crucial for the success of paid loyalty programs. There must be some sort of differentiation between ordinary customers and loyalty members, which means that creating clear value is important.

Strengths

• Paid loyalty programs restrict their rewards to only paying customers in order to elevate their experience
• They make limited resources more effective through scarcity while also creating a sense of exclusivity
• They stable earnings from your most exclusive services and enable you to cater specially to your loyalty customers

Challenges

• Paid programs are mostly valued based which means that there must be proven substance for customers to engage
• Customers may be reluctant to spend extra money for loyalty services especially for brands that they do not interact with frequently
• This type of program may not fit your business model so its important to assess its viability before implementation

Example: Amazon Prime

Amazon Prime is perhaps one of the broader loyalty programs that feature content, shopping, deliveries. With some of the largest user bases around, some resource management is necessary. Paid programs fit extremely well into such a capital intensive business model because it limits the use of their most important features to only paying loyalty members. Furthermore, they generate revenue from customer payments and these customers are typically the most frequent users. The customers that engage with their loyalty features are also the customers that receive their premium services, which can also increase their rates of satisfaction. 

Hybrid loyalty programs

Hybrid programs can be a combination of any of the many loyalty programs types. They are designed to deliver the highest possible value from customers and that may involve using multiple loyalty programs merged into one. Having the ability to choose from your options can help build a loyalty program that is fully focused on the benefit of your customers. 

This degree of freedom improves the chances a business will be able to meet customer expectations and as a result successfully retain their customers. This type of business are often the most advanced and are known to not limit themselves to simple discounts, but also to utilize experiential rewards. Experiential rewards of course are known to be highly appreciated by customers for their ability to create exclusivity and satisfaction.

Furthermore, these hybrid loyalty programs can be very practical since they can fit the desires of a broader audience. This restrictionless thinking can make it engaging for customers with varying expectations, which is especially important in a competitive environment. 

Strengths

• As the most versatile loyalty program it is possible to create the most advanced customer experience and integrate experiential rewards
• It’s possible to create an experiences unlike any other with hybrid loyalty programs which only make them more competitive
• They can have a combination of online and offline rewards which can support community building and customer relationships

Challenges

• Hybrid programs may be the most complex, but they may also require the most investment to establish
• Having customer interact with all elements of your loyalty program will be you biggest challenge
• The more complex your hybrid program becomes the more resource it will draw from your other operations effectively leveraging your investment

Example: Nike

As much as Nike is about their products, they are also a fitness brand that has a stake in their customers' lifestyle. As part of Nike’s loyalty program members benefit from customization options, exclusive access, reward points, and experiential activities. This culmination of multiple loyalty program types fits perfectly into a massive global brand with a larger user base. They are able to give their customers a sense of community, while also supporting their customer’s activities. The real question is whether Nike would be able to deliver the same standard of service with a one-dimensional loyalty program.

Value-based loyalty programs

Causes, beliefs, and social dynamics are an important element of a well orchestrated loyalty program. This type of loyalty program follows a non-standard approach the centers around what is relevant to the customers. Value-based programs are inherently customer centric and are devised to appeal to the beliefs of customers.

While what matters to one customer may not necessarily have the same meaning, knowing what is in fact important to your customers can be the potential for a very strong loyalty program. Which affirms how knowing the customer is absolutely critical, which can be very attractive to customers when attempting to create a sense of loyalty.

Some examples we’ve noticed of these types of loyalty programs include luxury brands focusing on exclusive experiences, donations of old garments, and support to NGOs. This has been known to be both highly effective, but also speaks to the diversity that is possible. It is this sort of creativity that is allowed by value-based loyalty programs that has proven their merits for retention.

Strengths

• Value-based programs have some of the most sophisticated rewards as they appeal to the customer personal ideals
• They can greatly enhance a brands perception by aligning values to social relevant topics
• They often have unique rewards that resonate with customer strongly, making them memorable

Challenges

• Value-based rewards maybe difficult to redeem value for a brand without additional rewards
• Programs that are heavily reliant on these types of rewards may appeal to a small contingency of their potential loyalty base
• Long-term retention may prove to be difficult without the ability to recognize impact of these value and the authenticity may be questioned

Example: Mango

Mango is a brand that understands their customers very well. They aligned their loyalty program with important social values and thus created a values based approach to loyalty. They feature garment donations and partnerships with NGOs to make their loyalty program about being socially conscious. While this isn’t the only feature of their loyalty program, it does make up a prominent part of their loyalty rewards. Customers are able to donate garments that will go to charitable foundations and in exchange they receive rewards that can be used for discounts. This makes Mangos loyalty program highly influential and bolsters their brand image.

New trends in loyalty programs

Undoubtedly there are trends in loyalty programs that describe the future of the industry as a whole. These trends point towards a few very relevant topics that have been seen to make a significant difference in the creation of loyalty programs. 

The first and most common trend for loyalty programs are the utilization of SAAS products that automate the creation of loyalty programs, however this is only beneficial if these apps are a part of a complete synergetic solution that operates in combination with other critical marketing functions.

In addition to the utilization for cost effective and comprehensive apps is a growing sentiment for personalization. Customers highly appreciate when a brand understands their personal taste and gives them the options to choose their rewards. But personalization can be a deep topic with abundant adaptations and it's worth looking at loyalty programs from this perspective.

However, the strongest retention factor in loyalty programs trends are without doubt experiential experiences and a sense of exclusivity. When a brand successfully elevates the customer’s experience; creating lasting impressions to be exact, is when they build the most resilient loyalty. In fact, some of the most valuable brands build effective loyalty programs by following this final trend.

How to choose the type of loyalty program

Choosing the right loyalty program can be a complicated task, but the choice we make will mostly depend on competitive factors along with potential market fit. The first task on the agenda is getting acquainted with standard industry practices. We should see a repetitive theme in our segment that can point us in the right direction and that can be a strong starting point in the selection process.

Once we’ve established a standard and understand why the industry leans towards that type of loyalty program, we need to start thinking about differentiation. Customers search for value before they consider loyalty and understanding how you can attract customers is key. Loyalty programs are intended to enhance the customers experience or incentivize engagement which can vary depending on your price point.

If we look at luxury brands we’ll see that discounts can do more harm than good, forcing them to focus on experiences and creating exclusivity. While coffee shops will find it difficult to justify VIP access and so something like punch cards and point programs are more appropriate. Through this comparison we can see that there are clear reasons why one loyalty program may be more appropriate than others. While we may lean towards the best possible loyalty program, balancing expectations is crucial as there is generally a limit to our investment.

Conclusion

Retention is often described in e-commerce as being essential for business growth and a strong indicator for future success. The most practical way to exercise customer retention strategies are through loyalty programs which can come in many different types. Loyalty programs have demonstrated their importance in mediating customer expectations with many of the world’s biggest brands implementing them as competitive strategies. Not every loyalty program will appropriately fit into your business goals and so knowing the many types is essential. Hopefully this guide gave you enough insight to build your own loyalty program effectively.

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