Learn about the different types of customer loyalty programs.
The onset of the COVID-19 pandemic plunged the world as we know it into a completely new normal. Over the next two years, there was a rapid shift toward digital, and consumers have embraced online channels like never before.
What no one expected was how dramatically this would change consumer behavior.
Consumers today are spoilt for choices. The ease with which you can reach out to customers means that there is stiff competition in the market and the only way to stay ahead is to become the preferred choice for customers.
In other words, earn long-term customer loyalty.
A loyal customer is highly likely to make repeat purchases from your brand. In fact, research shows that nearly 60% of loyal customers will purchase frequently from their preferred companies. This means that you are getting more value from a single loyal customer over their lifetime than you would by acquiring a new customer. To put it more clearly, existing customers have an average conversion rate of 60% to 70% while new customers have a conversion rate of just about 5% to 20%
And to top it off, loyal customers are your trusted brand ambassadors. A happy customer is highly likely to promote your brand among their friends and family which is more persuasive than any marketing campaign you run. Case in point, nearly 81% of customers trust recommendations of friends and family over companies.
Clearly, customer loyalty is the key to sustenance.
A loyalty program is one of the most tried and tested ways to boost customer loyalty.
Starbucks, one of the largest coffee shop and roastery chains in the world, is one of the best examples when it comes to customer loyalty. The coffee shop franchise has a loyal, almost cult-like customer base and all of it comes down to the Starbucks experience and more importantly, their loyalty programs. Customers who sign up for their loyalty program earn points or stars every time they buy a drink or something to eat. Once they reach a certain number of stars, customers get a free purchase.
It’s clear that the loyalty program incentivizes customers each time they make a purchase, nudging them to spend more money.
Similarly, a number of ecommerce businesses such as Amazon, Shopify, Sephora etc. have successfully implemented different types of loyalty programs in order to boost customer engagement and keep them happy and satisfied.
Customer loyalty programs are definitely a great tool for your business. However, there are several types of loyalty programs in retail and it is crucial to understand the pros and cons of each in order to determine one that works best for your brand.
Let’s take a look at some of the most popular customer loyalty programs used by retail brands across the world and also explore the pros and cons for each.
This is one of the most common loyalty programs used by ecommerce brands. In this system, customers earn a specific number of points based on the size of their purchases. Over time, once customers accumulate a certain number of points, they are eligible for a reward. It could be a free purchase, a discount, coupons, etc. A great example would be what we discussed above in the case of Starbucks.
Source: Global Brands Magazine
- The points program is simple and straightforward which means that it is quite easy for customers to understand
- All a customer needs to do is make purchases to earn points. This means that they don’t need to be convinced to join the program
- You have the flexibility to decide the limits on both points issued as well as the rewards offered to customers
- It is a great way to collect customer data for cross-selling and promotions
- Points accumulate over time which means that it does not offer instant gratification to customers
- An entire loyalty management team is required to regularly update and manage a points-based program to reduce fatigue
- It is difficult to figure out how you need to structure the points system and in some cases, you may even need to find suppliers to put together meaningful rewards
In the tiered loyalty program, there are different levels and each level comes with its own benefits and rewards. With every purchase, the customer advances upwards in their ranks and is eligible for better rewards. The rewards are exclusive to a particular tier, ensuring that members feel valued and appreciated.
For instance, Sephora’s Beauty Insider program is quite popular for its experiential rewards. There are three tiers with the lowest tier being free to join. There’s a minimum spend to enter the next two tiers but it comes with the benefit of free shipping, custom makeovers, discounts, and even invitations to exclusive events limited to the topmost tier.
- High-value rewards for top-tier customers who are most likely your most loyal customers
- Higher opportunities for customization
- Exclusive rewards for tiers means that customers are motivated to make more purchases and keep advancing
- Top-tier members are unlikely to cancel their membership
- Not really attractive to new customers since it takes longer and more time to reach the top tiers
- Can be complex and requires more communication
- Program expenses
These types of loyalty programs work best for ecommerce brands where customers are interested in contributing to a social cause. In value-based loyalty programs, some form of donation is made to a charity every time a customer makes a purchase.
An example of this would be how TOMS, a for-profit company based out in Los Angeles donates a pair of shoes to underprivileged children in different parts of the world every time a customer purchases their products.
- Encourages moral responsibility among customers
- Helps in building ethical relationships with customers
- Contributes toward corporate social responsibility for a variety of social causes
- Not all customers are interested in a value-based loyalty program
Similar to the points program, the cash back loyalty program incentivizes customers by giving them a small portion of their money back each time they make a purchase. However, one thing to note is that in cash back loyalty programs, even though that’s what they are called, do not always offer ‘cash’ returns. More often than not, members are entitled to store credit which they can use to purchase anything from the store itself.
Kohl’s for instance has a cash back loyalty program where members earn 5% back in Kohl’s Rewards every time they make a purchase. The Kohl’s Rewards balance is then converted into Kohl’s ‘Cash’ at the first of every following month and can be used to purchase almost anything at Kohl’s.
- Easy to sign up for
- Quite easy to understand since it is similar to the points program
- Offering cashback can be attractive to customers, encouraging them to spend more
- Delayed gratification since customers have to wait to make big value purchases
- Low engagement, especially among new customers since cash will be held back until you reach a specified threshold before you are allowed to spend
- Most cashback loyalty programs have an expiration period. This means that if purchases are not made within the specified time frame, the discount expires.
Also called fee based loyalty programs, members have to pay a certain fee to gain access to the program. The fee could be one-time or recurring and members receive continuous benefits almost immediately. The best example of a paid customer loyalty program is Amazon Prime. Members pay the Amazon Prime fee once every year and they are entitled to benefits such as free two day or one day shipping, streaming access, grocery shopping from other retailers, Amazon Video, and more. In fact, the ecommerce giant found that Prime members were spending twice as much as non-prime members!
Source: Retail CRM
- Instant gratification for customers
- Members of premium loyalty programs are 60% more likely to spend on your brand to avail the immediate benefits
- Brands generate revenue from the initial investments made by customers while entering the program
- Require expertise to build, manage, and update the program
- Customers are highly likely to cancel their membership if they do not see any satisfactory benefits
- Fee based entry can create a barrier for a huge section of customers who cannot or are not interested in paying a fee to avail the services
A hybrid loyalty program is interesting in that it takes elements from different types of loyalty programs to elevate the benefits received by members. For instance, Starbucks Rewards App uses a system that combines the point system with gamification. The app sets challenges for customers where they have to purchase a specified product within a certain time to get a free drink or snack and bonus points. Customers gain free rewards and extra points every time they solve a challenge.
- Customers are more engaged and likely to spend more with hybrid loyalty programs
- Since most of these programs are free, there is low barrier for entry
- Rewards can be elevated
- Requires proper strategy and execution and can be complex
- Could get confusing for customers leading to low engagement
- Results are highly dependent on how efficiently you design the program
Once again, the punch card loyalty program is similar to a points based loyalty program except that in this case instead of points, with every purchase, the customer is entitled to a punch or stamp on a card. This can be done either physically or virtual and is best for small retail brands where purchase order values are relatively smaller.
Flour, an online bakery and cafe for instance, uses a digital punch card where a virtual stamp is made on their loyalty card every time they purchase something. After they have accumulated a certain number of stamps, they are entitled to discounts on food and beverages.
- Very easy to grasp since it is quite similar to points and cashback loyalty programs
- Low cost to business
- Customers are likely to make frequent purchases to earn more stamps or punches on their loyalty cards
- Delayed gratification for customers
- More difficult to collect customer data
- Quite easy to be subject to fraud, especially with physical punch cards
Evidently there are a variety of customer loyalty programs both simple and complex. There is no one size fits all. When it comes to deciding which loyalty program to go for, the key is experimentation. It all comes down to various factors like the size of your business, the products you sell, your target audience, and the kind of rewards you offer.
A points or punch card based loyalty program would be better suited for smaller ecommerce businesses while a tiered program could be great for mid-size retail business. Similarly, a lot of beauty brands leverage the points based loyalty program while clothing brands offer exclusive cashback and credit for certain purchases.
Ultimately, how your customer engages with your loyalty program is heavily dependent on the kind of rewards they stand to gain from it and how you design your loyalty program.
Setting up a customer loyalty program that is closely aligned with your business needs can be challenging. Using loyalty management tools could go a long way in helping you manage these complexities and set up your customer loyalty programs with ease.
Flits allows you to easily create engaging loyalty programs that turn customers into loyal brand advocates through the use of Shopify loyalty programs and store credits. Flits is used by over 5000 Shopify merchants and encourages meaningful customer interactions.
Curious to know more? Luckily, you can experiment and understand how Flits works by signing up for their free trial!