Want to design an irresistible loyalty program? In this post, we weigh up the pros and cons of the different loyalty program types, so you don't have to!
The relationship between customer and brand has evolved beyond being purely transactional. Customers have more choices about who they do business with and have higher expectations for what a brand offers. Customers not only enjoy being rewarded for their business, they expect it.
Beyond financial gain, rewards make customers feel valued. But creating a reward mechanism that’s valuable to both you and your customers is complex and requires research and understanding of your audience.
A loyalty program is exactly what it sounds like: a program that inspires or incentivizes continued business with a company, usually by offering rewards, discounts, and perks.
Did you know that 79% of customers are more likely to continue doing business with a brand that has a loyalty program? Loyalty programs, when designed well, are mutually beneficial.
You can explore the psychological and financial benefits of loyalty in more detail in this blog post: The Importance of Customer Loyalty. But the key takeaway is that loyalty programs increase customer engagement, earn you more positive referrals and create happier customers overall.
So, how do you go about designing a loyalty program? What are the pros and cons of one program over another? And which reward structures should you use? Read on for the answers.
Type 1: Points-based loyalty programs
A points-based loyalty program has a very simple exchange: Make a purchase and you’ll earn a certain amount of points that can, eventually, be exchanged for a set value.
Points-based loyalty systems gained popularity in the 1980s when American Airlines introduced a frequent flier program that rewarded customers with points, based on the number of miles flown. These points could then be redeemed for flights or better seats. This system evolved to where customers could achieve different tiers (gold, platinum, etc.) depending on how many miles they had earned and spent.
Although tier-based loyalty isn’t technically required for a points-based loyalty system, the link between these systems should be noted as oftentimes the number of points a customer accrues informs which tier they’re at within the program. We’ll cover the specifics of tier-based loyalty separately.
Besides the American Airlines innovator, there are plenty of successful modern points-based loyalty system examples:
- Starbucks Rewards - Perhaps the most famous modern points system. Coffeehouse Starbucks operates its rewards within the hassle-free ordering app that allows customers to order and collect their favorite customized drinks. When making a purchase, customers earn a certain amount of points that can eventually be redeemed for drinks, snacks, and even merchandise. At the end of 2022, about 29 million people were enrolled in the program, making it one of the most popular rewards programs in the world.
- The North Face XPLR Pass - Outdoorsy clothing brand The North Face has set up its points reward program so that you can earn and spend points in a number of different ways. Yes, every $1 is 1 point earned, but beyond this, members can refer friends, download the app, bring a reusable bag when shopping, and more to earn additional points. Points can be spent on exclusive gear and clothing collections. But beyond this, customers can get access to special events and experiences such as a mountain climbing trip.
- Chipotle Rewards - Mexican fast-casual restaurant chain Chipotle makes ordering and picking up food easier and more fun with a points-based loyalty system built into their app. Every $1 spent in the restaurant or during an online/in-app order will earn a customer 10 points. Chipotle incorporates extra points and point multipliers when a customer earns a badge or achievement in the app. Points can be spent on food, free guacamole, beverages, and even redeemed for donations to non-profit partners.
- DSW VIP Rewards - An example of both a points-based and a tier-based system. Shoe department store DSW’s VIP program allows customers to earn points for qualifying purchases corresponding to how much they’ve spent depending on which tier they’re currently at. However, as they earn more points, they’ll ascend the loyalty tiers and earn an escalating amount of points for each dollar they spend. Points are then exchanged for discounts and special offers, while greater tiers provide access to free shipping, exclusive products, and more coupons.
- Chick-fil-A One - Popular American fast-food chain Chick-fil-a encourages users to download their apps to start earning points for the purchases they’re already making. Each franchise can send push notifications to customers regarding exclusive deals and offers. Besides this, customers can accumulate points, participate in challenges, and receive birthday rewards to encourage their loyalty. Earning points is tied to an increase in membership tiers that result in additional points for purchases as well as exclusive deals.
- Simple - Easy to explain and understand
- Gamified - The customer is rewarded after meeting a clear goal
- Comprehensive rewards - 300 points earns a free favorite drink (and I have 250!)
- Flexible - Customers can choose the most relevant reward
- Valuable customer data - You'll learn which rewards are popular and what customers' buying habits are
- Value - points often need to have insignificant value to be financially viable
- Brand credibility - Points can devalue or damage a brand’s perception if the rewards lack quality or variability
- Limited personalization - Customers often need to select from a limited pool of rewards that may irrelevant to them
- Expiration - Points may expire or have restrictions for redemption, leading to member dissatisfaction
- Maintenance and infrastructure - Databases holding individual customer identification information are required to know how many points they have and how many they’re earning. A mobile app is also generally required.
- Short-term customer commitment
Type 2: Tiered loyalty programs
A tier-based loyalty program offers different levels of rewards based on a customer's level of engagement, spending, or loyalty. Often referred to as VIP rewards, tier-based loyalty programs are designed to encourage customers to keep coming back for increasingly enticing rewards.
Tier-based loyalty programs often involve implementing points that inform where a customer stands within the tiers. 5,000 total points earned may give a customer “silver” status, for example. Whereas 10,000 points earn the customer “gold”. Points aren’t required for a loyalty program, however. Sometimes, the purchases alone will allow customers to earn higher ranks for better rewards.
There are a few modern examples of tiered loyalty programs currently used by companies:
- Sephora’s Beauty Insider - Beauty company Sephora offers three different tiers that grant better benefits for greater tiers. Customers can join the lowest tier, INSIDER, for free. Once they spend $350 a year, they’re granted VIB (very important beauty) status. $1000/yr grants them the highest status: Rogue. Higher tiers earn more discounts, savings, and access to points. But customers can only redeem their points once they’re at Rogue status.
- American Express - Limit-free credit card company American Express has several different card tiers that correspond to the color of the card. These different tiers of cards come with escalating annual fees. An American Express Gold card, for example, costs $250 annually. However, paying for a higher-tier card will grant you better point multipliers for qualifying purchases that you make. Credit cards often have programs structured similarly to this.
- Encourages increased spending and engagement
- Grants exclusivity and status
- Rewards the most loyal customers
- Complexity - Tier differences can be confusing
- Exclusionary effects - Customers can be disinterested in the program due to the bar to entry
- Hard to achieve benefits - Customers have to “prove” their loyalty to receive the best rewards
- Needs extra management and maintenance
Type 3: Paid membership programs
Membership-based loyalty programs typically involve some sort of fee that grants a person access to exclusive loyalty benefits.
These benefits may include discounts, an enhanced experience, access to exclusive events, and more. Paid memberships differ from the other two loyalty program types because loyal members immediately achieve the benefits that they want. A customer loyal to your brand doesn’t have to ascend the ranks or accumulate points to get the best benefits that they deserve.
Paid memberships will often be referred to as subscriptions and may involve an upfront fee or regular payments to keep access. Sometimes free access to limited benefits or a free trial is involved that provides potential customers with a glimpse of the ultimate benefits. Memberships are the most simple of the loyalty programs, as the value of the membership is generally greater than or equal to the price. If a customer is already regularly shopping at a brand, the membership ensures that they’re getting the best deal and experience.
There are several examples of membership loyalty programs utilized by companies:
- Amazon Prime - Probably the most famous and successful paid membership program, online retailer Amazon offers the Prime monthly subscription that allows members access to free, fast delivery, a catalog of music, movies, shows, and more. Amazon Prime has been growing over the years, having about 200 million members across 19 different countries.
- Sweetgreen Sweetpass - Salad restaurant Sweetgreen wants to make it easier than ever to eat healthy while on a budget. Their $10/mo Sweetpass+ quickly generates a lot of value. Sweetpass+ members enjoy $0 in delivery fees, a daily $3 off orders, and a promise that 50% of your first-time membership fee is donated to carbon reduction partner Friends of Earth. They sold 17,000 passes during the program’s pilot testing with 90% of surveyed customers being interested in purchasing the pass again after the trial.
- Costco - Costco is probably the most versatile “grocery store” out there - they offer vehicle services, electronics and appliances, clothing, and gasoline. But they’re also a more unique case because there is no “free” version of their wholesale goods. Instead, customers wanting access to their wide range of products and services pay $60/year for access to their warehouses. They also have a higher tier membership at $120/year that incorporates a rewards program and additional discounts.
- REI Membership - Outdoor equipment retailer REI offers a unique membership subscription with a one-time $30 fee to join. With this, members not only get access to free shipping and exclusive offers or coupons, but also access to local events. REI connects members across the US, helping them host local outdoor events like hikes and camping. Beyond this, REI donates $5 of every subscription fee to the REI Cooperative Action Fund public charity.
- AMC Stubs - AMC Movies launched a movie subscription service in 2018 that pays for itself if you see more than 2 movies every month. AMC Stubs has 3 different tiers of membership with the lowest tier being free to join. For $19.99, members get access to up to 3 movies every week, priority lanes at concessions, and free upgrades on snacks and drinks. AMC Stubs launched as a less restrictive alternative to Moviepass, which had limits on what and when one went to the movies.
- Simple - easy to explain and understand
- Guaranteed revenue streams through membership fees
- Increased customer loyalty - Those willing to pay for a program are committed to the brand.
- Enhanced customer experience - A membership program has room for immediate and enhanced personalized experiences
- Deeper data insights about your most loyal customers
- Focuses on belonging and community building rather than competition between members
- Offers immediate benefits and privileges regardless of engagement level
- Encourages long-term commitment
- Limited reach - Accessibility is dependent on customers being comfortable with the value you’re providing with the membership. This may exclude some potential customers interested in your brand.
- Customer expectations - Customers will have high expectations when they’re members that are paying for exclusive access
- Hard to demonstrate direct value - The benefits of a paid membership program may not be obvious to potential customers
- Continuous effort and infrastructure - Delivering on promised benefits needs to be guaranteed
There isn't a magical "one loyalty program to rule them all" solution.
Each program type – whether tiered, points-based, or membership-based – comes with its pros and cons.
The simplicity and flexibility of the point-based program can be appealing but the value of points may fluctuate, and customers may lose interest due to the limited personalization.
Tiered loyalty programs offer a sense of exclusivity, but they can be hard to manage and may not resonate with all of your customers equally.
Membership-based loyalty programs create a sense of belonging and provide personalized experiences to members. They can foster stronger customer loyalty and encourage repeat business. But they require additional costs or commitments from customers, which can limit their reach.
Ultimately, the type you should go for will depend on the nature of your business, your target audience, and what you want to achieve. Assess your goals and customer preferences before implementing a loyalty program, and then be sure to regularly evaluate and adapt your program based on customer feedback.
The key to a successful loyalty program lies in creating a customer experience that rewards, engages, and strengthens your relationship.