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What are the Different Types of Loyalty Programs?

What are different types of loyalty programs

5 Types of Loyalty Programs

This is not an exhaustive list of all the types of loyalty programs. The loyalty programs listed below are five of the most popular types of loyalty programs. For each type of loyalty program we’ve provided 1) a brief overview, 2) the pro’s and cons of each type of loyalty program, and 3) an example of how each loyalty program has been applied.

  1. Points Loyalty Program
  2. Tiered Loyalty Program
  3. Fee-Based Loyalty Program
  4. Cash Back Loyalty Programs
  5. Coalition Loyalty Programs

1. Points Loyalty Program

Points Loyalty ProgramWith a points program, customers earn points for transactions, engagement, or visits and can redeem points for rewards. Many points programs are are starting to reward non-transactional behavior including downloading a mobile app, subscribing to an e-newsletter, liking a page on Facebook, etc. You may find that a points program works best for high-frequency purchases or interactions. Lancome, Southwest Airlines, Walgreens,  GameStop, and Dick’s Sporting Goods use this loyalty model.

Pros

  • Maintains price integrity
  • Flexible, customizable and currency can be sold to partners to fund the program
  • Aspirational purchases to achieve rewards can provide gains in units per transaction; store trips and conversion
  • High free rider hurdle (not giving margin away to everyone, only those that give you loyalty and earn rewards)
  • Robust customer data and insights to drive business decisions

Cons

  • Higher exit costs
  • Need to have a contingency on balance sheet for point liability.
  • Higher volume of customer questions and operational issues
  • Reward fulfillment can be more expensive
  • Overabundance of loyalty programs where thousands of points are required to earn a benefit devalues all points programs and creates a “Halo effect”

Dick’s Sporting Good’s ScoreCard Rewards

The ScoreCard Rewards program is simple and easy to understand. Dick’s Sporting Goods is very transparent in their communication. They recognize that some customers are motivated by cash back offers, so they’ve done the math for those customers. Customers get .033% back for everything they buy.  Or for those customers that are motivated by points, they state it simply, 300 points = a $10 Reward.

Dicks Sporting Goods Points Loyalty Program
Source: Dicks Sporting Goods

2. Tiered Loyalty Program

Tiered Loyalty ProgramA tiered loyalty program provides both immediate gratification with short-term attainable rewards and long-term aspirational rewards. In a recent loyalty study, 50% of respondents said they increased their spending or changed other purchasing behavior in order to achieve a higher tier status in a rewards program. The key to a successful tiered program is communication. Members need to know the program benefits, their current status and how close the are to earning additional benefits. You may be familiar with Chicos, Zappos, Starbucks Rewards, and Wyndham Rewards tiered loyalty programs.

Pros

  • Focus resources on high-value customers and deliver superior experience across touch points
  • Flexible and customizable
  • Aspirational purchases to achieve greater status can provide gains in overall share of wallet
  • High free rider hurdle (not giving margin away to everyone, only those that give you loyalty and earn rewards)

Cons

  • Not as attractive for low to moderately engaged customers
  • Potential negative impact if and when customers are downgraded
  • May not gather as much customer data and insights as other types of programs to drive core business decisions
  • More complex and require communication on status level

Chico’s Passport Loyalty Program

Chico’s loyalty program is a tiered program structure. Everyone can participate in the Passport program, but only those customers spending $500 or more earn the 5% reward. A tiered loyalty program enables Chico’s to allocate its marketing dollars to only those customers that are loyal. This strategy can be very successful.

Chicos Passport Tiered Loyalty Program
Source: Chicos

3. Fee-Based Loyalty Programs

Fee-Based Loyalty ProgramA fee-based loyalty program has the promise of “you get what you pay for”.  They appeal to customers that are highly committed. The customers have done the math that if they pay to join the program, they will at least break even or potentially get rewarded for what they already planned to spend. In a 2015 loyalty study, 65% of American consumers stated that relevant rewards are worth paying for.  Of the respondents who already participate in fee-based loyalty programs, 69% said they were enticed by free shipping, followed closely by special discounts at 67% of respondents. Walmart, AMC Theatres, American Express, Indigo, Restoration Hardware, and Amazon are using this loyalty model.

Pros

  • Highly engaged customers likely to participate and see value
  • 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

Cons

  • Not as attractive new and moderately engaged customers
  • Potential for higher volume of customer questions and operational issues
  • Higher exit costs.
  • No data collection or insights to identify potential growth customers
  • The cost to participate in the program will limit adoption.

Amazon’s Fee-Based Loyalty Program

In February 2005, Amazon launched Amazon Prime — an all-you-can-eat express shipping membership program for about a million products. Amazon Prime’s 63 million members now make up more than half the online retailer’s customer base according to a Consumer Intelligence Research Partners study.

Why is the program so successful? The Prime loyalty program changes customer behavior. “When a customer becomes a Prime member, they do step up their purchases considerably,” according to Amazon Chief Financial Officer Tom Szkutak. Not surprising. When a customer shells out $99 for an annual membership, they’re going to spend the rest of the year trying to get their moneys worth for that purchase.

Amazon Prime Fee Based Loyalty Program
Source: Amazon

4. Cash Back Loyalty Programs

Cash Back Loyalty ProgramCash back rewards programs are easy to understand, create, and maintain. The value proposition is simple — spend $X and get $Y. Companies like JCPenney, Macy’s, Bank of America and CVS Pharmacy are using cash back reward programs to reduce their churn rates and increase transaction amounts.

Pros

  • Easy to communicate the value proposition
  • Can be tiered to offer greater rewards to high-value customers
  • Redemption of rewards can drive incremental visits and sales
  • Avoids the stigma of “discounts on every purchase” perception

Cons

  • Rewards both profitable and unprofitable customers alike
  • Doesn’t provide instant gratification
  • Not as compelling to infrequent shoppers
  • Easy for competitors to duplicate
  • Timing of rewards is critical if you want to keep members engaged in earning and redeeming cash back rewards

JCPenney’s Cash Back Loyalty Program

During JCPenney’s Analyst Meeting on August 17, 2016, J.C. Penney’s exec VP-chief customer and marketing officer, Mary Beth West, summed up JCPenney’s loyalty program goals, “Our objectives are to increase the number of known customers, drive revenue per customer, and really leverage the robust data set to truly develop a deeper relationship with her. So our loyalty program has long been a driver of our sales, with 63% of current sales from the customers enrolled in the program.”

JCPenney is piloting an update to this loyalty program to see what benefits matter most to the customer. According to Mary Beth, “The new program hits each of the pain points head-on. Now her points don’t expire as long as she shops with us at least once a year. Second, there’s no cap. So she can earn unlimited rewards. The more she spends, the more she earns. This is really important as we get into higher-ticket items like appliances. And now she gets an email with confirmation of earned rewards immediately after purchase.”

JCPenney Cash Back Loyalty Program
Source: JCPenney

5. Coalition Loyalty Programs

Coalition Loyalty ProgramA coalition loyalty program is a loyalty program operated by more than one business and the customer data is collected in a shared customer database. Some examples include Plenti, Upromise, and the Canadian-based Air Miles program. American Express launched the Plenti coalition loyalty program in 2015 with AT&T, ExxonMobil, Macy’s, Nationwide, Rite Aid, Direct Energy and Hulu as the sponsors of the program.

Pros

  • Companies that have a proprietary loyalty program and a coalition loyalty program can gain access to more insights about their customers beyond the data collected in their proprietary loyalty program’s customer database.
  • Customers can potentially earn rewards faster
  • Expand the brands reach into a broader customer base (even with overlap between customers in a proprietary loyalty program and the coalition membership base)
  • Share many of the fixed costs with other program sponsors, including marketing, rewards and operational costs
  • Coalition manages the rewards redemption liability, taking this financial liability off of the brand’s balance sheet

Cons

  • Brands can experience attrition when customers shift their loyalty away from the company to other companies in the coalition.
  • For most coalition loyalty programs, the coalition owns the data. There is limited or no access to key data to effectively grow customer loyalty.
  • Coalition programs do not give you a competitive advantage or differentiate your company in the marketplace.
  • Coalition programs are more expensive if you are successful and have a high level of participation because program costs are often driven by dollars and transactions that go through the coalition loyalty program.
  • Some coalition programs are open programs, where customers are able to earn points with you and go and redeem them at your competition.

Plenti Coalition Loyalty Program

Members earn points on qualifying purchases at participating partner locations, by shopping online through the Plenti Online Marketplace at hundreds of popular retailers or by activating offers from partners on plenti.com or our mobile app, like Plenti’s welcome offer. Member can use Plenti points toward savings at AT&T company-owned stores, Chili’s, Macy’s, Rite Aid, Harveys, and participating Exxon and Mobil stations. For every 1000 points members earn, they can look forward to at least $10 of savings. According to Fortune Magazine, “For the companies, even ones like Macy’s that already have huge loyalty programs, Plenti is a way to tap into the broader customer base of its partners, save on program costs, and lift sales by offering a more appealing program to customers.”

As you evaluate each of these different types of loyalty programs, the following are 6 critical factors in the design of a successful loyalty program.

  1. Successful loyalty plans are strategic
  2. Trade-offs are required to attain financial goals
  3. Objectives must drive program strategy
  4. Identify how program design delivers value
  5. Leverage best practices of industry leaders
  6. Best loyalty programs align with customer relationship management goals.