What are the Different Types of Loyalty Programs?
5 Types of Loyalty Schemes
This is not an exhaustive list of all the types of loyalty programs. The loyalty schemes listed below are five of the most popular types of loyalty programs. To help you choose the best loyalty scheme for your brand we’ve provided: 1) a brief overview of the different types of loyalty programs, 2) the pros and cons of each, and 3) examples of how each type of loyalty program has been applied successfully.
- Points Loyalty Program
- Tiered Loyalty Program
- Paid Loyalty Program
- Cash Back Loyalty Program
- Coalition Loyalty Programs
Loyalty Program Examples
1. Points Loyalty Program
With a points program, customers earn points for transactions, engagement, or visits and can redeem points for rewards. Many points programs are rewarding 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, Nordstrom, 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 the balance sheet for point liability
- Higher volume of customer questions and operational issues
- Reward fulfillment can be more expensive
- An 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 is a tiered points program. Members earn 1 point for every $1 spent on a qualified purchase at DICK’S Sporting Goods, Golf Galaxy and Field & Stream locations and online stores. Members receive a $10 Reward for every 300 points they earn. Plus, they get exclusive offers via mail and email.
In October 2019, Dick’s Sporing Goods launched ScoreCard Gold, an enhancement to its loyalty program targeting top-tier athletes.
ScoreCard Gold Benefits
Customers spending over $500 in a calendar year or be are active ScoreRewards credit cardholders are awarded ScoreCard Gold status. The benefits of ScoreCard Gold include more ways to earn ScoreCard points and member-only benefits, including early access to sales and product launches.
ScoreCard Gold members get 3X points on any purchase once a year. They get to pick the day. Dick’s Sporting Goods triples the points! That’s a $10 Reward for every $100 spent on qualified purchases! Also, they join a community connected by sport, with the ability to unlock a lineup of additional surprise and delight members-only perks and more ways to earn points that can be turned into Rewards.
Dick’s Sporting Goods leverages its extensive and expanding customer relationship marketing database from the ScoreCard Rewards program to grow its community presence through the sponsorship of thousands of teams and leagues at the local level. Dick’s Sporting Goods uses their data to create customer segments based on demographics, seasonality of purchase, brand preference, purchase behavior, and lifestyle. The deep enterprise wide strategies to support these customer segment and adjust business and marketing strategies to maximize ROI.
Walgreen’s Balance Rewards
Whether you’re shopping in-store, online, or from Walgreens App — customers can use your Balance Rewards membership to get points, redeem rewards, and save instantly on featured items. Plus, unlock additional savings with paperless coupons, special promotions, and members-only offers.
Balance Rewards for healthy choices® (BRhc) is part of the Walgreens Balance Rewards loyalty program and it rewards individuals for their efforts to take healthier actions for a better life. The free program allows participants to log their steps and self-monitor glucose and blood pressure, so they can earn points toward goals they’ve set and save money on their Walgreens purchases. Over 3 million devices have been connected to the Balance Rewards for healthy choices® program over the five years that the program has been in existence. Participants simply connect to the BRhc program through the Walgreens app on their iPhone or Android phones, or through various apps such as FitBit, Google Fit and Apple Health.
In 2019, Walgreens made Fortune magazine’s 2019 Change the World list for its Balance Rewards for healthy choices® (BRhc) digital wellness program, which has more than 850,000 active members nationwide. Companies were ranked on four criteria: (1) measurable social impact of the program, (2) business results of the program, (3) degree of innovation relative to others in its industry, and (4) the degree to which the program fits within the company’s overall strategy.
2. Tiered Loyalty Program
A 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 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 situation, and how close they are to earning additional benefits. Progress bars, milestones, and other gamification techniques help keep customers engaged. You may be familiar with Chicos, North Face, Sephora, and Wyndham Rewards tiered loyalty programs.
Pros
- Focus resources on high-value customers and deliver a superior experience across touchpoints
- Flexible and customizable
- Aspirational purchases to achieve higher 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)
- Tiered loyalty programs drive retention among the most desirable customers.
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 the status level
North Face VIPeak
What makes North Face’s tiered VIPeak loyalty program successful? The loyalty program is an extension of the customer’s brand experience. The loyalty program gives North Face a direct connection to their customers. They know who they are, what they buy, and are learning how they use the products. Also, the experiential rewards in the program are designed to foster the connection between the North Face brand and the activities it’s customers love to do.
Chico’s FAS Passport Loyalty Program
Chico’s FAS 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 FAS to allocate its marketing dollars to only those customers that are loyal.
As a customer-first and customer-obsessed organization, Chico’s FAS is delivering lifecycle marketing using predictive intelligence to optimize messaging to each customer across all channels. Chico’s FAS is developing a single platform with a unified view of its customers through robust customer data that has been collected for more than three decades. This includes leveraging Chico’s FAS loyalty program, which has some of the highest participation rates in retail.
3. Paid Loyalty Programs
Paid loyalty programs are often called premium or subscription loyalty programs. A paid 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.
Interest in premium loyalty programs is strongest among millennial consumers. A Clarus Commerce study found that 68 percent of consumers would be willing to join a paid loyalty program if their favorite retailers offered them and the benefits were valuable. Interest jumps to 80 percent for millennials. Walmart, Lululemon, Panera, GameStop and Bed, Bath & Beyond, 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 a 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 limits penetration
Amazon Prime
Amazon Prime is $119 for an annual membership or $12.99 per month, though there are special discounts for students and EBT and Medicaid holders. Members receive benefits that include FREE fast shipping for eligible purchases, streaming of movies, TV shows, and music, exclusive shopping deals and selection, unlimited reading, and more.
Why is the program so successful? In a word, value. JPMorgan analysts analyzed all the perks that Prime membership now offers, including free two-day shipping on millions of items and same-day delivery of Whole Foods groceries, and found that Amazon Prime customers are paying a tiny fraction of what the services are actually worth. According to the analysis, Prime membership is worth an estimated $785 annually and continues to grow as the program evolves.
4. Cash Back Loyalty Programs
Cashback rewards programs are easy to understand, create, and maintain. The value proposition is simple for every dollar you spend, you earn a percent back in cash. Companies like Wells Fargo, Target, Shell ,are using cashback reward programs to reduce their churn rates and increase transaction amounts.
Pros
- Easy to communicate the value proposition
- Can be tiered to offer more exceptional 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 cashback rewards
Target Circle
Target Circle program’s benefits include:
- Earning 1 percent on every Target run to redeem later
- Having a positive impact in their local community by voting to direct Target’s giving initiatives
- Receiving personalized deals and perks, including a birthday surprise
- Getting early access to special sales throughout the year
Target Circle members also have the opportunity to cast votes to help direct Target’s giving to approximately 800 nonprofit organizations in their local communities.
Before launching the program, Target piloted the loyalty program in Dallas-Ft. Worth, Charlotte, Denver, Indianapolis, Kansas City and Phoenix over 18 months. Guest response were overwhelmingly positive, with Target Circle members saving more and spending more than guests who were not enrolled in the program.
Target Circle is designed to complement Target’s RedCard* credit card loyalty program by offering perks and special deals for all guests, including those who currently may not be interested in acquiring a new credit or debit card. All customers who have a Target.com, Cartwheel or Target RedCard account are enrolled in Target Circle. Target RedCard members receive 5 percent off nearly all purchases made at any Target store or on Target.com everyday.
“Our guests are at the center of everything we do, and we’re always looking for new ways to create even easier, more rewarding shopping experiences that give them another reason to choose Target more often,” says Rick Gomez, executive vice president and chief marketing and digital officer, Target. “We worked directly with guests to develop Target Circle, and the program includes the benefits and perks that they told us were most important to them, from earning on every Target trip to having the opportunity to help Target make a positive impact within their local communities.”
5. Coalition Loyalty Programs
A 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, Rainbow Rewards, Rainbow Rewards, Nectar and the Canadian-based Air Miles program. Coalition programs are appealing to companies that want a way to tap into the broader customer base through partners, save on program costs, and lift engagement by offering a a broader array of ways to earn rewards. To date
The chart below provides a comparison of stand-alone loyalty programs versus coalition loyalty programs.
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. It is limited or no access to crucial 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 can earn points with you and go and redeem them at your competition.
- When members experience problems with the program operationally (e.g. points were not accredited, long waiting time in the customer service hotline, etc.), these negative experiences might be attributed to the program sponsors.
Plenti Coalition Loyalty Program
The program officially ended in July 2018. Members earned 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. Members earned 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 earned, they earned at least $10 of savings. According to Fortune Magazine, Here is how brands replaced it:
- Southeastern Grocers Replaces Plenti with New Loyalty Program,
- Chili’s Rewards Program Updated After Exit from Plenti Rewards
10 Critical Factors for Designing and Implementing a Loyalty Program
Reichheld, the author of The Loyalty Effect and Loyalty Rules, found that loyalty leaders grow on average more than twice as fast as the industry average across a wide variety of industries. While we know that mastering the art and science of loyalty marketing is well worth our time, executing it effectively still proves to be a challenge for most companies. According to a study by CapGemini, a high percentage of loyalty programs are failing. Fifty-three percent of consumers stated that they abandoned at least one loyalty program within the last year. That means that companies are putting money and energy into programs that aren’t hitting the mark.
The first step is to narrow in on the critical factors to successful loyalty marketing. Here are the ten things that the world’s most successful loyalty programs have in common.
Experts in Designing Successful Loyalty Programs
Every relationship reaches a point where some action has to be taken to keep it on track. The same holds true for the relationship you have with your customers. As you explore developing your loyalty program, let Customer Insight Group be your first stop on a new route to success. Our marketing strategists have helped over 30 Fortune 500 companies optimize their loyalty programs. We know the way to improved sales and profitable customer relationships. We can help you:
- Develop your program benefits and reward structure to optimize relevance and increase sales.
- Create a value proposition that focuses your resources on your most valuable customers — a differentiated program that will put your customers out of reach of your competitors.
- Create not just a launch communication strategy but an ongoing communication strategy to increase purchase frequency and share of wallet.
Call us today at 303.422.9758 to learn how we can help you create a loyalty program that is relevant to your customers, builds loyalty, and enables you to dominate market share.
Filed under: Loyalty Marketing