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Definitive Guide
to Consumer
Loyalty Programs

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What is customer loyalty?

In its simplest sense, Customer Loyalty is the inclination for an individual to favour a particular product, brand or service. I bet you already knew that.

Till a few years ago, getting people loyal to a brand was fairly straightforward - you create a great product, market it well, offer stellar customer support and voila! You’ve got yourself a loyal customer base.

However, the digital explosion has made it harder than ever before for brands to engage and retain a loyal customer base. Today, a customer is bombarded with hundreds of communications from multiple brands with few differentiators.

Customer Loyalty Program

Gaining customer loyalty cannot be a one-off thing. A brand needs a focused and integrated plan to retain its best customers - put simply, it needs a customer loyalty program.

A loyalty program typically involves giving customers free merchandise, early access to sales, products and coupons. Loyalty programs have been proven to be extremely successful in driving repeat sales for brands. The "Get With The Program" report states that all other things being equal, 72% of consumers will buy from retailer with a loyalty program over one without.

Timeline

Copper Coins (1793)

1793 - Copper Tokens

The origin of Loyalty Programs can be traced to 1793 when supermarkets and gas stations started offering their customers 'copper tokens' which could be redeemed for in-store merchandise

1872 - Tickets

1872 - Tickets

In 1872, the Grand Union Tea Company started distributing tickets which could be exchanged for merchandise from the Grand Union store catalogs.

1886 - Certificates

1886 - Certificates

The Larkin Company, a hybrid soap manufacturer and premium mail-order business, founded in Buffalo, New York, started distributing certificates with its soap sets. The company encourages its customers to redeem these certificates for items from the company's catalog.

Late 19th to Early 20th Century - Stamps

Late 19th to Early 20th Century - Stamps

A department store in Milwaukee was the first to use trading stamps to boost customer loyalty. The premise was simple: customers were given trading stamps for every purchase which they pasted into booklets issued by the company. When a customer collects a certain number of filled booklets, they can exchange it for toys, tools, jewellery or other household items.

1929 - Boxtops

1929 - Boxtops

Betty Crocker started the issuing coupons which could be redeemed for flatware. Soon after, they started printing the coupons on the outside of packages and the term 'box tops' was born.

1980s - Frequent Flier & Cashback Programs

1980s - Frequent Flier & Cashback Programs

In the early 1980s, American Airlines kick started the concept of Frequent Flier Program with the famed Advantage program. A few years later, Discover started the concept of offering cash backs to customers based on the no. of purchases in that year.

1995 - Card-based Programs

1995 - Card-based Programs

Tesco (a UK supermarket) was the first brand to use technology to track customer behavior when it implemented the world's first card-based loyalty program.

2000s - Mobile App Loyalty Programs

2000s - Mobile App Loyalty Programs

It was sometime in late 2002 that mobile loyalty programs started gaining prominence. Capillary played a major part in this revolutionary shift by being one of the first tech companies to introduce a mobile-based loyalty program for retailers. The mobile loyalty programs had multiple advantages that resulted in their wider adoption. Retailers could now combine real time communication and point of purchase analytics to transform loyalty program into a potent marketing channel.

Current landscape of Customer Loyalty Programs

Current landscape of Customer Loyalty Programs

Over the years, Loyalty Programs have steadily evolved from being a passive 'reward & retain' instrument to becoming a major component of the customer experience and engagement cycle.

The other big trend in Loyalty Programs is the advent of Omnichannel Loyalty Programs.

As a brand, you would want to be present wherever your customers are, right? That's where Omnichannel Loyalty Programs come into play. While traditional Loyalty Programs restricted the redemption of points to a single channel, omnichannel loyalty programs encourage your customers to earn and burn points across multiple channels (app, web, in-store etc.) where your brand has a presence.

Brands are also leveraging the vast amount of customer data to drive personalization through their loyalty programs. Research says that a personalized Loyalty Program has a major impact on the overall customer satisfaction levels.

Benefits of Customer Loyalty Programs

The primary objective of a loyalty program is to retain existing customers and encourage repeat purchases. An Accenture Report found that 66% of US consumers spent more on brands that they were emotionally connected or loyal to.

Here are some interesting insights about the power of Loyalty Programs:

check_circle70% of members consider Loyalty Programs to be part of their relationship with a company

check_circleAn effective loyalty program can increase a brand's market share by 20%

check_circle84% of consumers said they are more likely to visit an online website with a loyalty program

Are you in the midst of developing a Loyalty Program? Maybe you're worried how the cost vs. benefit will play out? Read on to find out why it's imperative for businesses to invest in a Loyalty Program.

Increase in Repeat Sales

This is the primary metric on which the success of a loyalty program is measured. If your existing loyalty program is not driving repeat sales, it's highly recommended to do an in-depth analysis of the program to fix the underlying issue. When implemented correctly, an effective loyalty program is even capable of contributing 30% of your total revenue.

Builds a healthy relationship with your customers

Over the years, loyalty programs have steadily transformed from a mere transaction system to an emotional and personal connection between a brand and its customers. This is evident in the way more brands are incorporating higher personalization and experiential rewards into their loyalty program. Consumers are also increasingly expecting early access and VIP benefits in return for their loyalty to a specific brand. Several brands have overlaid their loyalty program into their Customer Relationship Management (CRM) system to offer highly personalized rewards for their customers.

Leads to an increase AOV (Average Order Value)

The Average Order Value (AOV) is a simple but vital metric that reveals how much a customer typically spends every time they shop with you. It's critical because you are increasing your overall revenue with zero acquisition costs. It's also much easier to convince an existing customer to tack in a couple of more bucks to their order rather than convince a new visitor to go through the entire sales funnel. Reports say the majority of brands see an average of 13% increase in Average Order Value from reward program purchasers. This is of course a conservative estimate and there have instances where the loyalty program resulted in 25% to 35% higher Average Order Value. This clearly indicates that a successful loyalty program not only retains your valuable customers but also entices them to spend more on every purchase.

Improves brand perception

A Loyalty Program offers far greater insights about a customer (demographic, purchase patterns, product preferences etc.) compared to an invoice. The data collected through a loyalty program is extremely valuable as it reveals the true preference of a customer (as opposed to one gathered from a survey). Though Loyalty Programs started off as a transactional platform, over the years, brand have realized its potential as a data goldmine. Several leading brands now use Loyalty Program data to predict customer's purchase intent and receptiveness to marketing campaigns. Moreover, the ability to integrate Loyalty Programs with CRM platforms allows brands to combine data from multiple sources like social media, in-store and mobile applications to create a rich persona for every customer.

How Customer Loyalty Program Boosts Sales?

Over the last few years, online and offline businesses around the world have accepted a fundamental reality about customer loyalty.

You cannot generate superior long-term profits unless you achieve superior customer loyalty.

Did you know that increasing customer retention rates by 5% increases profits by 25% to 95%? Loyal customers contribute to your bottom-line in a multitude of ways - they bring in new customers through recommendation, they are more likely to make higher repeat purchases and higher Average Order Value (AOV).

The last one is especially important; it’s estimated that loyal customers will spend approximately 67% more than other customers.

1). By Increasing Customer Retention

By know you would have heard the familiar adage - 'It costs 7 times more to acquire a new customer than it takes to retain one'.

However, you will be surprised to know that 44% of companies focus heavily on acquisition compared to only 18% of businesses that focus on retention. The reason for this against the grain behaviour by marketers is beyond the scope of this article. However, for any businesses to succeed in this hyper competitive market, it will need a mix of good retention and acquisition strategy.

Without a good customer retention rate, the cost of doing business will skyrocket as you will end up spending a fortune on acquisition costs. Besides, if you simply focus on acquiring new customers, you will be left with a whole of customers who does smaller AOVs (new customers typically test the waters of a new brand with small value purchases).

On the other hands, retention is a much simpler and far easier ball game - you already have valuable data about customer affinities, purchase journeys and demographics; all of which can be used to offer personalized rewards and offers to nudge the customer towards opening up the wallet.

2). By Increasing Customer Lifetime Value

Customer Lifetime Value (CLV) and Customer Loyalty are two different entities that are closely related to each other. Customer Lifetime Value (CLV) is simply the total revenue a customer will generate over the course of their lifetime. It is a critical metric that needs to be taken into account while making important decisions in sales, marketing, product launches and customer support.

Customer Value Customer Lifetime Value

There are few ways a company can increase CLV

arrow_upwardIncrease the customer base

arrow_upwardIncrease the no. of repeat purchases per customer

arrow_upwardIncrease the retention age of customer

arrow_upwardIncrease profits per sale

Now, this is where CLV and Customer Loyalty come together. Each of these 5 points fall into a customer loyalty segment namely: Retention Loyalty, Advocacy Loyalty & Purchasing Loyalty. And by boosting retention, advocacy and purchase loyalty you can automatically boost the CLV of your business.

Here’s how:

arrow_upwardBy increasing retention loyalty you can ensure that a customer interacts with your brand over a longer time period.

arrow_upwardBy increasing purchase loyalty, you can increase the frequency of sales from a customer

arrow_upwardBy increasing advocacy loyalty, you can acquire more customer.

As you can see, maximizing customer loyalty is the easiest and most effective way to increase your Customer Lifetime Value (CLV)

3). By Increasing Brand Awareness & Brand Recall

In a competitive market with little product differentiation, brands awareness can be a key factor in driving sales and conversions. The reason is tied to a basic human trait - we prefer to interact with people/things that are familiar to us. In fact, research suggests that when given a choice of multiple brands, customers are 60% more likely to purchase from a brand whose name they have at least heard once before.

Now, how is brand recall and a positive brand image related to customer loyalty? It basically works in a two way loop - a great customer reward program can spread positive mind share about you brand and a good brand can entice more people to be loyal to your brand.

To sum it up, good brand recall and a great reward program can work together to increase sales and conversion.

Here’s how:

flash_onGood brand recall blocks off other brands from the consumer's range of choices

flash_onAn effective loyalty program can boost brand recall

flash_onWhen presented with a set of familiar brands, consumers tend to pick the ones with a higher brand recall

flash_onGood brand recall forms the basis for a clear and attractive brand image,

flash_onBrand recall coupled with high customer satisfaction levels translates into increased customer loyalty.

maximise-retention-rate-customer-lifetime-value.jpg

Best Loyalty Programs

Whether you're planning to implement a loyalty program or in the process of restructuring your current reward program, it's always a good idea to take notes from other loyalty programs that have had critical successes. So here goes:

  • Sephora’s Beauty INSIDERexpand_more

    Sephora Beauty Insider

    Sephora is a major beauty retailer in the US that accounts for 22.7% of the total US beauty specialist retail sales.

    The premise for Sephora’s Loyalty Program - the Beauty INSIDER - is fairly simple: for every US dollar you spend at Sephora online, Sephora retail stores or in Sephora inside JCPenney stores, you receive one Beauty Insider point.

    Sephora Beauty Insider

    So what is it that makes this reward program so great? Let’s find out.

    check_circleBrand-focussed

    Sephora is perceived as a high-end beauty retailer and the brand has entrenched that feeling of luxury, prestige and exclusivity into its loyalty program.

    check_circleMobile App access

    The Beauty Insider Membership Card is built in to the app, eliminating the hassle of carrying around a membership card.

    check_circleMulti-tier Membership

    Sephora has structured its membership tiers (INSIDER, VIB & ROUGE) based on the total dollars spent. This is a great gamification technique that entices customers into spending more in an effort to reach the next social status milestone.

    check_circleExperiential Rewards

    In keeping up with its high-end image, Sephora has chosen to go with exclusive & luxury rewards instead of offering simple discounts. e.g.:- members (ROUGE-tier) get passes to exclusive celebrity events, all members can access the Sephora Beauty Studio and also enjoy birthday gifts and personalized makeup recommendations.

    check_circleSuperfast Registration

    All you need is your name, email, password and date of birth!

    check_circleOmnichannel Loyalty Program

    Whether you shop on the Sephora website or at the Sephora store in your neighbourhood, the loyalty program automatically syncs your points.

    As for the success of the Loyalty Program, we'll let the figures speak for themselves - Sephora Beauty Insider has over 10 million members!

  • Starbucks Rewardsexpand_more

    Starbucks Rewards

    Starbucks is a premier American coffee retailer present in 28,218 locations worldwide. The company is often credited for revolutionizing the coffee shop business and their loyalty program has garnered rave reviews from customers and industry experts around the world. The Starbucks Rewards is a free, 3-tiered program with a fairly simple earn and burn criteria: every time a customer spends $1 they get 2 stars and the tiers are as follows:

    starbucks-3tier

    Here’s what makes the program so effective:

    check_circleMobile First Experience

    Starbucks Rewards is a great example of a mobile loyalty program executed well. The rewards program is centered on an intuitive, interactive app experience; customers can quickly view the no. of stars they have earned, load their wallet, and locate the nearest Starbucks outlet and order on the go! With a whopping 6 million sales per month the app contributes 22% of all US sales for the brand.

    Starbucks Rewards

    check_circleDynamic & Engaging Offers

    Every time a customer opens the Starbucks app, they are presented with a new and limited period chance to earn more stars. This keeps the program fun, fresh and engaging.

    check_circleExpanded Earn Option

    Starbucks made a smart move by opening up its loyalty program to cover purchases outside of its retail outlets. Customers can now earn 'Stars' on purchases like bottled beverages, coffee beans and k cups in other grocery stores. This is a great way to expand the scope of your loyalty program at a very minimal cost.

    check_circleThe Coveted Gold Card

    When a member earns 30 stars within a period of 12 months, they become a 'Gold' member and is entitled to several benefits like free refills, free food and the much coveted personalized Gold Card. While the freebies are nice, the Gold Card is what most members covet thanks to its flaunt-factor, especially in social media platforms like Instagram and Twitter. Creating a physical entity loyalty program and serves as an incredible motivator for members.

    check_circleEncourages Higher AOV

    Starbucks entices customers to spend more on every order by allowing them to preload their wallets. This removes the Point-Of-Sale guilt customers feel when paying by cash or swiping their card. Also, in a rush to get to the Gold membership, customers often pay for their friends just for getting more stars.

    check_circleHigher Incentives for Elite Customers

    The Starbucks Rewards program is structured to incentivise high-spending members’ spenders. Once an elite member earn 300 stars and reaches Gold status, he/she is treated to a free drink for every 125 points earned.

  • Amazon Primeexpand_more

    Amazon Prime

    Amazon Prime was launched in 2004 and as of today it boasts of a whopping 80 million members! The program is unique in the sense it might not be even correct to call it a loyalty program. At its core, Amazon Prime is a project that changes customer behaviour by reducing purchase friction which in turn lead to an increase in loyalty. If you take away just one learning from this entire piece, it should be this:

    Customer loyalty isn't about discounts, rewards or points; it's about ultimately changing customer behaviour to align with your long-term business objective.
    Amazon Prime

    Amazon's long term objective was to create an exceptional and effortless customer experience and the Prime loyalty program paved the way for it.

    Here’s how

    check_circleLaser-focussed on the customer

    Much like the company's famed motto, Amazon Prime is rooted in its focus on delivering an exceptional customer experience. They achieved this by opting to offer fast, free delivery instead of discounts and rewards. This meant that Amazon was the first name that Prime Members thought of when they wanted to make an online purchase. As mentioned before, at its core, Amazon Prime is really about changing customer behavior by presenting a better, faster and more enjoyable alternative.

    check_circleValue Added Perks

    Apart from the free, fast shipping, Amazon throws in a whole bunch of value added services like video/music streaming. They also offer access to thousands of eBooks and photo storage. While these services are not exactly free in a sense; Amazon has positioned it such that these are additional services a member enjoys in addition to the primary free shipping. This is also a fantastic opportunity for Amazon to gain mind share in verticals it doesn't have a solid brand presence yet.

    check_circlePlan for the Long Run

    When Amazon launched the Prime program it was bleeding money - each expedited shipping order cost the company around $8 and if a Prime member places 20 orders a year, it would cost Amazon $160; which is far higher than the $79 membership fee. But as Jeff Bezos has reiterated countless times, Amazon always plans for the long haul and he is ok with sacrificing short term financials to get to these long term goals. A Prime member now contributes $1,224 in purchases to Amazon each year, compared to an average of $505 for non-Prime customers. After factoring shipping and streaming costs, the average Prime member yields Amazon $78 more in profits than other customers. And there are 80 million of them; you do the math.

  • MAC Selectexpand_more

    M.A.C Select

    M.A.C Select has a straightforward premise: a free, three-tiered program where the more a customer spends, the better the benefits he/she earns. The tiers are:

    looks_oneSeduced - Open to anyone who signs up; you don’t need to make a purchase. Perks in this tier include early access to limited-edition products.

    looks_twoDevoted - Spend $150 or more in a year and you receive early access to select collections, complimentary makeup application, free product samples and complimentary two-day fast shipping.

    looks_3Obsessed - Spend more than $500 per year on products and you get exclusive priority access to special collections, two complimentary makeup applications, complimentary two-day expedited shipping (minimum order value of $50)

    M.A.C Select

    Now let's see what the world's leading cosmetic gets right with their loyalty program:

    check_circleGreat Timing

    M.A.C smartly avoids the peak sale periods and holiday seasons to run its special offers; thereby ensuring maximum impact and customer engagement. From a customer's point of view this makes absolute sense this gives them something to satiate their makeup cravings while they wait for the bigger sales from Sephora and other major brands.

    check_circleSubstantial Value

    When it comes to loyalty programs, one of the major complaints from customers is the lack of substantial value in the rewards. M.A.C fixes this by offering a 20% discount for loyal customers.

    check_circleCompliments Other Offers

    For those who aren't in the know how, M.A.C runs a 'Back to M.A.C' program where customers can bring in six empty M.A.C makeup containers of any kind and pick a classic lipstick of any shade for free. The retailer has integrated this program into their Select loyalty program quite well - M.A.C select customers can bring in as many empty containers as they like and the get to choose from an expanded selection of any basic lipstick, lip gloss, or single eye shadow.

  • Neiman Marcus InCircleexpand_more

    InCircle Rewards

    Neiman Marcus is one of the most respected names in retail. In 1984, the company introduced InCircle Rewards, which became a hallmark in rewards program and catered to Neiman Marcus' most valued and loyal customers.

    InCircle Rewards is tied directly to purchases made with the Neiman Marcus or Bergdorf Goodman (Neiman’s sister concern) proprietary credit card. Members earn two points for every dollar spent. The more members spend, the more benefits they earn.

    It's an excellent example of a luxury loyalty program done right. Even if you're customers are not luxury segment, several aspects of the InCircle loyalty program is still relevant and replicable.

    InCircle Rewards

    check_circleCompany-wide Commitment

    Neiman places serious commitment to employee training across all positions - right from the sales associate to the C levels. Every new employee undergoes extensive InCircle training and how it should be positioned for the customer. The company even has a dedicated “InCircle Ambassador," in every store who is the go-to person for any questions related to the program.

    check_circleClear, Consistent Communication

    Neiman is renowned for building a relationship with a customer through relevant and engaging communications. The company smartly leverages emails and SMSes to connect 1:1 with customers. Neiman customers frequently receive messages from store associates that goes something like "Hey, remember the teal jacket you bought a few weeks ago? Well, we just received fresh stock of pin-striped skirts that would look great with it. I have already set aside two colours of your size — will you be able to stop by next week?”. And when the customer walks in to the store, the savvy sales associate will have matching shoes, scarfs and stockings ready to create an incredible up-sell.

    check_circleKnow Your Customers

    Loyalty Programs are a great way to understand shopper preferences and purchase patterns. Unfortunately a lot of brands fail to leverage this aspect of reward programs well. Not Neiman Marcus though; InCircle members account for 40% of the company's overall revenue and the brand's analytics game is so strong that it can associate 90% of its revenues with specific customers.

    check_circleMulti-tiered Programs

    Multi-tiered programs are a great way to increase AOV and repeat purchases. Neiman Marcus gets this right with a seven-tiered program that offers rewards that increase as the amount spent goes up. All InCircle members earn two points for every dollar charged on purchases made at Neiman Marcus; eventually earning them a $100 Point Card. Higher-tiered rewards members can also receive complimentary gift packaging, double points, an InCircle concierge and a $25 perk card

  • My Red Lobster Rewardsexpand_more

    My Red Lobster Rewards

    Red Lobster is the world's leading seafood restaurant that caters to a more affluent customer base compared to competitors like Applebee’s, TGIF and Chilis.

    The restaurant already boasted of a loyal customer base but the brand wanted to up the ante and create a more rewarding and engaging connection with their customers.

    The My Red Lobster Rewards is a mobile app-based system that rewards customers based on their spending.

    redeemGuests who sign up for My Red Lobster Rewards earn 75 free points as a welcome bonus

    redeemDiners earn one point for every dollar spent at Red Lobster.

    redeemOnce a member earns 125 points, they can choose from three offers – which can be redeemed during a future restaurant visit.

    A competitive landscape and weak walk-ins has led to several restaurant chains to jump on the loyalty program bandwagon and it seems to be working well. According to the company, My Red Lobster Rewards members had a higher frequency of visits and also spend more than non-members.

    My Red Lobster Rewards

    Here's what Red Lobster has gotten right with their loyalty program:

    check_circleGreat UX

    The app features an easy and intuitive interface which allows members to easily track and redeem points right from their mobile phone.

    check_circleStart Small, then Scale

    Red Lobster tested the app with customers in Colorado for more than a year, before expanding it to Arizona and Wyoming and finally rolling it out for the entire nation. This is a great way to test the waters and iron out inefficiencies from your reward program.

    check_circleExpand App Functionality

    In addition to scanning receipts and tracking points, Red Lobster offers added features and functionalities like the ability to locate the closest store, add name on the waitlist, and to order takeout straight from the app. This is an excellent way to add value to your mobile loyalty program.

  • Southwest Airlines Rapid Rewardsexpand_more

    Rapid Rewards

    Despite operating in one of the most competitive airline industry in the world; Southwest has managed to stay ahead of the competition and became the largest carrier in the U.S. in terms of passengers flown in 2016. Experts attribute its success to three key factors - low fares, excellent customer experience and its award-winning loyalty program.

    Rapid Rewards

    Rapid Rewards, the loyalty program of the Dallas-based carrier was launched in 1987 and over the years it has garnered several appreciations and accolades. Let's see what Southwest got right with their rewards program.

    check_circleNo Blackout Dates

    Several travel companies make their offers and redemption invalid during the holiday season and other peak periods. Not Southwest Airlines, which allows point redemption even during blackout dates and also without expiry dates for points accrued. This gives loyal Southwest flyers the freedom to redeem points on their annual vacation (which is usually during the holiday season) without worrying about blackout dates.

    check_circleMultiple Redemption Option

    Southwest Airlines understands that not everyone wants the same thing. That's why the airline offers several ways to redeem the Rapid Rewards points. In addition to miles, Rapid Rewards members can redeem their points on hotel booking, car rentals, concert passes and thousands of products in the "More Rewards" section. This focus on customer needs and expectations rather what the company itself wants to achieve from its loyalty program invariably increases its value and engagement.

    check_circleMulti-Platform Access

    Apart from desktop access, Southwest Airlines has dedicated iPhone and Android apps which allows tracking and redemption of points through a handheld device. Members can also check in, access airport information, view flight status and complete various other tasks things in addition to the Rapid Rewards mobile access.

A Winning Loyalty Program

A good customer loyalty program can generate significant gains in recurring revenue for your business through higher AOV and repeat sales. While there are several ways to go about creating an effective customer loyalty program, here are our tips based on what has worked well in the past:

gradeGive your customer the choice of opting for a physical card, key fob or an app-based loyalty solution

gradeKeep your loyalty program unique to your brand instead of partnering with other brands or businesses

gradeKeep it simple - offer points for X currency spend and make it easy for people to track the points. Also, avoid long list of exclusions and fine print

gradeInclude a sign up bonus for new members that offers free points of up to 50% of points of the next reward

gradeImplement achievable reward thresholds based on the average spend of your customers

gradeOffer a wider redemption choice which gives your customers the freedom to redeem their points on what they like

gradeOffer special 2X or 3X rewards on non-peak times of the week or month on slow moving products

gradeMake sure the rewards can be redeemed from the day a customer reaches a certain reward threshold. This will encourage repeat visits

gradeOffer special points with limited validity to encourage repeat business

gradeCommunicate the benefits of your loyalty program across all customer touch points (e.g.:-app, in store, desktop etc.)

gradeDon’t limit point earns only to purchases; reward them for social sharing, brand promotions, reviews etc.

gradeDesign your loyalty program around your customer and what they value most - is it discounts? Is it personalized experiences? Or is it exclusivity?

gradeAlways set a grace period on the expiry date of points so customers who may have missed a deadline can still save their points

gradeAlways set goals for your loyalty program and measure them with a CRM

gradeUse personalization to understand what type of rewards resonate best with each customer personas

gradeAssess current customer satisfaction levels before implementing your loyalty program. This will help you gauge its benefits much better

Types of Loyalty Programs

Choosing the right type of loyalty program is a critical factor that will decide whether it becomes successful or failure. And which program you choose should depend on your customer base, your business model and your brand positioning. So make sure you factor all of these before choosing the model for your loyalty program.

Point-based Loyalty Program

This is the simplest and most common loyalty program model where customers earn a specific amount of points for every transaction or specific action. These points can then be redeemed for discounts, products or services. The Point-based loyalty program works great for frequent and short term purchases.

Pros:

check_circleMaintains price integrity

check_circleFlexible, customizable and currency can be sold to partners to fund the program

check_circlePromotes higher AOV, purchase frequency and conversion

check_circleAbility to target high value customers

check_circleAccess to extensive customer data and insights

Cons:

errorHigher exit costs

errorNeed to have a contingency on balance sheet for point liability

errorReward fulfillment can be more expensive

Tier-based Loyalty Program

A tiered loyalty program works to provide both short term rewards and long term, aspirational benefits once a customer reaches a specific level. This is a great way to encourage repeat purchases as well as increase the average order value. This is a very effective loyalty program model since fundamentally affects the behaviour and purchase patterns of consumers by tapping into the basic human traits relating to social status and acceptance. If you're planning to implement a multi-tier loyalty program, please make sure that you convey the benefits, earn/point process for each tier clearly across all channels.

Pros:

check_circleAllows you to focus on high-value customers

check_circleAbility to customize rewards to each customer's preferences

check_circleAspirational purchases leads to higher revenue

Cons:

errorNot very attractive for casual and low engaged customers

errorMight have a negative impact when customers are downgraded

errorComplex and requires clear communication to be effective

Fee-based Loyalty Program

A fee-based loyalty program appeals to highly engaged customers who have already made up their mind what they want out of your loyalty program. For fee-based loyalty programs to be effective, it needs to offer a very relevant value proposition to the customer whether it’s in form of free shipping, special discounts or priority access to sales. Amazon Prime is a classic example of a fee-based loyalty program that garnered universal acclaim and acceptance.

Pros:

check_circleAccess to pre-qualified and highly engaged customers

check_circleMembership fees often nullifies the program cost and even becomes an alternate revenue channel

check_circleAccess to insights on high-value customers

Cons:

errorNot very attractive to moderately engaged customers

errorPotential for higher volume of operational issues

errorLack of data on low/moderately engaged customers will impact long term growth

errorLimited adoption due to cost factor

Cashback Loyalty Program

Cashback programs are simple and straightforward - spend X amount and get Y amount as cashback. They have been effective in reducing customer churn rates in a variety of industries like retail, banking and insurance.

Pros:

check_circleSimple & straightforward value proposition

check_circleCustomizable to a multi-tiered program offer more value to loyal customers

check_circleDrives incremental visits and sales

check_circleOften perceived as a higher value compared to discounts

Cons:

errorRewards loyal and casual customers alike

errorNo instant gratification

errorEasy for competitors to replicate

Reward Loyalty Program

Also known as a coalition loyalty program, this type of program involves a brand partnering with another brand to offer rewards and incentives to a shared group of customers. The Plenti coalition loyalty program is a good example of a coalition loyalty program.

Pros:

check_circleCustomers can earn rewards faster

check_circleExpands the brands reach into a broader customer base

check_circleReduced marketing, rewards and operational costs compared to standalone loyalty program

check_circleReduced financial burden on brand’s balance sheet

Cons:

errorHigher churn rates due to ease of shifting loyalty from brand to another within the coalition

errorLimited access to customer data

errorOpen coalition programs allows your customers to earn points from you and redeem them with a competitor

5 Ways to add value to your Customer Loyalty Program

If your loyalty program doesn't add value to your customers, it won't be long before your customer jumps ship to a competitor. Here are some ways to increase the value of your loyalty program.

1Communicate with Your Customers

Get constant feedbacks from customers regarding the benefits of your loyalty program through in store and online surveys. Another way to figure this out is to compare what your customers are choosing vs. what you are offering. After a thorough analysis, you should be able to come up with insights regarding what your customers are actually looking for from your loyalty program and what type of rewards attract them the most.

2Reward for Initial Engagement

Once a new customer engages with your brand, make sure you reward them. While most brand do this, they often miss out on finding unobtrusive ways to remind them about these points. A great way to do this is to reward customers for social following or email opt-ins. This gives you a chance to push special offers and reward redemption options to these new customers.

3Reward Your Customers Creatively

Most customers expect to be rewarded when they make a purchase. However, the best loyalty programs reward customers when they are not expecting it; so go ahead and offer your customer a special bonus points along with a personalized birthday mail. Even better, try sending a certain segment of customers a simple "You're Awesome!" mail along with free points. It would cheer them up and create a positive reinforcement with your brand. These are just simple examples, try to think of creatively engaging your customers while incorporating your brand persona and business model.

4Support a Charity

According to research, 83% of Americans want brands and retailers to support charitable causes. This is a great opportunity for you to leverage your loyalty program to allow customers to donate points to charitable trusts and organizations. For example, Canadian Red Cross allows members to donate using AIR MILES and Aeroplan miles. You can implement a similar loyalty program strategy where your customers can donate to a charitable cause that is related to your products and services.

5Offer Innovative Rewards

For your loyalty program to stand out, it needs to go beyond discounts and promotions based rewards. When you provide loyal customers with a unique, personalized experience, it makes a long lasting and valuable impression compared to gifting them something they would have ability to purchase anyway. And if you are able to connect that connect that incredible experience with your brand persona, you have hit the loyalty marketing jackpot! A great example is Theory11, an online seller of magic tricks and other party trick accessories. As part of its loyalty program, the brand offers customers various training sessions over Skype. Customers who are higher up the loyalty tier get access to private training sessions and a handful of top tier customers get the opportunity of a lifetime - a one-on-one session with David Blaine.

Ideas for Loyalty Programs

Ditch the Card, go Mobile!

Ditch the Card, go Mobile!

Loyalty cards usually get lost in the wallet and are cumbersome to carry around. We highly recommend a mobile app for your loyalty program

Build a Referral System in to Your Program

Referral System

This will work well for a restaurant brand. Instead of offering free meal/discount/coupons on every 10th purchase, offer them a 1+1 free offer on every 5th purchase.

Align Your Program with Your Brand Persona

Brand Persona

If your brand is built around 'best value' and 'lowest price', then focus on offering cashbacks and discounts. If your brand serves a premium customer segment, opt for experiential rewards.

Invest in a good Loyalty Program Software

Loyalty Program Software

A Loyalty Program Software is the core platform that tracks and manages your loyalty program. So, rather than investing in a complex one, try to ensure it fits your business needs.

Reward Feedback

Reward Feedback

Encourage your customers to give feedback on your products and your loyalty program. A simple reward for sharing their opinion goes a long way here!

Keep it Fresh!

loyalty programs fresh and engaging

Try to keep your loyalty programs fresh and engaging by offering special, limited period offers for earning as well as redeeming points

Be Social

Social brand advocates

Create an exclusive coupon code for your social followers to make them feel special and encourage them to become brand advocates

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The Metrics You Need To Measure Your Loyalty Program

How do I measure the success of my loyalty program? As more and more businesses are focusing on tying marketing efforts to their revenue; it has become critical for marketers to show effective ROI on loyalty programs.

Here are the key metrics you should be tracking to measure the effectiveness of your customer loyalty program:

track_changesCustomer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is simply the overall revenue contribution you can expect from a customer during his/her engagement with your brand. To calculate CLV, you need to first calculate the Customer Value

Customer Value Customer Lifetime Value

Once you get the Customer Value; finding the Customer Lifetime Value is simply multiplying it with the average lifespan of the customer. The trouble is getting the exact lifespan of a customer is not easy; especially if you're a relatively new brand. A good thumb rule to take is 3 years.

track_changesRedemption Rate

Redemption Rate Calculation

Redemption Rate is a percentage which indicates at what rate are your customers are redeeming their loyalty points. A high redemption rate indicates that your customers are highly engaged with your loyalty program. A healthy benchmark is a 25% redemption rate; anything less than that and it indicates an issue with the redemption process of your loyalty program, i.e., your customers are earning loyalty points and are not spending them. Here's how you calculate the redemption rate of your loyalty program.

track_changesActive Engagement Rate

Active Engagement Rate Calculation

This ties in with Redemption Rate in that it measures the number of customers who are actively engaged with your loyalty program (through points earned and redeemed).

track_changesRepeat Purchase Rate (RPR)

Repeat Purchase Rate (RPR)

While CLV is a great way to measure the long term impact of your loyalty program, the Repeat Purchase Rate (RPR) gives you an overview of the short-midterm impact. The Repeat Purchase Rate (RPR) basically gives you the percentage of customers who have made more than one purchase for a period of 1 year. One of the primary objective of a loyalty program is to increase repeat purchases and thus measuring the RPR is critical for gauging the effectiveness of a reward program. Also, remember that the RPR has a major impact in increasing the Customer Lifetime Value (CLV)

Why Loyalty Programs Fail

stopCryptic CommunicationThis is the most common suspect in ruining an otherwise great loyalty program. If a customer doesn't understand the tiers, earn/burn policies and rewards associated with your loyalty program at the first glance, you have a problem that needs immediate fixing

stopImpossible Reward StructureIf you have setup a very steep reward structure, your customers are going to get disenchanted and ignore your loyalty program

stopTrying to Accomplish Everything at OnceLayering your loyalty programs with too many things (social media, referral bonus, coupons, and discounts) overcomplicates it

stopStaff/Employee IgnoranceWhen a store employee is unable to explain the program to a customer, it creates a bad customer experience

stopBuild & Forget ApproachYou created a loyalty program and never bothered to promote it on your website or social media

Fixing Ineffective Customer Loyalty Programs

buildStep back and go through your loyalty program rules with an objective mindset and see if you are able to comprehend the tiers and earn/burn rules. Even better, ask your friend/family read about the program and ask them what they understood. This is a great way to fix unclear communications.

buildEvaluate the average spend of your customers and the frequency of visits to arrive on a reward structure that is financially viable to you as well as be valuable to your customers.

buildWhile all your marketing efforts can be layered into your loyalty program, it should be done carefully. The best way to do this is to treat the loyalty program as a central platform and connect other channels in a modular form. e.g.:- your social followers can receive bonus points for sharing/liking your page, your customers earn 2X points for referring their friend and so on.

buildMake sure your loyalty program is an integral part of employee and staff training. Try gamifications and leaderboards to encourage staffs to actively learn more about the program and promote it your customers.

buildRevive and refresh your loyalty program by introducing new rewards and redemption options. Try to invest in a loyalty program management software which automates the campaigns and other aspects of your loyalty program. A marketing campaign centered on your loyalty program is another great way to kick start a depleted program.

Artificial Intelligence & Machine Learning powered Loyalty Programs

AI and Machine Learning have the potential to fundamentally revolutionize the retail and loyalty industry. The reason? Loyalty is closely linked to customer experience and AI is becoming impressively accurate in predicting human behaviour and purchase patterns.

Here's how AI will impact Loyalty Programs:

memoryPredictive Insights

Historically, customer data collected through loyalty programs have been used to target customers with relevant messages. However, with the help of AI and Machine Learning; brands can take this several notches up to predict customer behaviour and influence purchase patterns. Imagine getting real-time information of every customer who walks in to your store along with insights on what they are most likely to purchase. Advanced AI algorithms is capable of predicting human actions long before the thought even starts taking shape in the subject's mind.

memoryPrescriptive Analytics

AI-powered insights can instantly give you a segment of customers who are more likely to spend more once they move into the next tier of your reward program. Now all you have to do is offer them 3X points on their next purchase as a special gift. Prescriptive analytics can be applied to a wide range of retail scenarios to reduce churn, increase conversion rates and improve overall customer experience.

memoryFraud Preventions

Loyalty point accounts are frequent targets for fraudsters, mostly due to their low-level, rule-based security. They typically work like this - if this specific anomaly happens, then raise an alert. The trouble is that once a fraudster identifies a rule, he/she can easily bypass it. AI works a little differently; it monitors millions of transactions and creates a flexible protection layer capable of identifying and stopping an attack in real-time.

memoryIntelligent Interfaces

AI-powered voice assistants like Alexa and Siri have so far been mostly confined to their virtual avatars. As consumers become more comfortable with these technologies, they are likely to show up in the physical realm as shopping assistants and other customer service roles. In the near future, it won't be farfetched to imagine that a customer makes a purchase in a retail store without ever interacting with a human.

Over the years, retailers have faced a major dilemma when it comes to loyalty programs - how to increase revenues without negatively impacting the customer experience. AI and Machine Learning can help retailers with intelligent insights that can increase the overall sales, conversion; while ensuring a great customer experience.

And that brings us to the next big thing looming large over the loyalty horizon - the Blockchain Loyalty Programs.

Blockchain Loyalty Program

Last year, a dozen companies like Singapore Airlines, Rakuten & Chanticleer (parent of Little Big Burger, American Burger Co., Hooters, Just Fresh, and BGR) have announced their intent to launch blockchain-based loyalty programs to encourage customer engagement.

Integrating your loyalty program into a blockchain essentially involves setting up an integrated yet open system. Think of the blockchain as the Operating System and the loyalty program software as an application running on this OS.

Let's get the obvious out of the way - private blockchains and branded cryptos are still very nascent technologies. So why are top brands and businesses experimenting with it?

check_circleInterchangeable RewardsBlockchain-based loyalty programs allows brands to offer rewards across multiple products and services, thereby giving customers virtually unlimited freedom for reward redemption.

check_circleHigher FlexibilityBrands can easily track rewards across several engagement parameters like content consumption, beacons or IoT product use.

check_circleCost EffectivenessBrands have often struggled with expanding their loyalty programs across affiliates and partners as it involves expensive system integrations. A blockchain loyalty program can significantly reduce development, integration and security costs.

check_circleAnti-FraudBlockchain members in a network have their key information shared in a distributed ledger–– this is a core feature of blockchain. This 'single source of truth' concept makes loyalty fraud extremely difficult to execute.

Sounds great! So why blockchain loyalty are programs not being adopted by everyone? Here are the not-so-great stuff about blockchain loyalty programs:

errorOverhyped?Let's be honest, most enterprise blockchains are still in Proof-of-Concept stages and are focused on generating more Press Releases than actual deployments.

errorSteep learning curveBrands will have to incur significant marketing spend in educating customers on how to use blockchain.

errorScalabilityThis is a critical issue plaguing public blockchain networks and programs with high volume transactions.

errorLess DataBlockchain loyalty programs allow only limited access to Personally Identifiable Information (PII) data due to limits on how much PII can be put on a shared network.

Learn how leading brands like Giordano, Peter England, Tunglok & REDTag are increasing sales and conversions with omnichannel loyalty programs.

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