7 Loyalty Program Types: Which One Is Right for You?

Vinod Janapala
Vinod Janapala  |  September 6, 2019

Entrepreneurs and business management experts have often reiterated that getting your first customer is not the real challenge in business. 

The true test remains in encouraging a customer towards repeat transactions while establishing a core customer base. An interesting way to establish a core customer base is adopting a genuine customer loyalty program

Customer loyalty programs explained

Customer loyalty programs are not just a great way to establish the customer base, these can create a common platform for meaningful customer engagement. Companies have been launching customized loyalty programs through online channels or customer feedback apps.

These systems provide value addition to your customers while developing a personal one-on-one connection. However, the concept of loyalty programs can be convoluting for organizations as every program type is not always suitable for every business.

customer loyalty

Image courtesy of Business Essentials 

So, how can you decide which loyalty program is right for your business? We'll discuss the seven major types of loyalty programs to help you understand their suitability for your requirements. 

1. Points-based programs

Points-based programs are one of the most common customer engagement and loyalty programs across the world. The primary reason for its huge popularity is the simplistic approach, low operational cost, and quantifiable enhancement in customer experience, for all customers and their expectations.

Give redeemable points to each customer on every transaction and substantially increase the possibility of a repeat transaction from the customer. There are multiple ways of managing the points, which can be translated into different types of coupons or cash points ensuring a simple future purchase.

Customers can easily accumulate the total number of points to reach a substantial amount for the next purchase. It is efficient and easy to maintain the process, appropriate for retail stores, service industries, and online marketplaces.

Pros:

  • Free membership facilitates many customers participating
  • Exponentially more sign-ups than fee-based loyalty programs
  • Offers much lower risk than other loyalty programs
  • Automation helps businesses in avoiding direct interaction with customers to sell them on this program

Cons:

  • The program doesn’t offer instant gratification to its customers
  • It is a very common program, making the “special” factor disappear from your business
  • Only transactional benefits will help retain the customers, but not as much in building loyalty

2. Association-based rewards programs

The concept of forming alliances and providing associated benefits to the customer is gaining momentum in almost every sector, be it retail or services. Giving discounts and rewards redeemable across all associated brands is a more fine-tuned method of extending loyalty benefits to customers.

You can establish partnerships and alliances with associated brands to draw an encouraging customer benefits program. There is no clear definition outlined for the types of associations as companies can mutually decide on different workflows. Again, customer experience apps or even their online account can be utilized as the primary medium of offering offers or rewards for associated brands.

The term coalition loyalty program is also used for a similar approach, though it is more suitable when you are operating multiple businesses. You can coordinate between all your business and offer rewarding benefits to the customers under one head.

Pros:

  • Brands and businesses get access to a broader customer base
  • Rewards earned by the customers can be used at multiple locations
  • Marketing and rewards funding is shared with the partners, reducing operational costs

Cons:

  • Data collected from this program is owned by the coalition
  • Individual retailers can’t differentiate their loyalty program
  • Your business might run at the risk of customers redeeming their rewards with a competitor 
member rewards card

Image courtesy of Business Woman Media 

3. Tiered loyalty membership systems

A tiered loyalty membership system classifies customers based on their behavior, purchase history, shopping patterns, and more. Based on these parameters, every customer is placed on a rank or level, which ultimately decides the measure of the benefits each customer is entitled to. Can be easily managed by customer experience integrations or applications, these are perfect to encourage more targeted purchase from the customers.

To increase rankings and elevate from their current level, customers often feel motivated towards fresh transactions. Reaching certain levels and achieving ranks can be rewarded with gifts, coupons, or hefty discounts for future transactions.

Moreover, tiered loyalty membership systems are also an efficient way of creating significant customer segments and offer specific schemes to each segment. It ensures your engagement and loyalty program is relevant to each customer.

Pros:

  • Higher value customers are focused upon, which helps in increasing revenue
  • Tiers help in catering to the customers’ needs, helping in improving their experience
  • Encourages customers to engage more to elevate their status
  • Memberships taken are very less likely to be canceled compared to other loyalty programs
  • Highly customizable

Cons:

  • Lower tier customers don’t usually engage much
  • Relationships with customers can be damaged if their memberships are downgraded for any reason
  • Lower tier members don’t develop enough enthusiasm due to the daunting task of getting upgraded, and hence, prefer free point-based program

4. Simple fee-based programs

This is one of the most straightforward methods of engaging with the customers and leveraging on the instant gratification. In a fee-based program, customer needs to pay a certain basic amount to get entitled to exclusive discounts, products, sales or services. These are also known as VIP or Premium membership benefits, primarily made popular by the credit card distribution companies.

However, convincing customers to pay an upfront membership fee could be a challenge in the beginning. Therefore, it is usually preferred by businesses targeting elite customers who are looking for a premium membership.

Pros:

  • An engaged customer base sees the value of engaging and encourage other customers to do so too
  • One of the easiest loyalty programs to understand for the customers
  • Funds generated from onboarding members can be used as an auxiliary revenue or to even cover up the costs of the program

Cons:

  • Lower tier customers have a high barrier for entry, which can drive them away
  • Managing this program effectively is a very tough task
  • Customer queries for this program are relatively higher compared to other programs

5. Value-based programs

The core value of running a business is connecting to the customers on a deeper level to retain them. Value-based programs are not only respected for their broad approach to reward loyal customers, but also because they help build long-lasting and stern relationships with customers, increasing their loyalty index.

With this program, you can reward your customers by not rewarding them.

Customers’ purchases can be translated into currency, just like points programs, and then your enterprise can donate a certain percentage of the purchase amount to charity or welfare programs. This can also be taken further by having multiple options for charities or welfare programs to choose from on your customer experience app.

This program holds a special value for both the customers and the enterprise as the rewards offered for customer loyalty and retention benefit the world and on an ethical level, this program turns out to be one of the best programs for businesses.

Pros:

  • Gives back to the society
  • Helps in establishing a moral and ethical trust between the business and the customer
  • Easier to execute than other programs

Cons:

  • Customers don’t get actual rewards, which can drive some of them away
  • Extensive background research required about the charities or welfare programs you wish to donate to

6. Gamification programs

Through a customer feedback app, your business can engage the customers in a plethora of ways to increase their loyalty, one of which is gamification. The easiest way to do it is by incorporating a gaming loyalty program into your customer experience software.

Offering inventive and engaging games on your customer feedback app like spin the wheel for rewards, your business can increase customer retention and ultimately customer loyalty. This program can be targeted toward first-time customers to give them the incentive to be a repeat customer to your business.

Pros:

  • A vibrant and engaging program
  • Easily executable
  • New customers can get incentives to engage with your venture again if they didn’t already

Cons:

  • Unpredictable as to how many customers are willing to engage in it
  • Not getting rewards might make customers feel defeated and not willing to engage with your venture again 

TIP: Need some inspiration on how to get started with gamification? Check out these seven incredible examples to get you motivated! 

Related content: 7 Examples of Gamification →

7. Hybrid programs

Combining two or more types of loyalty programs for the benefit of your customers makes a hybrid loyalty program. Picking out the best loyalty strategies suited for your business from various loyalty programs provides your business with an increased loyalty index from customers by benefiting the customers through various rewards they can claim.

For instance, fee-based programs can be merged with game programs to split the benefits customers receive into different tiers. VIP membership can be split into Club, Gold, and Elite tiers, and be gamified to encourage customers to spend more to move to a higher tier and ultimately, get better rewards.

Hybrid loyalty programs can be used by businesses who have assessed their strong and weak suites, and want to enhance their strong suites to attract a mass of loyal customers. Building up and combining the best loyalty strategies works great for a short period of time like three months, but the best part about this program is that it’s effective and can be reused by businesses whenever they want.

Pros:

  • Has a much more chance of bettering customer experience than other programs
  • Combining the best strategies in different verticals can make for a wholesome experience for the customers, which encourages them to trust your business more
  • Customization your venture has the ability to do with this program is much better than other programs, providing you with the flexibility to keep changing the plans according to your interest.

Cons:

  • Requires high expertise and continuous assessment to execute properly
  • Impact of this program changes with every customization your venture makes 

Image courtesy of piHappiness

Conclusion

A good loyalty program should be engaging, modernized, and rewarding. The growing use of customer feedback software in this regard is noteworthy as it provides a direct and personalized link with the customers which offers and helps your venture in implementing all sorts of loyalty programs seamlessly. 

Looking for customer feedback management software? Discover the best choices for enterprise companies and small businesses alike on G2 today. 

See the Highest-Rated Enterprise Feedback Management Software, Free →

Vinod Janapala
Author

Vinod Janapala

Vinod is Senior Digital Marketing Manager at piHappiness. piHappiness is a top customer feedback software designed to collect customer feedback on Web, iPad and Android tablets. Vinod is keen on such topics as Marketing, Customer Experience, SaaS Challenges, and Personal Growth.