5 Types of Loyalty Programs: Which is Right for Your Business?

However, choosing the right kind of plan from this plethora of loyalty programs can become a tedious task.

But no sweat as we have you covered right here in this blog to help you make the right decision for your business. In this blog we shall cover the basic understanding of each type of loyalty program followed by its benefits, industry and challenges that is supported with an example for your better understanding.

Now, before choosing the right type of loyalty program for your business, let’s first understand what a Loyalty program is.

A loyalty program is a strategy in marketing, fashioned to cultivate long-term relationships with the customer by offering discounts, rewards or other benefits. This helps garner a continued loyalty for the brand and forges a long-term relationship between the customer and the business.

In this compendious guide we’ll delve into some of the different types of loyalty programs to choose from, along with their benefits, challenges and how businesses can determine which among this best aligns with their objectives.

Types of Customer Loyalty Programs for different Businesses:

1. Point-Based Programs

Point based programs are among the most ubiquitous and straightforward of all the programs. For every purchase a customer earns points. The accumulation of these points in total leads to a reward or benefit which the customer can redeem in the form of a discount on future purchases or free service or VIP access to a product or service and many more.

Benefits:

• Simplicity – Its uncomplicated and direct to understand.
• Customer retention – The rewards will lead to repeat purchases.
• Reward structure – Businesses can design their reward structure based on the customer’s behavior.

Commonly Used in the following industries:

• Retail
• BFSI
• Travel
• Hospitality
• Restaurants
• Entertainment
• Lifestyle and wellness

Challenges:

• Lack of value – If these points take too long to accumulate and do not redeem meaningful rewards, the customer may lose interest in the program.
• Infrastructural Expense – The tech-loyalty platform and the architecture required to carry out a point-based program for your business can be cost-prohibitive internally.

Examples:

• For instance, BSES Rajdhani Private Limited offers its users a point-based program called ‘Electric Rewards’. Under this program, the customer earns 100 reward points for their E-bill subscription, another 100 reward points for making timely online payments within the 7 days of bill generation and 50 reward points for online payment made within 8-15 days (about 2 weeks) of bill generation.The accumulation of these points can be exchanged for a range of rewards like travel perks, sports, banking benefits, dining experiences, and more. For example, 3000 reward points can be redeemed for access to the airport lounge during travel.
• Marriott Bonvoy Benefits offers its customers redeemable points for free hotel check-ins, dining, car rentals, flights, free Wi-Fi and much more that can even be shared among near and dear ones of the customers. This has helped Marriott to better understand the need of the customer to create a better experience.

2. Tier/Milestone Loyalty Programs

This program introduces a different level of benefits or rewards to a customer based on their engagement, spending or loyalty to the brand. Depending on the customer engagement and milestone spends with the brand, they enter different tiers or levels of membership — unlocking advanced benefits and privileges with each upward level. In this hierarchical set up a customer progresses through every step of engagement level to accumulate points and redeem them based on their qualifying area.

Benefits:

• Stimulates more purchase and engagement- This leads to an increase in the purchase of a customer to unlock a higher tier or level in the program for customer to access more rewards and benefits from it.
• Exclusivity – It creates a sense of exclusivity for the customer based on more purchases as the customer enjoys the privileges and aspires to attain higher status, leading to better interaction with the brand.
• Data and Analytics – It helps provide valuable information into customer behavior and preferences and their pattern of spending, which can help businesses utilize marketing strategies. This also helps businesses to monitor areas of improvement for better results.

Commonly Used in the following Industries –

• Hospitality
• BFSI
• Retail
• Financial services
• Gaming & Entertainment
• Automotive
• Subscription Services and more

Challenges:

• Complexity – It can get complex based on multiple tiers and complex qualifying factors for each tier. This can confuse a customer, leading to failure in understanding advantage or how to proceed leading to frustration and losing interest in the brand.
• The higher level to enter the next tier may discourage the customer from participating in the program especially if they feel the rewards or benefits are not worth the effort.

Examples:

• Myntra insider is a very smartly designed loyalty program which offers its loyal customers a range of benefits based on each tier. Tier 1 is an entry level tier called the Insider Bronze for myntra customers who can avail benefits such as early access to sales, exclusive discounts and offers, Birthday surprises and special deals also they earn points at a standard range for every purchase.Tier 2 is called the ‘Insider Silver’ that can be achieved after making a certain number of purchases that is higher than that of tier 1 customers. Here there are increased points earning rate for each purchase, access to exclusive product launches, free shipping, priority customer services support.Lastly, Tier 3, known as Insider Gold, is offered to a premium range of customers who have reached a higher threshold of points or purchases. The premium benefits include VIP access to limited edition collections, Personalized style recommendations from fashion experts, Invitation to exclusive fashion events and workshops and Special anniversary/birthday rewards and milestone bonuses. This not only enhances the shopping experience for the customers but also makes them feel rewarded.
• Sephora’s loyalty program falls under a tier/milestone loyalty program that earns its customer points for every purchase they make at Sephora. The program is divided into Insider, VIB and Rouge.The benefit for Insider includes free joining, free shipping, beauty insider cash, 10% off, x points, discounts, free birthday gifts with 5 options, access to the reward bazaar, unlimited same day delivery and exclusive events.VIB membership is purchased for 350$ per year that provides its VIB customers with all Insider benefits plus 15% off, better points earning rates and exclusive gifts and birthday gifts with 6 options.Rouge can be availed with a spend of $1000 per year that offers all the benefits from VIB membership along with additional benefits such as rouge rewards, 20% off, rate of earning points higher and first access to all the products.

3. Paid Loyalty Programs

This is a subscription-based loyalty program that requires a certain frequency of payments made by the customers to avail themselves of the benefits and privileges offered.

Benefits:

• Improves Customer Loyalty – Members remain loyal and are likely to continue their subscription as they get tangible benefits. This increased loyalty can lead to higher customer retention.
• Competitive Advantage – it gives a differentiating factor for your brand and sets it apart with its competition. It also attracts high value customers who are willing to invest in the business.
• Increases customer engagement – It keeps the members engaged with the brand to increase the value of their membership by offering exclusive benefits and rewards.

Commonly Used in the following Industries

• Retail
• Hospitality
• Streaming Services
• Subscription Boxes
• Financial Services
• Gaming and Entertainment
• Lifestyle and Wellness

Challenges:

• Perceived value – One of the primary disadvantages of this program includes convincing customers of the benefits and advantages of subscription fees. If the customer is not convinced, then he/she will not enroll or renew their subscription.
• Retention – Retaining members can be tough in the long term especially if the competitor offers similar rewards or privileges.

Examples:

• Amazon Prime Membership – This provides members with benefits such as free 2-day delivery on selective items or same day delivery and exclusive discounts on movies and TV shows and more. To be eligible to avail these privileges customer must have a prime membership on Amazon.
• Zomato gold referral programs – Zomato, a very popular food delivery service provider, runs a Zomato gold referral program where the existing members of the program share the referral link with their friends and family. When the referral subscribes to this program, both earn rewards like a month’s free subscription.

4. Experiential Loyalty Program

Not all loyalty programs focus on discounts and freebies but some offer experiences as rewards. Emotional connection with the customer through personalized experiences, recognition and special treatment is the whole gist of this program. As Bernd H. Schmitt says, a professor at Columbia University, there is value in tangible rewards and the experience itself.

Benefits:

• Memorable Experience – Creates a lasting memory for customers instead of material possessions whether a concert, spa, vacation or more.
• Differentiation – These unique and personalized experiences give the brand a competitive advantage that cannot be replicated.
• Brand advocacy – This also creates brand loyalty and advocacy that customers share in their circle.

Commonly Used in the following Industries

• Travel and tourism
• Hospitality
• BFSI
• Healthcare
• Wellness

Challenges:

• Resource intensiveness – This requires significant investment in time, capital and manpower.
• Risk Management – This can be subject to unforeseen issues such as logistical damage or customer dissatisfaction

Examples:

• One of the best examples of this type of loyalty program is the ‘Infinia card’ offered by HDFC bank credit card to its eligible premium customers who can access the card only through an invitation and not on application.It grants several perks such as in travel, including airport lounge access, meet and greet services, airport transfers, and priority check-ins. For golf enthusiasts, they offer complimentary lessons in India, access to premium golf courses worldwide, as well as 24-hour Golf Concierge Assistance service.
• Another example of an experiential loyalty program is that of HSBC where they have curated what is called HSBC’s Golf league the privileges of which are availed by HSBC’s premium as well as global customers.These privileges range from getting access to golf tournaments that includes, instant bookings, exclusive guest access to customer’s friends and family, cart services, driving range, complimentary game lessons, special discounts, and more.The very experience and the leisure of golfing in this range of features offered to the golf lovers by HSBC unlike transactional awards enhances customer experience forging an emotional connect and fostering loyalty to the brand.

5. Coalition Programs

In this type of program different businesses come together and offer rewards to mutual customers. When these businesses pool their resources, better and more enticing rewards are offered to the customers.

Benefits:

• Better Reach – This allows businesses to increase their customer base and broaden their market, which leads to a better reach.
• Cost Sharing – Cost can be shared among the businesses partnering in the venture and better distribution of resources and cost saving.
• Happy Customer – Customer enjoys the privileges of redeeming rewards from multiple businesses that enhances customer experience and induces better engagement.

Commonly Used in following Industries:

• Retail
• Grocery stores
• Travel and tourism
• Hospitality
• Financial Services
• Healthcare
• Wellness
• Restaurants
• Ecommerce

Challenges:

• Conflict of interest – Business must have similar or aligned objectives. Hence different priorities can make it difficult for businesses to run such loyalty programs.
• Data Privacy – Businesses may raise concern regarding the privacy of their data. Hence, they need to prepare proper guidelines to protect data sharing and other privacy concerns.

Examples:

• One world Alliance is a perfect example of coalition loyalty program where various airlines such as American airlines, British airways, Cathay Pacific, Qantas, and Alaskan Airlines unitedly offer its respective clients rewards that can be either shared or redeemed or transferred to any of the partner airlines.
• Future pay is one such example where customers earn future pay points that can be redeemed at future group retail outlets such as Big Bazaar, FBB, Central etc. They partner with many other brands and merchants to offer exclusive discounts and deals for the customers.

Conclusion:

Customer loyalty provides an edge to a business by setting your business apart in this competitive market. And now that we understand how to choose the right type of loyalty that coincides with the goals of your business, it will also help you make better decisions as well as bring success to your organization while driving in more customers.

“Repeat business or behavior can be bribed. Loyalty has to be earned.”
— Janet Robinson, American executive, former President and CEO of The New York Times