User retention and customer loyalty are vital for businesses who want to drive ROI, increase customer lifetime value, and achieve continuous growth. Without a dedicated consumer base, brands often end up wasting valuable time and resources on customers who have no interest in engaging with them beyond their initial purchase. However, it can be hard for companies to retain consumers - over 30% of them would seriously consider switching to a brand’s competitor after just one bad experience.

Today’s customers expect more out of the businesses they buy from, including personalization, targeted messaging, and rewards. Loyalty programs are one of the best ways to give consumers everything they’re looking for. They also help brands gain valuable data to guide their business decisions and refine their marketing strategies. What is a loyalty program, and how do they work?

What is a loyalty program?

Loyalty programs are a long-term, full-scale marketing tactic where businesses give consumers an incentive to continuously engage with their brand. They consist of three components: objectives, actions, and rewards. The main objective of a loyalty program is to drive sales and retention, as well as increase engagement and improve credibility. Brands may also use them to attract new customers and gain user insights. Actions refers to consumer behaviors that brands want to reinforce, such as making purchases, sharing content, and leaving reviews. Lastly, rewards are the driving force that push consumers to complete desired actions so that brands can achieve their business objectives, which includes free products, brand merchandise, discounts and special offers, and so on.

Types of loyalty programs

Points-based loyalty program

In a points-based loyalty program, members make purchases and complete actions to earn points, which they redeem for rewards. For example, purchasing a specific product may be worth 50 points, while watching a specific video may be worth 30 points. Then, consumers might redeem 200 points for a $5 digital coupon or 500 points for a tote bag. Points-based loyalty programs are the most common type, as they’re low-risk and offer low barriers to entry. However, brands need to be careful about striking the right balance when determining how much their points are worth.

One example of a points-based loyalty program is Vachon Market Consumer Rewards, where consumers purchase qualifying Vachon products to earn points, referred to as JoyBucks. Members can also earn points by subscribing to Vachon’s email newsletter, inviting others to join the program, and participating in spin-and-win games, quizzes, and surveys. They can then redeem their points for brand merchandise like t-shirts, water bottles, and hats.

Tiered loyalty program

In a tiered loyalty program, members are separated into tiers based on their purchases and/or engagement levels, which gives them access to exclusive content and rewards. Both points-based and tiered loyalty programs rely on gamification tactics to drive user engagement. Tiered loyalty programs help brands attract and engage higher-value consumers, meaning they also have higher barriers to entry compared to a points-based system.

In Universal Pictures’s All-Access Rewards loyalty program, members are segmented into four tiers based on the number of physical or digital movie purchases: Extras, Screenwriters, Directors, and Movie Stars. Some rewards, such as signed movie scripts, are exclusive to members of higher tiers, incentivizing users to make additional purchases.

Spend-based loyalty program

In a spend-based loyalty program, members spend a specified amount to receive a specified amount in return. For example, they might earn $1 for every $5 spent. Spend-based loyalty programs are relatively inexpensive and easy to implement, and helps brands increase their order value and reduce their churn rate. However, some customers may not find money to be a strong enough incentive, leading brands to include other rewards as well.

Pizza Hut’s Hut Rewards is a combination of the spend-based and points-based models, allowing consumers to earn 2 points for every $1 spent, which go towards free pizza and sides like breadsticks and chicken wings. Program members also receive extra benefits like exclusive offers, faster checkout speeds, and birthday gifts. Another example of a spend-based loyalty program is TENA’s Consumer Rewards program, where members earn 100 points for every $1 spent; their points can be redeemed for digital Visa prepaid cards.

Value-based loyalty program

In a value-based loyalty program, members make purchases and complete actions, then earn rewards in the form of donations to charitable organizations. Brands often incorporate a points system to determine the donation amount; for example, program members might redeem 500 points to make a $10 donation. Value-based loyalty programs help companies nurture closer connections with customers who share the same beliefs and advocate for causes they support, such as environmental sustainability and animal welfare.

TOMS is an American shoe company best known for their original one-for-one model, in which they donate one pair of shoes for every pair sold. Their current business model donates one-third of their profits to organizations that work with underserved communities. Members of their TOMS Rewards loyalty program make online purchases to earn points, which are either redeemed for brand merchandise or donations towards TOMS’s grassroot partners like the Los Angeles LGBT Center, GirlForward, and Cities United.

Coalition loyalty program

In a coalition or shared loyalty program, multiple unrelated brands work together to create a single loyalty program to attract a broader range of consumers. Coalition loyalty programs are not the same as multi-brand loyalty programs like Toro’s The One Landscape Contractor Rewards Program, which feature multiple brands owned by the same company. One major disadvantage of coalition loyalty programs are their low levels of brand loyalty, as program members are typically loyal to the program itself, not to the participating brands.

Plenti, which ran from 2015 to 2018, is one of the best examples of a coalition loyalty program. Members could make purchases from retailers like Walmart, Sam’s Club, and Target to earn Plenti points. They could then redeem their points to earn savings for program partners like Macy’s, Rite Aid, and Hulu.

Premium loyalty program

In a premium or fee-based loyalty program, members pay upfront to receive exclusive benefits. Unlike other loyalty programs, which ask consumers to spend a certain amount or complete certain actions first, premium loyalty programs give them immediate access to perks like free shipping, special offers, and so on. This fulfills their need for instant gratification and creates a sense of exclusivity. The main disadvantage of a premium loyalty programs is their high barriers to entry, as not everyone is willing to pay membership fees.

One of the best-known premium loyalty programs is Amazon Prime. Members pay either $15/month or $139/year to receive faster delivery and shipping options, as well as deals and discounts. They also gain exclusive access to entertainment services like Prime Video, Amazon Music, and Audible Premium Plus.

Hybrid loyalty program

In a hybrid loyalty program, brands use a combination of different loyalty program models to provide consumers with more incentives and opportunities for engagement. For example, the spend-based Hut Rewards and value-based TOMS Rewards programs also use points systems to drive user motivation and purchases. This also allows companies to diversify their strategies, such as using a spend-based model to target budget-conscious consumers while incorporating a tier system to attract higher-value shoppers.

Benefits and challenges of loyalty programs

Benefits of loyalty programs

The main advantage of loyalty programs are their ability to establish trust and connections, as well as build strong relationships and communities. Short-term marketing promotions like sweepstakes and giveaways are effective for driving sales and engagement, but may not necessarily result in retention or loyalty. With loyalty programs, brands can deepen company-consumer relationships over longer periods of time, nuturing trust through engaging actions and meaningful rewards.

Loyalty programs also drive increases in ROI and customer lifetime value. Constantly acquiring new customers can be expensive, especially when they aren’t given incentives to return. Through loyalty programs, brands can motivate consumers to make additional purchases and engage with their content and services, then reward them for desired behaviors. This increases the monetary value they bring to the business, resulting in higher ROI and bigger profit margins over time.

Lastly, loyalty programs give brands more opportunities to capture valuable user first-party data and insights. With short-term promotional efforts, businesses typically only collect consumer information through initial form submissions. Loyalty programs provide an endless number of potential consumer touchpoints, such as quizzes, surveys, polls, game mechanics, and so on. Marketers can then use these insights to offer personalized experiences, such as product recommendations and special offers. Data helps brands find the best strategies and content for engaging with their loyalty program members.

Challenges of loyalty programs

The main disadvantage of loyalty programs is the amount of time and resources required to develop, implement, and maintain them. Short-term promotions typically consist of a small number of variables, where consumers complete a single action, such as making a qualifying purchase, to earn a single reward, such as a physical coupon. On the other hand, loyalty programs may offer dozens of actions and rewards, ranging from surveys and spin-and-win games to gift cards and free products. Brands need to account for the marketing and logistics costs required to support users, provide rewards, and manage program data.

The other disadvantage of loyalty programs is the constant shift of consumers’ needs, motivations, and interests. Marketers should continuously evaluate their program’s performance and adjust their strategies, from the types of actions they require to the kinds of rewards they offer. For example, if members are no longer watching videos to earn points or aren’t interested in redeeming points for merchandise, brands need to look at their data to understand what shoppers want before they risk losing valuable customers and revenue.

Best practices for loyalty programs

Prioritize simplicity and accessibility

Brands can easily overwhelm their users by overcomplicating their loyalty program’s flow, from creating accounts to earning points to redeeming rewards. While they may want to create exclusivity through tier-based and premium-based models, consumers should still be able to easily understand how to join and participate in the program. Loyalty programs should also be aligned with people’s existing shopping behaviors to create the ideal omnichannel experience. Brands need to make it easy for customers to find more information through their current marketing channels, such as their email campaigns, social accounts, and in-store displays.

Create value beyond products and services

Loyalty program members are already committed to a brand and its products and services to a certain extent, and want to be rewarded for their commitment. Companies need to continuously create offerings outside of their existing operations to keep them engaged. For example, they can use gamification tactics to give away free merchandise and discount codes, or run contests and sweepstakes where members can win exclusive products. Brands who oversimplify their loyalty programs by only offering what they already have are less likely to get the returns and results they’re looking for.

Build meaningful connections and brand communities

As mentioned previously, loyalty programs help brands increase consumer trust through meaningful objectives and rewards. They should also use loyalty programs to build brand communities, where members can connect with each other over shared interests and experiences. For example, they can include a social sharing aspect to drive conversations about their brand and loyalty program on Facebook, Twitter, Instagram, and so on. Marketers can encourage members to share their own content with others, such as photos, videos, and reviews. This creates a sense of authenticity and belonging, further strengthening consumers’ connections with their favorite brands.

Capture and leverage user first-party data

Data is crucial to developing and executing effective marketing strategies, as it helps brands make accurate decisions, reduce risks, and drive personalization efforts. Marketers should take advantage of the potentially endless number of consumer touchpoints within a loyalty program to capture as much zero-party and first-party data as possible, ranging from basic contact details to consumer preferences and shopper behavior. For example, companies can include preference centers to ask program members what types of products they like or what kinds of content they want to see. They can use surveys, quizzes, and polls to reward customers for completing them and collect user insights at the same time. Lastly, they can look at their most popular actions and rewards to get a better understanding of user motivations.

From there, brands can use their consumer data to continuously improve their loyalty program, as well as guide their other business and marketing efforts. If members aren’t redeeming their points for a specific reward, marketers should consider replacing it with something more valuable. If users enjoy participating in spin-and-win games, they could incorporate it into their next gift with purchase promotion. Lastly, they can segment customers by product interests to send them personalized recommendations and targeted messages, driving additional purchases and ongoing engagement.

Create effective loyalty programs for building your data collection and brand community

Loyalty programs are beneficial in several ways, as they allow brands to build stronger relationships and dedicated communities, nurture sales and user retention, and capture valuable user insights to continuously improve their marketing efforts. If companies want to foster customer loyalty and differentiate themselves from their competitors, they need to create an effective loyalty program.

With 3 tier logic’s PLATFORM³, brands can execute loyalty programs for user retention, consumer engagement, and first-party data collection. Modules like Contests and Promotions, Points and Gamification, Social Content Sharing, and Data Capture & Analytics provide marketers with the tools they need to inform their decisions and successfully grow their business. To learn more, book a demo with our team today.

Complete Guide to Data-Driven Loyalty Programs (Examples Included)