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The 4 Main Types Of Loyalty Program — And How To Choose The Right One For You

the-4-main-types-of-loyalty-program-—-and-how-to-choose-the-right-one-for-you
The 4 Main Types Of Loyalty Program — And How To Choose The Right One For You

Is customer churn giving you a headache? In today’s ecommerce landscape, loyalty programs are no longer a luxury – they’re a necessity. But with a sea of options available, choosing the right option for your brand can feel like navigating a loyalty program labyrinth. 

Fear not, we’re here to clear things up! In this guide, we’ll break down different types of loyalty programs, exploring their strengths, weaknesses, and whether they’re a good fit for your brand. The four main types of loyalty programs are: 

  • Points-based
  • Value-based
  • Tiered
  • Subscription

We’ll also cover lesser-known options, such as: 

  • Hybrid
  • Coalition 
  • Paid

So if you’re ready, let’s dive straight in.

Points-based loyalty programs

What it is

Points-based loyalty programs are a classic strategy for driving customer retention. They work by rewarding customers with points for every purchase, or positive interaction they make. These points can then be accumulated and redeemed for rewards, like free products, free shipping or exclusive experiences.

Benefits of points-based loyalty programs

There are several reasons why points-based programs remain so popular, including:

  • Flexibility for customers. Customers are in the driver’s seat with points-based loyalty programs. They can save up for that dream reward or indulge in smaller perks more often. It’s all about making loyalty rewarding, on their terms.
  • Regular engagement. The constant accumulation of points keeps members regularly engaged with your loyalty program. Every new purchase brings them closer to a desired reward, meaning more repeat customers for your brand.
  • Scalability. The simplicity of points-based programs means they’re easy to implement and expand upon as your brand grows.

Drawbacks of points-based loyalty programs

On the other side of the coin, here are some challenges that you might want to consider:

  • Delayed gratification. Members might need to make several purchases before redeeming rewards, which could be discouraging and result in a loss of interest. A great way to counteract this is to immediately credit their account with loyalty points as a thank you for signing up to your program. 
  • Cost considerations. Maintaining a points-based program requires offering attractive rewards, which can add up financially. It’s important to include the cost of your rewards into your calculations. 
  • Complexity can creep in. Managing point accrual, redemption options, and program rules can become complicated if you don’t have the right support in place. Luckily, with LoyaltyLion’s platform, that’s not something you have to worry about! 

When is a points-based loyalty program right for you?

Points-based loyalty programs are ideal for brands with frequent, smaller transactions, for example, fashion brands. They’re also suited to brands who are struggling with low order values. The bigger the purchase, the more points a member earns, so customers are always encouraged to spend a little more per order. This drives up the average order value.

How to design a great points-based loyalty program

To set your points-based loyalty program up for success, it’s important to: 

  • Define clear rules. Make sure your customers understand how to earn and redeem points. Clear communication is essential.
  • Offer rewards worth reaching for. Include a variety of attractive rewards that motivate your customers to participate. Make sure you tailor your rewards to your customers.
  • Monitor and adjust. Regularly review the program’s effectiveness and make changes if you don’t see the results you hoped for.

Examples and case studies

H&M Member

H&M’s loyalty program keeps things simple! Members earn points with every purchase, and every 200 points scores them a $5 reward. Their website clearly explains how to earn points and redeem rewards, making it easy for customers to engage with. 

H&M member

Starbucks Rewards

The Starbucks Rewards program is a shining example of a user-friendly points-based system. This loyalty program allows members to earn ‘stars’ for every purchase, which can be redeemed for free drinks, food, and other items. The program seamlessly integrates with the Starbucks app, making the experience convenient and rewarding.

Starbucks rewards

The Body Shop: Love Your Body™ Club

The Body Shop’s loyalty program, ‘Love Your Body™ Club’, rewards customers for purchasing their favorite skincare products. Members earn 10 points for every $1 spent, and once they hit 500 points, they automatically receive a $5 voucher.

This straightforward points-based system makes it easy for customers to track their rewards and enjoy the benefits.

The Body Shop Love Your Body club

Value-based loyalty programs

What it is 

Value-based loyalty programs are all about forging deeper connections with your customers. This type of loyalty program rewards members for actions that align with the brand’s values, such as social responsibility, sustainability, or community involvement

Benefits of value-based loyalty programs

Here’s where value-based programs shine:

  • Genuine brand loyalty. Customers feel a deeper emotional connection to brands that champion causes they care about. This translates into stronger loyalty and repeat business.
  • Differentiation. In a crowded marketplace, highlighting your values sets you apart. It attracts like-minded customers who resonate with your mission.
  • Converting customers into advocates. When customers feel invested in your cause, they become vocal brand ambassadors.

Drawbacks of value-based loyalty programs

While value-based programs offer tremendous benefits, there are some potential obstacles to keep in mind:

  • Niche appeal. These loyalty programs excel at attracting customers who already hold your brand’s values close to heart. On the flip side, your messaging may not resonate with customers outside of this value base.
  • Operational complexity. Integrating certain value-based actions (like product recycling) with rewards can add a layer of complexity to your operations. Your loyalty program might require more behind-the-scenes work than simpler points-based systems.
  • The cost factor. Supporting charitable causes or sustainability initiatives requires investment. Like all loyalty programs, it’s important to weigh the cost against the potential long-term benefits.

When is a value-based loyalty program right for you?

Struggling with high customer acquisition costs? Highlighting your sustainability efforts through a value-based loyalty program might be the solution you need. These programs build loyalty by aligning with customer values, transforming members into passionate brand advocates who naturally attract new customers. This emotional connection reduces churn and diminishes the need for costly acquisition campaigns.

How to design a great value-based loyalty program

Here are some key ingredients for a successful value-based loyalty program! 

  • Authenticity is key. Ensure your program truly reflects your core values and mission. Customers can spot inauthenticity a mile away.
  • Be transparent. Clearly communicate how your customers’ actions contribute to the cause. Showcase the impact their participation makes.
  • Engagement is everything. Offer lots of different ways for your customers to get involved. 

Examples and case studies

Ethique Rewards

Ethique Rewards stands out as a stellar value-based loyalty program. They box up all their products in plastic-free, home-compostable, recyclable packaging, in a bid to encourage their customers to #GiveUpTheBottle.

By rewarding their customers for eco-friendly actions and purchases, Ethique encourages ethical consumerism and fosters an active community that shares the brand’s values. 

Ethique rewards

REN Clean Skincare 

REN’s loyalty program, “Clean Rewards“, goes beyond traditional points-for-products. It empowers customers to make a real difference by redeeming rewards for initiatives like recovering ocean plastic and planting trees. This unique approach resonates with environmentally conscious consumers, fostering a deeper sense of engagement and loyalty. 

REN Clean rewards

Edgard & Cooper: case study 

Edgard & Cooper started with a simple dream: delicious, healthy pet food that’s kind to the planet. Their eco-friendly mission resonated with pet owners, and soon their business boomed. But they wanted more than just sales, they wanted a loyal community. So they launched a loyalty program with LoyaltyLion. 

With some customized development, they created a four-tier program to reward their customers (and their furry companions) with points known as “belly rubs”. Members have to complete certain challenges to earn belly rubs (adding an exciting layer of gamification) and can spend their points on feeding rescue dogs, planting trees, or earning a discount on their next order.

By aligning their rewards with ethical consumerism, Edgard & Cooper’s loyalty program empowers pet parents to make a real difference with every purchase. And the results speak for themselves. The folks at Edgard & Cooper smashed their goals by achieving a 22% AOV uplift, a 35% increase in active customers, and a 38% increase in their retention rate.

Edgard & Cooper loyalty program
Edgard & Cooper New Pal

Tiered loyalty programs

What it is

Imagine a loyalty ladder. The higher you climb, the sweeter the rewards. Tiered loyalty programs categorize customers based on their spending habits or engagement, offering increasingly valuable rewards based on their tier. Think of it as a VIP section for your most loyal customers.

Benefits of tiered loyalty programs

Tiered loyalty programs bring a lot to the loyalty table, including:

  • Better engagement. The tiered system creates a natural “gamification” effect, motivating customers to climb the ladder through increased spending or activity, boosting overall engagement.
  • A VIP customer base. Exclusive rewards cultivate a sense of exclusivity for high-tier members, fostering a loyal VIP base for your brand.
  • Customer segmentation. Tiering allows you to segment your customers, meaning you can tailor your marketing campaigns and personalized rewards based on their tier status and spending habits. 

Drawbacks of tiered loyalty programs

No system is perfect. Here are some things you need to watch out for with tiered loyalty programs. 

  • Complexity. With multiple levels and varying benefits, tiered loyalty programs may confuse customers if not clearly explained.
  • Barriers to entry. The perception that valuable rewards are out of reach could be demotivating to some customers. It’s important to include attractive benefits in every tier.
  • Engagement erosion. If the program relies solely on spending to climb tiers, it might neglect customer engagement beyond transactions. Consider incorporating non-monetary ways to earn rewards and foster a sense of community.

When is a tiered loyalty program right for you?

Tiered loyalty programs are brilliant for brands struggling with low purchasing frequency. Members are consistently motivated to make their next purchase faster in order to reach higher tiers and unlock better rewards. 

How to design a great tiered loyalty program

Here’s how to create a tiered program that keeps customers climbing the ladder of engagement.

  • Define clear tiers

Define easily understandable tiers with distinct names (e.g. Bronze, Silver, Gold) that reflect increasing value. Clearly explain what customers need to do to reach each tier (e.g. spending amount, number of purchases, engagement actions) and make sure this information is easy to find. Make joining the program simple and accessible, with clear instructions on how to participate.

  • Balance your rewards 

Your rewards need to be appealing across all tiers of the loyalty program. While higher tiers may offer more significant perks, lower tiers should still provide valuable rewards to incentivize participation and encourage customers to progress. Strike a balance between attainable rewards for entry-level tiers and aspirational rewards for higher tiers.

  • Keep customers in the loop

Regularly updating members on their status and benefits is crucial for maintaining engagement! Send personalized SMS and emails to congratulate customers when they reach a new tier or unlock a reward. 

Examples and case studies

Never Fully Dressed – case study 

Never Fully Dressed (NFD), a rapidly growing fashion brand, wanted a way to enhance their brand identity while simultaneously incentivizing repeat purchases. 

Enter LoyaltyLion! 

With LoyaltyLion’s platform, NFD implemented an on-brand tiered loyalty program titled “Loyalty Love Rewards.” 

The program features three distinct tiers: Pink, Gold and Black, and customers seamlessly progress through these tiers based on their purchase history and engagement levels.

Recognizing the importance of clear communication, NFD developed a dedicated loyalty page on their website. This page serves as a central hub where members can readily access critical information such as their current point balance, available rewards, tier status, and program details. 

Thanks to a strategic blend of financial and experiential rewards, NFD now generates a significant portion of its revenue (32%) from loyal customers. Most notably, the program has spurred a 59% increase in member spend compared to non-redeeming members.

Never Fully Dressed tier benefits

Sephora’s Beauty Insider

Sephora’s loyalty program offers three tiers (Insider, VIB, Rouge) based on spending. Members earn points for purchases and receive benefits like free birthday gifts, free shipping offers, and exclusive access to beauty events at higher tiers. This tiered loyalty program works so well because the incremental benefits are so clear. 

Sephora Beauty Insider benefits

Nordstrom’s Nordy Club

Nordstrom’s loyalty program is made up of three tiers (Member, Influencer, Ambassador). Members receive benefits that are highly tailored to the brand, like personalized styling services, free alterations and priority access to style events. By keeping the perks closely aligned with their customer’s interests, Nordstrom ensures that the rewards are both valuable and relevant, meaning members will be motivated to move up the tiers.

Nordstrom Nordy Club

Subscription loyalty programs

What it is 

Subscription loyalty programs are increasingly important as subscription services continue to be a growing trend in the ecommerce space. A subscription loyalty program offers premium rewards to customers who subscribe to regular product deliveries, for example, a monthly coffee subscription. 

Benefits of subscription loyalty programs

Here’s why we love subscription loyalty programs: 

  • Recurring revenue. Securing your customers as subscribers is a reliable source of income that generates long-term profits.
  • Reduced churn. Subscribers are more likely to remain loyal due to the valuable perks they receive.
  • Customer advocacy. Subscriber perks like free shipping or access to exclusive products improve the shopping experience and increase the likelihood of your customers referring their friends and family. 

Drawbacks of subscription loyalty programs

If you’re thinking of implementing a subscription loyalty program, challenges to consider include: 

  • Commitment barrier. Customers might be hesitant to commit to a recurring fee.
  • Churn risk. Reduced customer churn is a major perk of subscription programs. However, this benefit can quickly evaporate if the perceived value of subscriber perks declines. Members need to consistently feel like they’re getting a good deal.
  • Cost management. Maintaining ongoing value for your subscribers can be costly if you’re offering benefits such as free shipping. 

When is a subscription loyalty program right for you?

Subscription loyalty programs are well-suited for brands with a high purchase frequency. Think about the products you know you’ll buy again every time you run out; pet food, deodorant, coffee, protein powder. The list goes on! 

How to design a great subscription loyalty program

For full instructions on designing a subscription loyalty program, we recommend reading our dedicated blog post. At a glance, the most important things to keep in mind are: 

  • Offer unique value. Provide benefits that are exclusive and valuable to your subscribers. Make sure they feel like VIPs.
  • Simplify sign-up. Make the subscription process easy and appealing.
  • Maintain engagement. Send regular personalized communications to keep subscribers engaged and reduce churn.

Examples and case studies

Waterdrop – case study

Waterdrop‘s mission is simple: help people stay hydrated with delicious, healthy alternatives to plain water. Their flavored hydration cubes are a refreshing hit, but the Waterdrop team craved a solution to keep customers subscribed and fuel even faster business growth.

To achieve this, Waterdrop utilized LoyaltyLion’s integration with ReCharge to create an on-brand loyalty program that includes a subscriber tier. This tier offers exclusive benefits, like early access to new flavors and community giveaways, demonstrating the value of ongoing subscriptions.

To spread the word, Waterdrop built a dedicated loyalty program page, clearly outlining the benefits of membership. Furthermore, they leveraged LoyaltyLion’s integration with Klaviyo to seamlessly connect their email marketing efforts with their loyalty strategy. 

By placing loyalty at the core of their marketing strategy, Waterdrop achieved impressive results. Customer spending soared by 90%, and the repeat purchase rate jumped by a remarkable 70%.

Waterdrop Club perks

One Good Thing 

One Good Thing customers can earn loyalty points through a variety of actions, such as following the brand on Instagram, referring friends, or signing up for the mailing list. Subscribed members earn five points for every £1 spent, whereas regular customers earn only two. This means their subscribed customers are consistently rewarded more for their loyalty. 

One Good Thing tiers

Clevr Blends

Clevr Blends is a women-led wellness brand selling mood-lifting lattes and beverage ingredients. They encourage customers to subscribe to auto-ship with the promise of monthly loyalty points, early access to new products and special discounts. Subscribers also save 15% off their products, making it a very compelling option. 

Clevr Blends subscription program

Less common loyalty program types

While points-based and tiered programs might dominate the loyalty landscape, there are innovative alternatives for brands seeking to differentiate themselves. Let’s look at some lesser-known options.

Hybrid loyalty programs

Think of a hybrid program as a loyalty program remix. Instead of sticking to a single format, these programs combine elements from different types to create a more personalized experience. 

Hybrid loyalty programs are great for flexibility; you can offer points for purchases alongside a tiered system with exclusive benefits for high-spenders. But as you might imagine, managing and communicating a hybrid program requires careful planning. It’s so important to clarify how the different elements work together to contribute to earning rewards.

Coalition loyalty programs

Coalition loyalty programs, also known as “shared loyalty programs”, are when two or more brands pool together to create a single, powerful loyalty program that customers can use across all participating brands.

Coalition loyalty programs let customers earn points across multiple stores, making it easier to rack up rewards and simplify redemption. This convenience can enhance the perceived value of the program. But on the flip side, managing a coalition loyalty program requires strong collaboration with partners, and working with the wrong brands could negatively impact your brand identity.

Paid loyalty programs 

In contrast to traditional loyalty programs, where points are earned through purchases, paid loyalty programs require an upfront fee in exchange for exclusive benefits. While this fee provides a predictable source of recurring revenue, the benefits need to be compelling enough to justify the cost. If customers already receive benefits like free shipping through other free loyalty programs, it might be difficult to convince them that yours is worth paying for. 

Choosing the right loyalty program for your brand

Finding the perfect loyalty program for your brand boils down to three key ingredients: understanding your customers, your business model, and your long-term goals. By evaluating the pros and cons of each type of loyalty program, you can find the one that best fits your needs. Whether you want to reward environmentally conscious shoppers or secure loyal subscribers, there’s a loyalty program waiting to unlock long-term growth for your brand!

Ready to take charge of your customer relationships? Check out LoyaltyLion’s prices and features page to find a plan that works for your business.

This article originally appeared on LoyaltyLion and is available here for further discovery.
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