Loyalty Programs Explained: 7 Types of Loyalty Programs

A loyalty program, also known as a rewards program, is a marketing strategy in which businesses offer special perks and incentives to encourage repeat customers. The best customer loyalty programs focus on improving the customer retention rate and rewarding an existing customer base.

A typical loyalty program will collect personal information from the customer such as their name, address, and phone number. The customer may be asked for some of this information when making future purchases, or they may be issued a personalized loyalty card. As the customer continues to return to the business, the business collects metrics that help it calculate its customer retention rate.

The best loyalty programs turn one-time customers into brand advocates. Explore some of the most common types of loyalty programs.

1. 1. Reward points program: With a reward points program or loyalty points system, customers are given a loyalty card or number that is collected at check-out. For every one dollar spent, the customer might earn one point. After accumulating enough points, the customer is rewarded with a discount or benefit of some kind. Point-based systems are helpful for tracking customer behavior, and businesses can use this data to improve customer experiences in the future.
2. 2. Cash-back program: Cash-back programs follow the same basic principle of a reward points program. Customers may be most familiar with the cash-back programs offered by credit card issuers. Typically, as a customer spends money at a particular business, they earn a percentage of their purchase back in store credit that can be credited toward future purchases.
3. 3. Tiered program: A tiered loyalty program offers various levels of rewards to loyalty members. As the customer spends more, they upgrade to the next tier, earning increasingly better rewards from one tier to the next. The rewards of a tiered system might include discounts, freebies, VIP customer experiences, or early access to new products. Tiered programs are especially good for rewarding brand loyalty, as they tend to prioritize existing customers over acquiring new customers.
4. 4. Punch card program: Some small businesses employ a punch card system to encourage repeat business. When a customer makes a purchase at a coffee shop, for example, they might receive one hole punch on their card. After a specified number of hole punches, the customer is entitled to a free product or discount.
5. 5. Gamified reward program: The gamification of a rewards program turns a point system into a game that customers can play. For instance, a fitness app may reward customers with gold stars for each workout they complete. As the customer continues to engage with the app, they earn more stars, which can then be exchanged for free products or a discount on future subscriptions.
6. 6. Value-based program: Value-based reward systems seek to build customer loyalty by giving back to causes that their customers care about. For example, a company may pledge to plant a tree for every item purchased. Though the customer does not directly receive a reward for their purchase, they're likely to make repeat purchases if they feel their patronage is making a positive impact on the world. Value-based programs are great for e-commerce businesses looking to drive sales in an online store.
7. 7. Referral program: A referral program rewards customers for sharing information about a business with friends and family. Typically, when a customer refers others who then go on to make a purchase, the customer is rewarded with a discount on their next purchase. This is an effective customer acquisition strategy that can promote a positive customer relationship.

Even a successful loyalty program is prone to limitations.

1. 1. Loyalty does not equal relational equity. Repeat customer engagement does not guarantee brand loyalty. It's possible that a customer is simply shopping for the rewards, and feels very little investment in your business as a whole. For long-term success, it's important to focus on building an emotional connection with your customer beyond the transaction.
2. 2. Loyalty programs provide an incomplete picture of customer behavior. Customer loyalty programs can compile useful data on customer behavior, but only to an extent. Since no customer will do all of their shopping with one business, a customer loyalty program cannot give a complete picture of customer behavior.
3. 3. The market is saturated with reward programs. Since many businesses offer rewards programs, they can lose some of their incentivizing power. You should consider experimenting with different types of customer loyalty programs to determine which program differentiates you from the crowd and provides effective incentives to your customers.

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