Cater to Your Customer Base With the Right Type of Loyalty Program

So you’ve decided to create a customer loyalty program. It’s a smart move considering 69% of customer service leaders view service’s role in driving retention as more or a lot more important than three years ago [1]. But if you’ve started to research your options, you might be feeling overwhelmed. Why? Because there are several types of loyalty programs to choose from.

If you’re a small-business professional searching for the best type of customer loyalty program for your specific product or service, you’re in the right place. We’ll walk you through five types of loyalty programs that are most relevant to small businesses and the customers you serve.

A customer loyalty program is a system where a business rewards repeat customers with discounts, gifts, experiences, or points toward one or more of the above. It’s useful for businesses because it encourages repeat purchases, increases customer retention, and may even attract new customers who like the idea of earning rewards.

In addition to these benefits, loyalty programs impact customer behavior. They provide psychological benefits through positive reinforcement, give customers a sense of achievement, and reduce time between transactions as customers get closer to earning a reward [2]. And when younger demographics in particular are seeking emotional connections from the brands they engage with [3], that’s a good reason to invest in relationships with your customers.

1. Point-based program

In a point-based program, customers earn points that translate into rewards. Examples of point-based customer loyalty programs include Delta SkyMiles, Tarte Cosmetics’ teamtarte, and The North Face’s XPLR Pass program, which is shown below.

Explanation of point-earning options from The North Face’s XPLR Pass program [4]

How can your small business easily establish a points program? The familiar punch card is a form of reward points at their most basic: punches translate to points that the customer accumulates to earn a free sandwich or cup of coffee.

You can get away with manually maintaining your rewards program through something like a punch card if you’re just starting out. However, we recommend investing in small business loyalty programs software, especially as your customer base gets bigger, and you’d like to save time by automating processes such as communications and tracking customer activity.

2. Tiered program

A tiered loyalty program is a type of point-based system where rewards increase the more the customer spends. Examples of tiered customer loyalty programs include Starbucks Rewards, Madewell Insider, and Sephora’s Beauty Insider program, which is shown below.

Screenshot of tiered rewards from Sephora’s Beauty Insider program, taken by author [5]

While a tiered loyalty program is a type of points program, it’s different in that members move up in rank the more they spend, and the benefits and conditions of each rank get more enticing.

This increase in value is what makes tiered programs so attractive to shoppers. While any loyalty rewards program can benefit the customer through positive reinforcement, tiered programs provide an additional sense of accomplishment, particularly when the name of each tier reflects an increasingly elite status, such as in the example shown below from Madewell.

Screenshot of tiered rewards from Madewell’s Insider program, taken by author [6]

3. Value-based program

In a value-based program, rewards are aligned with customer values, such as a donation to a charity. Examples of value-based customer loyalty programs include Warby Parker’s Buy a Pair, Give a Pair program and Target Circle, in which members earn votes for the nonprofits of their choice.

Screenshot of Target Circle nonprofits, taken by author from mobile app [7]

Other types of loyalty programs may also offer value-based incentives in addition to their program perks. Sephora is one example; they allow Beauty Insider members to donate reward points to the National Black Justice Coalition.

Value-based programs are particularly successful among younger demographics, who are more likely to shop or not shop with a brand based on how well it reflects their own values and beliefs [8].

But in order for a value-based loyalty program to be effective, you first need to be upfront about what you value as a brand. This means featuring your mission and values prominently on your webpage, and communicating those values through thoughtful social content.

4. Premium program

In a premium program, also known as a paid program, customers pay a fee to receive exclusive benefits. Examples of premium customer loyalty programs include Amazon Prime, Barnes and Noble’s membership program, and Panera Bread’s Unlimited Sip Club, which is shown below.

Screenshot of Panera’s paid loyalty program, taken by author [9]

Premium programs are more challenging to implement than other types of programs because customers want to make sure they’ll get a good return on their investment. This is why it’s important to design your premium program in a way that customers see the potential for ROI [10]. At Panera, the Unlimited Sip Club cost ($10.99 per month) pays for itself after four lemonades.

Premium programs are attractive to customers who already have a strong intent to buy from you or from similar businesses. Subscriptions often include premium content, such as Amazon Prime’s video streaming service, or access to premium conveniences like free or expedited shipping [10]. Just make sure what you’re offering doesn’t cost your business too much money.

5. Referral program

A referral program not only rewards existing customers, it also goes the extra mile in bringing in new customers without dipping into your customer acquisition budget. In the example below, an Austin property management company rewards clients who refer other rental property owners with a month of waived management fees.

Stone Oak Property Management’s referral program, screenshot taken by author [11]

Referral programs are effective because they’re based on trust. 88% of consumers are more likely to trust their friends and family for an honest review of your product or service than any other form of marketing [12]. And your customers are essentially providing you with free marketing when they have a positive experience and spread the word.

If you have an online store, you can easily implement a referral program by giving your customers a unique code to share with their friends. This makes it easy to track referrals and make sure that your current customers get rewarded. Referral marketing software can help with this as well as other tasks, such as following up with customers and managing affiliates.

When it comes to deciding which type of loyalty rewards program is best for your business, it’s best to abide by industry standards. Consider these examples:

• Points programs are often used by casual dining restaurants and coffee shops that reward loyal customers with a free food item or drink once they hit a certain number of points.

• Tiered programs are a good choice for businesses that prioritize long-term customer relationships, such as automotive services and travel and hospitality.

• Value-based programs work well for businesses that have a lot of competition, like clothing retail or grocery storessince the added incentive of appealing to customer values may offer a competitive edge.

• Premium programs are a good choice if you can ensure an ROI for your customers without costing your business too much money.

• Referral programs should be consideredif you offer a service that thrives on customer testimonials, such as a moving company or clothing alterations.

Whichever reward program you choose, make sure to use metrics such as customer lifetime value or net promoter score to measure its performance. You’ll also want to train your team on any tech tools you adopt to both run your program and more effectively measure customer loyalty.