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Loyalty program models: which is the one for you?

Written by Evanthia
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An astounding 77% of customer loyalty programs fail in their first two years. One of the primary factors for those failures is not implementing the ‘right’ loyalty program type, i.e., a program that best fits your customers’ needs and your business model. Once your business has built the business case for how a loyalty program will most effectively engage customers, the next step is determining what type of loyalty program model will be most successful–considering objectives, customers, budget and needs.

There are a total of 3 types of loyalty program models–the types of rewards available, how to redeem points for rewards, and whether participating in the loyalty program has a cost–subdivided into 11 sub-models:

Reward Types

  1. Point programs: In this type of program, customers earn points for taking up different behaviors, both transactional and non-transactional, which can be redeemed in the future for something they find valuable. The point type and amount of points delivered is determined by the company. An example of a point type program is Sephora’s Beauty Insider program, where members earn points for every dollar spent and can redeem those points for Sephora products.
  2. Cashback programs: Many consumers prefer to get rewarded with a monetary compensation. With every purchase made, they get a percentage of their money back. This makes customers willing to spend more money. Cash Back Credit Cards by Mastercard is a great example. For every dollar spent, customers earn a certain percentage back and can receive a one-time cash bonus back after spending an ‘X’ amount of dollars.
  3. Discount programs: Some customers prefer to be rewarded at the time of purchase, instead of after the fact. For them, discounts can be offered in various ways: discounts offered on specific products over a period of time, or discounts if certain criteria have been met (get 10% discount upon purchasing $100 worth of products). Many supermarkets, like Safeway, use this kind of loyalty program, granting discounts on specific products for program members.
  4. Benefits/Customer Experience programs: These kind of programs are based on offering some of its members special perks, treatments or benefits, recognizing their value and importance to the brand. There is no point allocation involved. Typically employing performance tiers, companies can make clear that their top customers are important and valued. For example, a very luxurious hotel chain offers it’s most frequent guests a free dinner, the Master Suite or a luxurious tour of the city.

How to Redeem

  1. Open: These loyalty programs give points to consumers if they buy products or services from a specific company. These points can be redeemed for diverse products offered by other providers. For example, through Itau’s loyalty program, for every purchase you make with your credit card, you gain points. And those points can be redeemed for flights, hotel rooms and diverse products from an extensive catalogue.
  2. Focused: In this case, consumers can only redeem their points in the same establishments in which they earned their points in the first place – they either obtain discounts on existing products or merchandise. The Starbucks Rewards program is a good example, as all the stars earned can only be redeemed in Starbucks coffee shops.
  3. Coalition Focused: The consumer accumulates points by purchasing products or services in various establishments participating in the coalition. All the points accumulated can be redeemed at any of the participating member brands. This is the most common coalition program and what most people are accustomed to. Examples of a coalition loyalty program is Nectar in the UK and Plenti in the U.S.
  4. Coalition Open: The consumer accumulates points by purchasing products or services in various establishments participating in the coalition. But, unlike the coalition focused program, in this case the points can be redeemed for diverse products provided by other providers that the members of the coalition choose to offer. For example, a coalition program made up of United Airlines and Marriott hotels offering the possibility to redeem points obtained through them for an apple laptop.

Participation requirements

  1. Free loyalty programs: the member of the loyalty program does not have to pay to participate. Most loyalty programs are free. Examples are CVS, Target, Sears, Bloomingdale’s, etc.
  2. Premium loyalty programs: the customer pays a monthly fee and gets access to perks, discounts, rewards and special treatments like free shipping or discounts. Amazon Prime is a well known premium program.
  3. Earned loyalty program: Another possible loyalty program is to offer a premium loyalty program at a highly discounted rate for being an exceptional customer. Banks are known to offer this kind of benefit. There is a monthly fee associated with having a savings account. But, many establishments offer a substantial discount of this cost to customers who have a very large savings account, for example. This strategy increases loyalty levels.

When choosing the type of loyalty that best fits your business model, you have to keep in mind how your customers see loyalty programs. The aspects they care about most are: what rewards they will have access to, how can the points that they accumulate be redeemed (and how easy is that redemption process) and whether or not they will be charged for these benefits. A company has to understand that while building in loads of modern design aspects is valuable, the main objective is to build a loyalty program with the appropriate attributes that your customers will resonate to and value.