Structure of Loyalty Programs

Retail loyalty programs are a marketing tactic. Other tactics with similar outcomes include coupons, holiday sales, and paid advertising. The end goal of a loyalty program is to increase profits: it is important to keep this in mind when it comes time to evaluate the effectiveness of your program. Although making your customers feel good and creating positive associations with your business are worthwhile benefits, ultimately you want to show that your program produced a net profit and increased sales.

The strategy behind a loyalty program is to encourage repeat business from current customers by offering them incentives to buy again. You’re turning a fairweather friend into a lifelong companion. Loyalty incentives usually come in one of two forms—discounts or perks. It’s important that you know your customers’ values and then choose the incentive that is most motivating to them.

Overall, customer loyalty programs are about making it easier for your customer to choose coming back to you rather than going somewhere else. Successful programs reduce barriers and increase incentives for consumers.

5 Types of Customer Loyalty Programs

1) Points Programs

A basic points system is the simplest and most straight-forward type of program. In short, for every dollar a customer spends, they receive a certain amount of points in return. These points accumulate until the customer is able to redeem them for a reward. For the most part, the number of points received per dollar is fixed and does not change between customers or purchases.

The North Face’s VIPeak Rewards is a good example of a basic points retail loyalty program. Customers sign up for free and immediately receive points with their next purchase. Shoppers earn 10 Points for every $1 dollar spent at retail stores and thenorthface.com, and 5 Points are earned for every $1 spent at outlet stores. Rewards are issued three times per year in the form of store credit. The amount of credit is based on the number of points accumulated: 2,000 points earns $20, 3,500 points earns $25, and 5,000 points earns $30. VIPeak members also get instant access to a 10% discount on their first online order, first access to limited-edition products, and member-only sales.

BEST FIT:

This type of program works best for businesses frequented by local customers, such as coffee shops, boutique retail and gift shops.  (SnowShoe supports this program in our Spark Loyalty solution. Find out more > )

2) Stepped Points Programs

Stepped points begin to add a weighted system to a loyalty program. The weighted system can be used to encourage certain behaviors as well as tap into the exclusivity factor desired by many consumers. Let’s look at two examples of stepped points programs:

Starbucks® Rewards is a very popular rewards program given our society’s love for coffee. The program is free to join either via the company’s website or app (the latter option being strongly pushed in the program’s messaging). In this case, points are called stars, and customers earn one, two or three stars per dollar spent depending on the method of payment. Paying with cash or card earns one star per dollar. Using a preloaded digital Starbucks Card on the app earns two stars per dollar. And paying with the Starbucks Rewards Visa Card earns up to three stars per dollar spent. Clearly, Starbucks is trying to encourage usage of the app or Starbucks credit card over the use of cash or other card.

Another example is DSW’s VIP Club, which uses a stepped rewards system to make their most loyal customers feel important, appreciated, and valued. When shoppers sign up for the VIP Club, they start by earning one point for every $1 spent. Once 100 points are earned, shoppers receive a $5 Reward. Club members also get free shipping, $5 off a purchase during their birthday month, and 50 points for every pair of shoes donated. When a shopper spends $200 in a calendar year, they automatically move up to VIP Gold status and receive additional benefits, such as first access to exclusive inventory, gifts for friends, and two double points days. A $500 annual spend bumps the shopper up to VIP Elite status, earning two points per dollar spent and receiving rewards twice as fast. Elite members also receive one triple points day and unlimited free returns in store and online.

BEST FIT:

This type of program works best for national brands with  working to increase individual customer spends, such as clothing and restaurant chains.

(SnowShoe supports this program in our Spark Loyalty Growth edition. Find out more > )

3) Pay to Play Programs

If your first thought was, “Who would pay an upfront fee when there are so many free rewards programs?”, you’re not alone. But if you start to take inventory of your rewards memberships, you may discover upfront fees are pretty common, from annual fees for airline mile credit cards to your Amazon Prime membership.

Let’s look at Barnes & Noble’s B&N Membership. In order to be a member of this loyalty program, customers pay a $25 annual fee, which automatically renews each year. Upon signing up, members receive a Sign-Up Bonus of 20% off their first purchase. Members also receive free shipping on all orders with no minimum purchase required, 40% off Hardcover Bestsellers and 10% off all purchases in stores. Additional benefits include early access to special sales prices and events, a special birthday offer, and 10% off Noon devices and accessories.

BEST FIT:

This type of program is best for businesses selling items used by consumers on a regular basis and aiming to increase customer frequency, such as bookstores, homegoods and pet supply stores.

(SnowShoe supports this type of program in our Spark Loyalty Professional edition. Find out more > )

4) Partner Programs

Some companies choose to partner with each other to reward their mutual customers and encourage repeat business within the network. A partner program can be a great way of introducing your brand to a new group of potential customers with the endorsement of a brand that they already trust. One of the largest partner programs is the AAA Membership. There is an up-front cost that varies by market, and this provides you with coverage for roadside assistance, towing, and other automobile-related services. In addition, members receive discounts and rewards with dozens of other brands for everyday home and travel expenses. AAA members automatically save at more than 100,000 online and store locations across the country, including with brands such as 1-800-FLOWERS, Hard Rock Café, and Samsung.

BEST FIT:

This type of program is best for brands with multiple locations across the country, or for stores which are located nearby one another. It is also a great option for brands that offer products to be purchased together, such as peanut butter and jelly. SnowShoe only supports this type of program with professional development services.

Contact our professional services team to find out more > 

5) Referral Programs

Many brands which are household names today used referral programs when they were just starting out. PayPal, Uber, and AirBnB all used referral programs to generate initial buzz about their companies in their first years of business. Let’s look at the AirBnB Referral Program which the company ended in February 2021. AirBnB Members were able to earn thousands of dollars’ worth of Travel Credits if they sent a referral link to a friend who in turn created an account and made a reservation. Referral links could be shared via email, text message, and, of course, via the almighty social media. AirBnB even used specialized API to determine which friends in a member’s network would be most likely to use a referral link, and the company would then suggest sending a link to this particular list of friends.

Measuring the Effectiveness of your Loyalty Program

As previously mentioned, retail loyalty programs are a marketing tactic, and the point of marketing is to produce an increased profit after marketing expenses are factored in. Therefore, it’s important to track not only the expenses of your program, but also the revenue associated with your program. This revenue may come in the form of overall sales or in the value of individual loyal customers.

There are many metrics you can use to measure your program’s success. For example:

• Purchase Frequency: Are members of your loyalty program shopping more frequently than non-members? Are you able to maintain or increase the shopping frequency of individual loyalty program members or of this group as a whole?
• Transaction Amount: Are loyalty program members spending more per transaction than non-members, and are member transaction amounts holding steady or increasing?
• Customer Retention Rate: What percentage of shoppers in a given period of time are returning customers, and has this percentage changed since implementing your loyalty program?
• Customer Lifetime Value: Looking at historical data, how much have your loyal customers spent with you in total, and how does this compare with the spending total of your non-loyal customers?

Other Metrics to Consider:

• Redemption Rate: How often and what amount of rewards are being redeemed by loyalty program members? A low redemption rate could suggest that the type of reward offered is not desirable to your customers or that there are too many obstacles for customers to earn points and redeem rewards.
• Participation Rate: How many enrolled members are actively earning points and using benefits of the program? If you have a low participation rate, try increasing communications with your members about the benefits of your program and how easy it is to earn rewards.