Your Complete Guide to the 8 Types of Loyalty Programs

When you talk about customer loyalty with anyone, shoppers and store owners alike often think of customer loyalty programs. And you’re both spot on! But have you ever wondered about the different types of loyalty programs other there?

Types? Yes. There are several types of rewards programs that brands use to engage customers and build loyalty.

Your customers may not be aware of the differences between these ‘types’ of loyalty programs.

But as a store owner you should be aware of the pros and cons of each. After all, you want to find the most suitable program for your online store.

In this article, we’re going to explore 8 types of loyalty programs, their pros and cons, and see how global retail brands are using them to increase customer loyalty.

Why customer loyalty is important

Customer loyalty is what all brands, regardless of industry or sector, aspire for. Everyone wants to have loyal customers who not only buy from you but believe in your brand and are likely you to refer you to others.

Year-after-year statistics show that brands who are successful at building a loyal following generate higher revenues and sales.

Here are some popular loyalty statistics that show how effective loyalty – and accordingly loyalty programs – can be:

• Acquiring a new customer can cost 5 times more than retaining a current one. (Invesp)
• A 5% increase in customer retention rates can boost sales by 25% to 95%. (Bain & Company)

In addition, data compiled by Annex Cloud has found that:

• 87% of customers want more brands to have loyalty programs.
• 64% of brands said they saw ‘an increase in loyalty memberships in the past year.’
• Roughly 54% of customers said they’re more likely to buy from a store or brand if it offered rewards.

If you have loyal customers, then you have succeeded in earning your customers’ trust. This can translate into more benefits for you such as:

• Getting referrals and growing your customer base
• Higher sales and revenues
• Better customer engagement (this is clearer with a rewards program)
• Creating a community
• An increase in customer lifetime value
• Higher average order values

Are you a skeptical store owner?

Despite the growing popularity of loyalty and rewards programs, some store owners are still skeptical.

‘Do customer loyalty programs really work?’ They often ask.

And it’s a good question. What we’ve seen is that some brands launch rewards programs that end up being failed experiments.

However, these failed loyalty programs are unsuccessful because they are more like traditional programs and fail to follow best practices. They are actually point-accumulation programs that offer no value or benefit to customers. So naturally, they fail. (No surprise there!)

Further reading: Do Customer Loyalty Programs Really Work?

Customer loyalty programs are created to ensure you stay top-of-mind for your customers so that they think of you when they want a certain product.

When customers join a loyalty program, here are a few of their first thoughts and questions:

‘What does [brand name] have in store for me?’

‘I want to see what are the perks for this rewards program.’

‘How much are 100 or 1000 points worth in [brand name’s] rewards program?’

So how do you make sure your rewards program is a good one – or better yet a great one – and not a failure? The answer is to get to know your customers and to follow loyalty program best practices.

But before we get into those best practices, let’s focus on the different types of loyalty programs so you can picture what yours looks – or will look – like.

Types of loyalty programs

Though some of the rewards programs mentioned in this section are seen as options within a loyalty program, they are generally considered among the types of loyalty programs.

We’ll explain each type in brief, mention the pros and cons, and the top brands using that type of program.

1. Point-based loyalty programs

Also known as traditional loyalty programs, points-based programs are the simplest and most basic form of a loyalty program.

Customers make purchases which translate to points and when they reach a certain number of points, they can get a discount or cashback reward.

Point-based rewards programs are best used with brands where customers buy products frequently. That’s why they are more commonly used by coffee shops and supermarkets.

Further reading: These 17 Industries Get the Best Results with Loyalty Programs

Popular brands that offer a points-based loyalty program

• McDonald’s (though they offer both a points-based system and discounted meals)
• Dunkin Donuts
• Second Cup

Pros:

Points-based programs remain the basic form of many customer loyalty programs today. However, as you’ll see in the loyalty program best practices section below, we don’t recommend limiting your rewards program to just collecting points.

Cons:

• They get boring easily.
• Many brands make it hard to earn points.
• Many point-based programs fail because brands offer a small window to redeem the points earned.
• Lack of clarity about the value of points usually results in customers abandoning the brand and program.

2. Tiered loyalty programs

These are the most commonly-used type of loyalty program for beauty brands. In fact, in our blog post on the 14 best beauty loyalty programs, nearly 12 out of 14 used a tiered loyalty program.

Tier-based rewards programs usually comprise 3 tiers or groups. Customers can rise between those tiers based on the number of points they earn in a year.

The standard format for tiered loyalty program is a basic or free tier, a middle tier, and a high tier where your brand’s biggest spenders, fans, and brand ambassadors are.

What are some popular brands that offer a tiered loyalty program?

• Sephora
• Ulta
• The Body Shop

Pros:

• They help brands and online stores build a community of their fans.
• Tiered rewards programs give customers a clear idea about what to expect.
• Can entice customers to spend more to get to the higher tiers and earn better rewards. They may also prompt customers to maintain their higher spend to stay in the higher tier.

Cons:

• Tiered loyalty programs are more complex to create and build compared to other types of loyalty programs.
• It may take you some time to determine the types of rewards to include in each tier.

You may also choose to create two tiers to begin then expand to three tiers as you get more customers.

Read our guide featuring 7 Examples of Tiered Loyalty Programs that Made their Mark in the World [And What You Can Learn from Them]

3. Paid loyalty program

You’re probably thinking ‘Are there customers who would pay money to join a rewards program?’ And your skepticism is in place.

Though they seem to be logic-defying, there are a few paid loyalty programs out there. However, they are generally uncommon.

The purpose of the fee, which can be a one-time or annual fee, is to break certain barriers and offer – reportedly – even better rewards. 

Brands that use paid loyalty programs include

• Bed, Bath, and Beyond (membership fee $29 per year)
• Aveda Plus Rewards (one-time membership fee of $10)
• Amazon Prime (fee differs based on country where Amazon operates)

Pros:

Brands are able to address certain problems that prompt customers to leave. Paid loyalty programs rely heavily on the brand’s connection and relationship with their customer.

Cons:

• The brand offering the paid loyalty program needs to create a kick-ass loyalty scheme to entice customers.

It’s highly unlikely you can launch a paid program when you’re just getting started. So we wouldn’t recommend this for small or new brands. However, if your brand sells something expensive like jewelry, you may consider it. But remember to keep the fee low.

4. Value-based loyalty program

The essence of what makes a loyalty program successful is offering value to your customers. However, a value-based loyalty program goes a step further. It focuses on connecting customers to charities and movements that matter to them.

Think of it as social responsibility within a loyalty program. It’s worth mentioning that the value-based loyalty program is often an option or opportunity within a larger loyalty program.

Some brands give customers the opportunity to donate the value of their points to the charity of their choice or to specific charities and organizations the brand is collaborating with.

However, most if not all value-based loyalty programs don’t involve giving customers points or rewards for their charity.

Brands that offer value-based loyalty options as part of their rewards programs

• The Body Shop (in the United States)
• UK footwear brand TOMS has maintained its ‘Improving Lives Campaign’ for years. TOMS promises to donate a pair of shoes to impoverished communities for every product bought by its customers.

Pros:

• Builds a better connection between your brand and your customers.
• Gives customers the opportunity to feel good by donating the value of their points to charity.

Cons:

• Might be hard to create especially if you’re just starting out.
• Requires building partnerships with charitable organizations.
• If your rewards program translates to vouchers or cashback rewards or instant rewards only and discounts only, customers might not be able to donate.

5. Coalition loyalty program

Also known as a strategic partnership(s) loyalty program, coalition loyalty programs rely on building partnerships with other brands and entities to grow your customer base.

In a way, the coalition loyalty program is similar to the value-based program as both focus on building relationships with other brands and organizations.

But unlike the value-based option, the coalition loyalty program needs to offer partnerships that customers would find beneficial to their needs.

Your brand offers products and services that solve your customers’ problems. If you’d like to create a coalition program, then you’ll need to take this a step further.

How does a coalition loyalty program work?

As a brand, you’ll need to create partnerships with other brands and entities that support your product offering.

For example, if you sell pet food, your coalition program may include discounted or free visits to certain vets in your area.

Pros:

• Your rewards program offers more benefits and value to your customers.
• You get co-branding opportunities which means you can generate more revenue and customers from your partners (who will be recommending you to their customers)
• Your partnerships can supplement your business and bring more traffic.

Cons:

• You may find it difficult to build partnerships.
• Partnerships may take time to take shape.
• Some businesses may not be interested in partnering with you
• Will require significant effort if you’re just getting started.

6. Omnichannel loyalty program

An omnichannel experience is when a brand makes itself available across multiple channels for a customer, while maintaining its messaging and brand identity.

Brands that provide an omnichannel customer experience are those present at in-person locations and have a website and mobile app.

Omnichannel rewards programs aren’t just about purchases. They’re about keeping customers engaged and your brand top-of-mind.

Most omnichannel loyalty programs are gamified, creating a fun and immersive game-like experience. This, in turn, translates to a better overall customer experience for your brand.

One of our loyalty program recommendations and best practices is letting customers earn points for activities other than making purchases. And omnichannel loyalty programs focus on exactly that. Customers can earn points by signing up, filling out surveys, ratings products and more.

Pros:

There are many benefits to having an omnichannel loyalty program. Such as offering a game-like experience, offering multiple ways to gain points, being interactive and more.

In addition, you can combine your omnichannel rewards program with tiered rewards to increase community-building and personalization.

An omnichannel rewards program will help you stand out from the crowd.

Cons:

To create an omnichannel loyalty program, you need to have a website, mobile app, and a physical store. That’s why bigger brands use omnichannel rewards programs. However, it’s easy to upgrade your program to an omnichannel one once you have all three.

Global brands that use omnichannel loyalty programs

• Ulta’s Ultamate Rewards
• Sephora’s Beauty Insider Rewards
• Starbucks

7. Community loyalty program

As an e-commerce business, you should aim to create a community around your brand. Successful rewards programs today are those that are able to build that community.

Several global brands have achieved this with grace. The first brand with a large community of loyal fans and followers that comes to mind is… Sephora.

While a community loyalty program is listed here among the types of loyalty programs, it’s not a standalone program. It’s part of your broader loyalty marketing strategy.

Pros

• Community loyalty programs are about increasing engagement with your brand.
• Communities create a sense of belonging and exclusivity among your customers.
• You can use your community to stay competitive.
• Using a community loyalty program means you can offer customers more personalized experiences.
• Can be very rewarding to brands.
• Can increase customer retention.

Cons

• Community loyalty programs require lots of patience.
• You need to invest lots of time and effort into building a community around your brand.
• You need to constantly engage your followers aka customers.
• It’s not a one-time-task. It’s a continuous process.

8. Game-based loyalty programs

Last but certainly not least are game-based loyalty programs or gamified loyalty programs.

As their name suggests, a gamified loyalty program is a program with a few game-like elements that entice and engage customers.

Gamified loyalty programs include multiple levels and customers get to earn better perks as they rise within these levels. You can also create challenges or contests to engage customers.

Pros

• Offers a game-like engaging experience for customers.
• Can be part of your broad customer engagement strategy.
• Provides unique ways to engage with your customers.
• Can provide opportunities to get customer feedback.
• Offers lots of room for creativity and experimentation.

Cons

• Can get boring or redundant if you don’t add perks to higher levels.

Loyalty program best practices

Now that we’ve covered the types of loyalty programs, let’s look at some best practices for guaranteed success.

Whether you’re just starting out, exploring rewards programs, or already have a loyalty program that you’d like to improve, these are must-follow best practices.

These tips will not only help you increase retention but also boost your acquisition efforts.

1. Highlight customer benefits

Customers are always wondering ‘What’s in it for me?’ So our first tip is to answer this question. What does you rewards program offer customers?

If your answer is ‘points.’ Then you need to rethink your loyalty program. If your answer is ‘perks and benefits,’ then you’re on a the right path to success.

Tell customers early on what they get when they sign up to your rewards program. Do they get a birthday gift or voucher? Do they get discounts or cashback rewards when they accumulate a certain number of points?

The best way to answer these questions and others is by creating a loyalty program explanatory page. It’s like a frequently-asked questions (FAQs) page for your program AND make sure it’s easily accessible.

2. Clarify your points scheme

One of the top reasons customer loyalty programs fail is because they don’t follow this step!

Any rewards program gives customers points for the purchases they make. The secret is to ensure your points have a fixed value.

For example, beauty brand Ulta’s rewards program gives customers 1 points for each $1 spent. So, whether a customer makes a purchase for $10 or $100, they know exactly how many points they’re getting in return.

The Body Shop offers the same 1-point-for-every-$1-spent. But they clarify that once a customer accumulates 100 points, they get a $10 voucher to spend online or in-store.

What some brands do is they don’t give that clear value for each point (or number of points) and leave the customer hanging. One day $1 equals 1 point, the next $10 equals 1 point. Customers get confused and stop using the program, making it a failure.

3. Customize your rewards

Personalization is a growing customer requirement in loyalty programs today.

Customers today want something different, something exciting, something personal. They want personalized experiences in rewards and perks in loyalty programs they join.

Data compiled by Red Point Global shows that only 25% of customers “are satisfied with the level of personalization in their loyalty program.” This is by no means a good figure.

So how can you add personalization to your rewards program?

Here are a few ideas:

• Birthday rewards
• Referral rewards or points
• Customer-and-store anniversary
• Special event coupons or gift cards
• Special invitations to events (popular among fashion and beauty brands)

4. Use a variety of rewards

Loyalty programs can get boring sometimes. Customers have figured it all out. You collect points, get a discount at X number of points and that’s it. It’s still good but it can get boring.

So what now?!

Use a variety of rewards to keep customers interested and engaged. You can use some of the ideas we mentioned in the above point on personalized experiences or create your own.

5. Don’t make it all about purchases

Traditional loyalty programs focused on customers collecting points only through purchases. Today, customers don’t want to feel like you’re only rewarding them for the money they’re spending.

New and updated loyalty programs allow customers to earn points for actions or activities that don’t involve purchases.

These can include:

• Signing up
• Providing you with information (Name, date of birth, gender, email…etc)
• Logging in on a daily or weekly basis
• Sharing social media posts
• referring friends and family
• Rating or reviewing products
• Responding to or filling out surveys or questionnaires
• Following you on social media

You can get creative with the ideas here.

Create your loyalty program with Gameball

You now know the 8 types of loyalty programs out there. And you probably have an idea about which type or combination of types you’d like to pursue.

A loyalty program has many moving parts. But it doesn’t have to be difficult. In fact, you don’t have to create the loyalty program from scratch. All you have to do is use a customizable rewards program software and integrate it directly into your store.

This is where Gameball comes in. To save you the time and effort of building a rewards program from scratch, while giving you many options to customize and tailor your program to your needs.

If you’re on Shopify, this is even easier. All you have to do is visit the Shopify store and integrate Gameball. Shopify store owners can also enjoy the always free version of Gameball until they start growing.

In this section, we’re going to help you add more flavor to your customer loyalty program using Gameball.

1. Your program. Your rules

Rewards programs are meant to be part of your long-term loyalty marketing, customer engagement, and customer retention strategies.

This means you can combine one or more of the above options and methods. You can also tailor the inner workings of your rewards program to suit your store’s and customers’ needs.

2. Drive engagement with social sharing

One of the benefits of using Gameball is that you can reward customers for activities other than purchases. One of those activities is getting customers to share social media posts, for which they can earn points.

You can custom-create those social media posts or let them create them themselves.

These social shares can include earning new badges, completing challenges, asking friends and followers to join your loyalty program or simply to share an update about your store.

3. Use multiple loyalty strategies

With Gameball, you can use one or more of the abovementioned types of loyalty programs and strategies to increase loyalty and engagement.

We recommend combining the community loyalty program with the tiered or gamified loyalty program. Once you start growing, you can add the value-based option.

If you have a physical store and an e-commerce website, then you can start creating an omnichannel experience with an omnichannel program. The more store locations you add, the more opportunities and benefits you can offer customers.

Restaurants and coffee shops often use the omnichannel option expertly. Second Cup and Starbucks are among those brands.

Further reading: 8 Secrets that Make the Starbucks Loyalty Program So Popular

Beauty brand Sephora’s Beauty Insider’ program combines the points-based and tiered loyalty program options. It also boasts a massive community of loyal follows of 35 million members.

4. Use challenges for added engagement

If you’re planning to create a customer engagement strategy, then you’re in luck because there are many ways to drive engagement in your e-commerce store.

One of those that are unique to Gameball is creating challenges. With Gameball, you can create and use challenges for a variety of things. From generating and driving customer engagement, to boosting sales during low-seasons, to creating referral campaigns. The opportunities are endless.

And what is cool about Gameball challenges? It’s the badges. We’ve got several ready-made badges for you. But you can create and design your own.

Further reading: Learn more about Gameball’s challenges and how to create them via our Help Center.

We recommend creating themed challenges such as a Christmas Challenge, a Halloween Challenge, and more.

5. Get more with segmentation

One of our newest features is customer segmentation. This means you can re-engage inactive customers or offer specific rewards to highly-engaged and active customers.  

Got 10 customers who visit your store and make purchases almost every week? You can create challenges and badges or personalized rewards for these super fans.

You can also re-engage customers who have not been to your store in 3 to 6 months with segmentation. Whether you choose to send them a limited-time discount or coupon, a double-point event, or a challenge.  

6. Reward customers for referrals

Referral marketing – also known as word-of-mouth marketing – is one of the most effective tools in your customer acquisition strategy. And you can get more referrals using your customer loyalty program.

But how?

Great question! You can use your loyalty program to reward customers for referrals. That way, you’re giving customers more opportunities to earn rewards and perks without having to pay money.

You’re also giving them an extra incentive to refer you.

Further reading: Discover the 6 Benefits of Referral Programs

Final words

Customer loyalty is the lifeline of a brand or business. Loyal customers are those who keep coming back.

In retail, e-commerce, and mobile commerce, the best way to go about your loyalty marketing efforts is to use a customer loyalty program.

The key to successful loyalty program is to ensure you’re clear on the rewards and how to redeem them. It’s also best to have a variety of rewards.

Don’t forget: Your loyalty program doesn’t have to be one of the above types only. You can mix and match the different types of loyalty programs and options to suit your needs and customer size.

As you grow, it’s only natural that your rewards program and its benefits grow with you.

Want to start building loyalty? Add Gameball to your e-commerce store today. If you’re on Shopify, you can start with the free plan or explore our paid plans.