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Loyalty Programs: How They Differ, And Which Type is Best for Your Business

Loyalty program rewards card and gift boxAccording to Harvard Business Review, “acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.”

Furthermore, older customers spend up to 31% more per purchase than do newer ones.

So, if you want to grow your business, investing in customer retention is clearly a winning strategy. One of the best ways to achieve this goal is to launch a loyalty program.

“Loyalty” is a broad term that includes many ways of rewarding users for their business (and convincing them to come back). What type of program to launch ultimately depends on what your customers will respond to most.

Here is how some of the more popular loyalty programs work in practice. You can use these examples to determine the most appropriate fit for your business.

1. Points programs

The underlying concept behind “points” programs is very straightforward: The more money users spend, the more points they earn. They can redeem those rewards for prizes, discounts, or other benefits.

Points-based loyalty programs are applicable to nearly all business types, especially retailers, because they are relatively easy to set up and manage. They also require the least customer education, since most users are familiar with how points systems work.

2. Paid programs

This type of loyalty program is also quite popular, with users paying money upfront to access different perks. Think of paid programs as VIP clubs that carry monthly or annual fees.

Although this approach can work with traditional brick-and-mortar retail stores, paid loyalty programs are best suited when “inconvenience” is already baked into the consumer experience:

  • Many airlines sell VIP access so travelers can skip long lines or relax in plush lounges.
  • Amazon uses a similar approach by making expedited shipping free for Prime members.

Discover 4 Advantages of Gift Cards

3. Referral programs

With a referral program, you reward longtime customers for bringing you new business. The benefits offered for this word-of-mouth marketing can be anything from cash to steep discounts to free giveaways. Depending on how you set up your referral program, you also can share these perks with new customers.

Referral programs are best suited for service industries. They also can deliver measurable results if you sell big-ticket items such as luxury goods or vacation packages.

4. Value-based programs

With this type of loyalty program, none of the benefits go directly to your customers. Instead, you donate a portion of proceeds, materials or time to charitable causes that align with your users’ values.

For example, TOMS is a popular retailer that has earned a lot of public support for its value-based loyalty program. For every pair of shoes it sells, the company donates a pair to someone less fortunate. TOMS has since expanded this formula to include gun violence prevention and providing safer access to water.

No matter what business you’re in, there are almost certainly charitable causes that you can support. By adding a value-based loyalty program, you can boost sales while helping to improve the world.

5. Gift cards programs

Most merchants probably don’t think of gift cards as loyalty programs, but when used correctly, they can help generate new business and keep customers coming back.

Consider the aunt who buys her nephew a gift card for graduation. He’s never been to your store, but the nephew will eventually visit. He’ll likely return, too, if there’s a balance on the card and/or if he likes your products.

The goal, of course, is to provide enough value across all visits to where the nephew becomes a longtime customer — even after the card has no balance.

How to Establish a Loyalty Program Quickly

Now that you understand how loyalty programs work, the next step involves setup for your company. For many businesses, the process can seem intimidating, especially given the sheer number of options out there. To help, we’ve written a condensed starter guide that shows you how to set up a new loyalty program quickly and affordably.

Topics: Small Business Tips

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