The different types of loyalty programs

Paid Programs

As the name suggests, paid memberships require customers to pay a one-time (mostly annual) fee to enjoy exclusive benefits. Since these programs offer customized customer experience, they provide a great way to enhance customer loyalty. 

Paid programs are a source of steady revenue for merchants and provide an opportunity to upsell other products or services. Additionally, paid loyalty programs offer many benefits to members, including early access to sales, premium customer support, personalized offers, unique customer experiences, and access to higher rewards for the best customers. 

A potential downside to paid programs is churn rates. To avoid this, retailers must continually engage members and demonstrate the value of their programs.

Plum Plus is a great example of a paid loyalty program. The program, which costs $39 per year, offers exclusive perks to members, including free shipping with no minimum spend requirement, a 10% discount on all purchases, 5 points on every dollar, access to VIP promotions and events, and other loyal perks. In return, the retailer gets new and steady revenue from membership fees. Also, since the customers pay to become members, they are more engaged with the retailer, which can mean more frequent purchases and higher average order values. Additionally, the paid loyalty programs allow them to access high-quality customer insights, which they use to personalize marketing efforts for better reach and higher conversions. 

Here’s how Plum Plus compares to the regular Plum Rewards membership.

Free Programs

Unlike paid programs, free membership programs allow members to sign up for membership with a retailer without paying any membership fees.

These programs give members a sense of belonging and access to exclusive offers without asking them to pay anything extra. These programs aim to encourage members to keep buying from the retailer and referring their friends and family members, which means more money for the business.

Like other loyalty programs, free membership allows retailers to collect data they can use to improve their marketing strategies.

Free memberships also come with some downsides. For example, some customers could interpret free membership as a lack of value, which could negatively impact the company’s value. Some members could misuse the benefits without providing value to the business. Also, since members are not paying any membership fee, they may be less active.

Mejuri is a good example of a free membership program. The program gives members access to exclusive perks, including early sale access, early access to the biggest drops and members-only products, personalized experiences, and more.

Community Programs

Community loyalty programs refer to value-based initiatives a retailer takes to engage with and support the local community. These activities can include running, hiking, cycling, volunteer activities, charitable donations, and more.

Community programs can help build a positive brand image, encourage word-of-mouth marketing, drive traffic to the store, increase visibility for the business, and increase customer loyalty. Community involvement shows that a retailer cares about the community beyond just making a profit.

While community programs offer a great way to increase engagement, careful planning is necessary in terms of time, effort, and financial resources to ensure they run smoothly and don’t affect core business functions. 

The Mountaineer, for example, is known to host a series of annual events like the Great Adirondack Train Run and Mountanfest to raise money for charitable causes and other nonprofit activities. Such programs help the company remain engaged with the community and enhance brand loyalty.

Tier Based Programs

This type of program categorizes customers into different levels or tiers based on spending, purchase frequency, and other engagements. Customers at the lowest levels can unlock new levels with access to more exclusive perks by meeting a certain threshold.

Since tier-based programs encourage customers to spend more to unlock new levels, they help increase a retailer’s revenue. Also, by offering more valuable rewards to loyal customers, these programs help build customer loyalty and provide retailers with more upsell opportunities.

However, a tier-based program can be hard to manage if multiple tiers and rewards are involved. Also, the programs can create a sense of alienation among customers who are unable to reach the top levels.

Lancôme’s Elite Rewards is an excellent example of a tiered loyalty program. The program allows members to earn 10 points for each dollar spent, 50 points for connecting with the merchant on social media, and 100 points if they share their personal details. Lancôme’s tiered loyalty program has three levels—Rose Gold, Gold, or Platinum, each with different rewards to redeem.

Cash Back Programs

Cash back loyalty programs work like points programs, but in this case, customers get cashback rewards when they spend a certain amount of money on purchases. Cash back programs offer a great way for retailers to motivate customers and encourage repeat purchases. Additionally, these programs encourage higher spending, leading to more revenue for the retailer.

A potential pitfall is that the cost of implementing a cash back program can add up quickly, making it hard to realize a positive return on investment (ROI).

Kohl’s cash is a good example of a cash back loyalty program.

This program gives customers $10 Kohl’s cash for every $50 spent during earning periods. Customers can redeem Kohl’s cash for future purchases with Kohl.