For businesses that are looking to increase customer retention, gain market share, and drive sales, a customer rewards program may be the answer. If you’re just getting started, should you be investing in creating a proprietary loyalty program for your business, or should you join an existing rewards program that customers may already be familiar with? Here’s what you need to know to make the right choice.
In a world of aggressive competition and ever-changing customer preferences, businesses need to leverage every advantage available to them. One such advantage can come in the form of a customer loyalty program that can be managed directly from your point-of-sale system. But not all loyalty programs are created equal. In fact, there are many pros and cons to the different types of rewards programs that can be implemented by businesses.
Choosing the right program for your business must be done with careful consideration, but first it’s important to understand the core differences between the various program options. This includes learning about the mechanics of various program types, as well as whether or not your business should create its own exclusive program, or partner with a major multi-brand rewards program. Let’s begin by examining some popular types of rewards programs, and how they work to reward customer loyalty.
How Popular Loyalty and Rewards Programs Work
In simplest terms, loyalty programs reward customers with perks and extra value based on how they interact with the business. Some of the possible types of qualifying interactions that can be counted towards rewards are:
- Dollars spent, with rewards level based on individual purchase values, or total spend over the entire history of the customer.
- Purchase frequency, with higher frequency customers acquiring increasingly better reward levels than occasional customers.
- Product/Brand/Category-specific, with rewards being tied to the purchase of specific brands, featured categories, or promoted products.
Using interactions such as these, customers qualify to increase their status in the program using a variety of different program mechanics. Each program type will use a different method to determine the types of rewards that customers are eligible for, and how the customer can leverage them to obtain specific perks and benefits.
Points-Based Customer Rewards Programs – Under points-based rewards programs, customers accumulate points with each qualifying interaction. As the customer gains points, they can choose to redeem them for benefits such as discounts on future purchases, free products selected from rewards catalogs, or other exclusive perks. Most programs of this type attach a non-monetary value to the accumulated points, however there are some that choose to represent earned rewards in a currency-type format. (Example: 500 points vs $5.00 in rewards).
Multi-Tiered Customer Loyalty Programs – While similar to points-based programs in terms of how customers gain status with each qualified interaction, multi-tiered programs use points threshold levels to determine the type of rewards available to customers. For example, new customers start at the first tier of rewards, and then advance to the next tier of greater rewards once they’ve accumulated enough points, and so on.
Paid Subscription Rewards Programs – Paid rewards programs operate a little differently than the other types. In these programs, customers can opt-in to pay a monthly or annual subscription to gain access to various levels of perks and benefits with the business. Based on the level of the subscription, the types of rewards can vary significantly, with lower-level subscribers obtaining small perks and higher-level VIPs gaining access to many exclusive benefits and members-only services.
Nevertheless, of the exact program type that fits best with your business, you can choose to manage the loyalty program internally, or you can opt to join an existing partnership rewards program. To make this determination, a greater understanding of the pros and cons of each approach is needed.
What is a Proprietary Customer Loyalty Program?
Proprietary loyalty programs are those managed directly by an individual company. Private customer rewards programs can be structured in any of the formats described earlier, including points-based, multi-tiered, and VIP subscription-based. These programs are defined by their exclusivity to a specific company. The points and rewards customers earn in these programs are not able to be redeemed at any other business, so they are inherently well-suited to reinforcing customer loyalty.
Private programs put the responsibility of management on the business, which can prove to be resource-intensive for some companies. Large-scale private rewards programs can require a great deal of attention to manage them effectively and ensure that they are delivering maximum benefit to the business. As a result, it may be necessary to invest in additional resources to handle the ongoing management of the rewards program.
However, although they require attention, private rewards programs offer the business complete control over all elements of how they work and how customers are rewarded. This can be an advantage by giving you a way to further differentiate your business from competitors. Depending on the nature of the market your business competes in, this may be one of the most beneficial aspects of choosing to implement a private loyalty program.
The key is to find the right balance between the effort needed to earn rewards, and the value of the rewards customers can redeem. If it’s too hard to earn enough points to get something worthwhile, customer interest will weaken. If it’s too easy to get high-end rewards, the program might end up costing the business more than expected.
Key Advantages of Private Customer Loyalty Programs
- Complete control over all aspects of the program.
- Easy for customers to earn and redeem with your business.
- Encourages repeat visits and higher cart value.
Potential Downsides to Private Customer Loyalty Programs
- Managing the program can be resource-intensive for small businesses.
- Lack of familiarity with the program can hinder sign-ups.
- Challenge in finding the balance between earning and redeeming.
What is a Third-Party Reward Program?
Instead of creating a rewards program from the ground up, companies can alternatively choose to join an existing partnership rewards program that serves many businesses across a diverse range of industries. Popular examples of third-party reward programs include Air Miles, Aeroplan, and Shopkick. Inside each partnership rewards program customers will gain access to a wide variety of rewards types, including products, services, and other perks. Some examples include gift cards for popular retailers and restaurants, home appliances, electronics, hotel and airline discounts, and much more.
Partnership rewards programs are expansive and well-known, many of which have an international or global reach. Customer awareness of these kinds of programs will be high, and familiarity with the mechanics of how they work will already be in place. There will be very little explanation or education needed on the part of the business to incentivize people to sign up, as many customers will likely already be members of the program, or at least a similar one.
Partnership rewards programs take the responsibility of managing the program off of the business, making it simple to get up-and-running with the program in a short period of time. However, this in itself can be a kind of disadvantage. With the business having so little control over the program, there is not as much differentiation to be gained. For example, all businesses who are part of the Air Miles program follow the same format with the same rewards. It certainly makes it easier, but does not provide the same level of brand reinforcement as a private program.
Another factor to be aware of is that, with a partnership rewards program, customers may choose to earn points at your business but then opt to redeem them somewhere else. This can result in achieving the exact opposite goal that you want from a rewards program. Customers may end up leaning more toward the partnership program than with your business, eroding the loyalty you’ve been working to strengthen. This can be exacerbated even more if any of your competitors are also enrolled in the same partnership rewards program.
Key Advantages of Partnership Rewards Programs
- Easy to join and get started offering customers rewards.
- Awareness of the program among customers will be strong.
- Low investment in time & resources to manage the program.
Potential Downsides to Private Customer Loyalty Programs
- Low differentiation from other businesses in the same program.
- Limited control over the program & rewards types.
- Customers may earn at your business, but redeem elsewhere.