7 types of loyalty programs and their benefits

1. Tiered loyalty program

Tiered loyalty programs separate benefits into different levels, with more rewards offered to customers in higher program tiers. Some programs use the names of precious metals -- silver, gold and platinum -- or other naming conventions to motivate customers to spend more and reach higher tiers for increased rewards.

Examples include loyalty programs from Hilton or American Airlines, which offer free sign-ups and encourage customers to continue to purchase from them. As customers make more purchases, they can move to higher tiers and gain more rewards over time.

2. Subscription-based or paid loyalty program

A subscription-based or paid loyalty program requires customers to pay an upfront, monthly or yearly fee to join and gain access to additional benefits. Subscriptions can benefit organizations that want to retain customers for specified amounts of time, and they increase the likelihood of those customers' loyalty to the brand, as they choose to invest in the subscription.

For example, Amazon Prime is a paid subscription service that offers free shipping and other services to subscribers. Amazon Prime users get free TV shows, music, shipping, photo storage and product recommendations with the plan.

3. Value-based loyalty program

This type of loyalty program differs from others because it doesn't offer any explicit rewards to customers, like discounts or other benefits. Instead, value-based programs emphasize the organization's values and, ideally, also align with customers' values.

With this program, an organization pledges to donate a portion of its proceeds to one or more charities, enabling customers to choose the charity that best aligns with their personal values. Organizations that use value-based loyalty programs aim to facilitate deeper connections with customers.

4. Points-based loyalty program

Points-based programs reward customers with points for each purchase, making them popular in retail environments, like restaurants. When customers reach a certain number of points, they can cash those points in to get a product or receive a discount.

For example, Chipotle Mexican Grill awards customers points for joining its program, and for all purchases thereafter. When customers rack up enough points, they can get free food or merchandise, among other rewards.

5. Coalition loyalty program or loyalty partnership

This type of loyalty program -- often called a coalition loyalty program or loyalty partnership -- encourages customers to engage with the organization and gives them access to additional discounts and promotions as a member.

Examples include airlines such as Delta or American giving loyal members access to promotions on hotels, restaurants and other businesses.

6. Cash-back loyalty program

In a cash-back loyalty program, customers receive a set or tiered cash-back reward on their purchases to encourage them to continue their membership.

For example, credit card companies such as Chase, Bank of America and Apple Credit offer cards that give customers cash back on purchases made that they can redeem for cash or other gifts.

7. All-in-one loyalty program

An all-in-one loyalty program combines several rewards into one offering, such as points, cash, special promotions, or early access to new products or limited inventory. Large retailers and banks offer similar programs that encourage their customers to engage and stick around for the long term.

Benefits of a loyalty program

A successful loyalty program means customers find value in it. To gauge success, an organization should monitor its program's use over time and ensure it converts enough customers.

Once successfully implemented, loyalty program benefits include the following:

• Enhanced customer analytics. Loyalty programs can capture customers' purchasing habits and demographic information, like age and gender, which provides valuable insights into the company's customer base. Those insights can help identify a marketing campaign's effectiveness so marketers can target customers appropriately to increase sales.
• Increased product sales. If organizations collect customers' contact information, they can send promotions to encourage repeat purchases or new product notifications.
• Improved brand recognition and customer loyalty. Loyalty programs can increase brand recognition, as a company can continuously reach out to and engage with its customer base. As customers opt into the program, they get continuous exposure to the brand and reminders of products they use or might like. They can also receive discounts and product promotions that could discourage them from looking at competing brands.
• Referrals from other programs. With some loyalty programs, organizations can share and refer customers that would naturally require additional services or products through coalition partnerships.
• Exclusivity of unique products and services. This benefit has a more psychological effect, as customers want to feel special. This exclusivity can further increase customer engagement and adoption of these programs, which drives brand awareness and increases sales.

Loyalty programs can help marketing teams improve brand recognition, increase customer retention and boost sales. Each company must know its customer base well enough to recognize which type of loyalty program would best suit its audience and products.

Editor's note: This was originally published in 2021 and updated to reflect changes in best practices for loyalty programs.

Reda Chouffani runs a consulting practice he co-founded, Biz Technology Solutions Inc., and is CTO at New Charter Technologies. He is a technology consultant with a focus on healthcare and manufacturing, cloud expert and business intelligence architect who helps enterprises make the best use of technology.