Customer loyalty is extremely important. The beauty behind customer loyalty programs is that any company can implement one to keep their customers coming back. 

If you’re like most businesses, 80% of your sales come from just 20% of your customers. It’s those loyal customers who perpetuate the company and help it maintain its profits. From airlines offering frequent fliers deals to telecommunications companies lowering their fees to get more volume, companies in just about every industry use loyalty programs to some extent.

In this article, we’re discussing the importance of loyalty programs, the different types, and why there’s been a resurgence of them amidst the coronavirus pandemic.

Loyalty Programs During the Pandemic 

Many chains and retailers have amped up their loyalty programs during the pandemic. Because the pandemic has hobbled normal operations, loyalty programs have become a key driver for major companies looking to draw in new customers. 

For instance, Panera Bread’s loyalty program, MyPanera, has reached 40 million members during the coronavirus pandemic. This growth was pushed largely by its unlimited coffee subscription. Now, more than 50% of Panera transactions come from loyalty program members.

In addition, popular coffee chain Starbucks announced they are updating their loyalty program this fall. Currently, the only way to earn stars is when paying with a Starbucks card. Domino’s Pizza has also seen a rapid increase in membership to its Piece of the Pie loyalty program driven by the pandemic.

Types of Customer Loyalty Programs

1. Points-Based System: This type of loyalty program is simple yet effective. The points-based system relies on the principle of the more you spend, the more points you will receive. Every time a customer makes a purchase, they get a certain number of points predetermined by the amount of money they spent. Dunkin’s Donuts’ loyalty program, DD Perks, rewards users 5 points for every $1 spent. When a user reaches 200 points — that is, when they spend $40, they get a free beverage.

Pros: 

• Free membership means low barrier to entry 

• Great for attracting higher volume of signups than paid loyalty programs

• Members don’t need to be “sold” on joining

• Low risk

Cons:

• Doesn’t have enough value to attract more desirable customers

• Doesn’t provide the instant gratification demanded by modern customers

2. Paid Program: A paid loyalty program involves inviting consumers to pay an upfront fee, sometimes monthly or annually, to enroll in a VIP program. Many businesses offer these types of programs, but perhaps the most popular one is Amazon Prime. By signing up and paying an annual fee, members get access to perks such as two-day shipping, access to a library of streaming entertainment, and cash back on purchases.

Pros: 

• Attracts your best customers 

• Highly engaged and desirable customers easily see the value 

• Benefits are easy to understand

• Member fees offset the implementation and maintenance costs of the program 

Cons:

• High barrier to entry 

• Requires highly specialized skillset to manage effectively 

3. Tier System: This system rewards initial loyalty and encourages more purchases. By offering tiers in a loyalty program, consumers are incentivized to buy more. Each tier gives customers perks that can vary from birthday gifts to entry into monthly sweepstakes. Members have to cross certain milestones to reach the next tier, and many times these milestones are measured in dollars spent. Sephora’s Beauty Insider, for instance, offers members three tiers. The Insider tier is free to join and offers the least value. When you spend $350, you automatically enter the VIP tier, which gives members free gifts and one makeover per year. Finally, spending $1000 annually lifts a member up to Rogue status, which comes with a private hotline and access to exclusive events.

Pros: 

• Focuses on higher value customers

• More opportunity for customization 

• Incentivizes additional purchases in exchange for upgrading to a higher tier 

Cons:

• Less attractive to lower tier members who won’t spend as much 

• Member relationships can be jeopardized if they are downgraded

4. Cash-Back Loyalty Programs: Similar to points programs, cash-back loyalty programs reward you when you spend a certain amount. Generally, these programs offer you coupons or cash back that can be used exclusively at that retailer. The CVS ExtraCare program, for instance, rewards members 2% back in ExtraBucks Rewards every time they use their ExtraCare loyalty card. These “bucks” can redeem just about anything at CVS.

Pros: 

• Easy to understand value proposition 

• Redemption of store exclusive rewards can drive additional sales that wouldn’t have occurred otherwise 

• Low barrier to entry

Cons:

• Doesn’t provide instant gratification

• Not as compelling to infrequent shoppers  

Conclusion

All in all, loyalty programs reward recurring engagement. Especially now, with many chains trying to increase customer traffic, loyalty programs have been crucial for drawing new business and retaining current customers.