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4 Types of Loyalty Programs for Small Business: Pros & Cons of Each

Posted Aug 21, 2018
Customer loyalty programs are excellent sales builders for small businesses

It’s hard to go anywhere without seeing a merchant with a loyalty program. Nearly every grocery chain offers them. Large organizations, like Office Depot and PepBoys use them. So do smaller businesses, like the corner sandwich shop or the local vape store.

Why are businesses so enamored with loyalty programs? Because they work. According to the IRI Consumer Connect Survey, 74 percent of consumers choose a store because of a loyalty or discount program!  Loyalty programs offer something back to your repeat customers, in turn, building affinity with shoppers.

But . . . loyalty programs aren’t something you can slap together and never look at again. They are a powerful marketing tool if you choose the right program and cultivate its use.

The real question isn’t why to use it, it’s how to pick the right one for your business. Should you build your own? Or invest in a loyalty system? What is the best type of program for your business and customers?

Loyalty programs are run in 3 basic ways. Either your system is based on points, on membership, or on status. Within each of these, however, are different ways to execute the programs and different reasons to use them.

4 Examples of Loyalty Programs

Punch Card

Most people are familiar with a punch card – or in some cases, a stamp-type program. Buy 10 pizzas, get the 11th free.  Buy 6 subs, get a free cookie. Purchase 5 pairs of shoes, get 50% off your 6th pair. Punch cards are straightforward, but they can have drawbacks.

The Pros

– As stated, punch cards are straightforward and easy to understand

– It’s a low-cost way for a small business to offer a loyalty program. You can even print your own cards

The Cons
– Customers must remember to carry the card with them
– Employees must remember to ask – and punch – customer cards
– It’s difficult to prevent fraud with punch or stamp cards
– The business doesn’t capture any information about the customer that they can later use for marketing

Points Program

Points programs are great for merchants that want to encourage frequent purchases. An example is Starbucks’ program. Each drink you purchase gives you points. And once you’ve reached a certain level of points, you get a free drink. At some grocery stores, you earn points that convert to a discount on a gas purchase.  The more points you accumulate, the bigger your per-gallon discount. Food isn’t the only business that benefits from point programs, of course. Airlines and credit card companies are frequent users of this kind of loyalty program, too.

The Pros
– Encourages customers to spend repeatedly with you
– Merchants can collect purchasing behavior data that they can use to target future promotional efforts
– Can be implemented in a number of ways, from mobile apps to scannable cards

The Cons
– The benefits need to be very clear to customers
– Results need to be frequent enough to keep shoppers engaged in the program
– Requires a means of recording points

Membership Programs

Free or fee-based, membership programs can be very clear and easy to use. A typical discount grocery store loyalty program can be membership based. If it’s free, customers “pay” for it by giving their information to the store and allow their purchases to be recorded and tracked. In return, they receive special discounts that non-members don’t get.

Paid memberships come with even greater perks. Probably the most well-known example is Amazon Prime. Prime members get free shipping, access to movies, TV shows, and music, and even special items in video games.

The Pros
– Data! The data gathered from customers allows you to create a vast range of marketing promotions tailored to each customer, including suggesting additional products they might like to buy
– Discounts give customers clear and immediate reasons to choose you over another business

The Cons
– Data! You’ve got to have the tools in place to collect the information, process it, and use it to improve your business
– Can be expensive to implement
– Time-consuming to analyze the data and determine the benefits and discounts that work best for you and your customers

Status Programs

Sometimes called tiered programs, status programs are a hybrid of points and membership. Customers join the program and have immediate benefits as a result. As time goes on and they make more purchases, they receive greater status within the program, unlocking new benefits. These programs tap into our desire to be acknowledged as VIPs. Examples include hotel and airline status programs.

Another example is inkbox, a high-end temporary tattoo company. Members can earn points in a number of ways, which allows them to unlock “chapters,” which give customers access to more perks.

The Pros
– Offers high-value customers an opportunity for exclusive items and experiences
– Creates high customer loyalty
– Provides insights into what your most profitable customers purchase

The Cons
– Customers at lower statuses may become discouraged with the program
– Design of the program can be difficult so that you’re only giving your best customers the highest benefits

Loyalty programs can be a great asset to businesses of all sizes. It’s important to consider what your customers are like, what will best motivate them,  and how they purchase before you decide on a particular program. Once the right program is implemented, however, it can make both your bank account and your customers very happy.