Insights

The Evolution of Customer Loyalty Programs

Loyalty programs have seen their share of ups and downs since the 1900s, when one of the first and most well-known versions in history — the Frequent Flyer program — made its debut. From reaching peak popularity, to subsequently falling out of favor with consumers over the years, businesses have seen their programs restructured, and in some cases, eliminated altogether. When the COVID pandemic hit in 2020, it shook the foundational premise of what makes loyalty programs beneficial, for businesses and consumers alike.

A Post-Pandemic Comeback

A recent McKinsey study revealed that more than 75 percent of consumers tried new brands, shopped at new places, and made purchases via new methods during the pandemic. This made it more important than ever for brands to engage and retain customers. Enter loyalty programs — again.

When it comes to the new normal, loyalty programs are a more natural fit than many other customer-retention tactics. That’s because they promote contactless interactions, in-app purchases, digital-first experiences, mobile-first designs, and even customizable offerings — all of which have become standard shopper expectations.

How Loyalty Programs (Used To) Work

There are a number of well-known loyalty program structures out there. The most basic is a simple reward system that allows customers to collect points based on purchases. Hotels.com, for example, gives members a free night’s stay after booking 10 nights at eligible hotels.

Other programs are tier-structured, with more attractive benefits and rewards as customers move through levels. Personal care and beauty giant Sephora offers Beauty Insider, VIB, and VIB Rouge levels, depending on purchase amount and frequency.

Charging a fee for benefits is another approach to loyalty and rewards. Amazon Prime, for instance, charges a flat annual rate of $119 for fast and free delivery on most products sold, and includes a range of other perks, including music streaming and video-on-demand. Costco’s rewards program follows a similar structure, with a $60 annual membership fee to access discounted bulk merchandise, less the digital add-ons.

Even though these transaction-based loyalty programs promote short-term interactions, they’re not as effective at achieving long-term engagement. It’s experience-based programs that typically see the most significant lift in customer retention.

Today’s Loyalty Programs

FROM POINTS TO PERSONALIZATION

The key to designing an experience-based program is personalization. Customers want to be looked at as more than just a member in a tier, and appreciated for the overall value they bring to your business.

This is where AI technology comes in. With AI, you can develop and maintain customer profiles with relevant and timely data. This includes every time a customer views a product, adds to cart, completes a checkout, or abandons their cart. By tracking all these touchpoints, you’ll better understand each customer, and in turn, can offer personalized incentives and targeted communication that keeps customers engaged and coming back.

GAMES, FTW

Other retailers have modernized their loyalty programs through gamification. Games help engage customers by giving them a sense of accomplishment and a reward each time they win a challenge. Gamification can be integrated into a loyalty program through in-app currency, badges, personal best scores, and leaderboards.

Starbucks, for example, uses gamification by rewarding customers with “stars” every time they interact with the app or make a purchase. And depending on how many stars have been accumulated, members can unlock new levels, and consequently, new benefits. Eighty-seven percent of North American retailers plan to use gamification to engage customers within the next five years.

Is B2B Loyalty A Thing?

Loyalty programs may be less common in the B2B space, but they can still be just as effective at building long-term relationships. What’s important to note is that buyer motivation will be different, and therefore, so should the incentives. Product upgrades, training and support, discounts, and store credit will probably entice stakeholders more than traditional coupons and punch cards.

Take Lenovo for example, this computer manufacturing company developed the Lenovo LEAP (Lenovo Expert Achievers Programme) for their business partners. Here, participants are awarded points for completing educational modules online or for selling eligible Lenovo server products. They can later redeem their points for MasterCard gift cards or reloadable cards.

What’s Next?

In the future, the most successful loyalty programs will be hyper-personalized, contextually relevant, experiential, and intelligent. Therefore, AI will continue to be an integral part of offering real-time, prescriptive promotions and offers. But most importantly, an ideal loyalty program will be integrated into a brand’s customer relationship management platform. This way, everyone from sales, to service, to marketing will be able to offer the best, most relevant, and connected experience for each customer.