Best Types Of E-Commerce Loyalty Programs: Pros and Cons With Examples

In today’s highly competitive market, your eCommerce business cannot survive without loyal customers. However, customer loyalty is something that should not be taken for granted and that requires thorough planning. One of the most important aspects you should consider in your plans for customer loyalty and customer retention is loyalty programs. 

E-Commerce loyalty programs are very effective in differentiating your eCommerce brand from competitors, improving customer retention rate, optimizing customer lifetime value, reducing customer acquisition costs, and hence, boosting your revenues. 

Also, did you know that 70% of customers are more likely to recommend a brand if it has a good loyalty program (Hubspot, 2022)? Accordingly, in addition to the countless benefits of eCommerce loyalty programs, they also help you leverage word-of-mouth marketing and raise awareness about your brand. 

In this article, we are going to walk you through the different types of loyalty programs and help you choose the right one for your eCommerce business. 

Table Of Content:

• 8 Types of eCommerce loyalty programs:

1. Point-based loyalty programs
2. Tiered loyalty programs
3. Paid loyalty programs
4. Value-based loyalty programs
5. Rebate loyalty programs
6. Coalition loyalty programs
7. Hybrid loyalty programs
8. Punch card loyalty programs
   

• Tips for choosing the right loyalty program for your eCommerce business

Types Of E-Commerce Loyalty Programs

Deciding to create a loyalty program for your eCommerce store is easy; however, what can be considered challenging is deciding which type of loyalty program to use. In the following sections of this article, we will discuss the most popular and effective types of eCommerce loyalty programs and help you decide which is right for your business.

 1- Point-based loyalty programs

Point-based loyalty program is one of the most common types of eCommerce loyalty programs. The way this type of program works is quite simple and straightforward. To demonstrate, customers earn a specific number of points each time they make a purchase or take a certain action. 

In this program, you get to choose the actions that your customers get rewarded for and the exact amount of points accorded to each action. For example, these actions could include:

• Purchasing a product or subscribing to a service.
• Creating an account on your eCommerce website.
• Verifying their email.
• Referring a friend. 
• Leaving a review on a product or a service.

Point-based loyalty program pros and cons

Pros:

• It is a simple type of loyalty program which means that it is easy for you to implement and for your customers to understand and engage with.
• It is a free type of loyalty program, so it does not require much thinking from customers to sign up for it.

Cons:

• It is pretty basic, so it does not offer much room for you to differentiate yourself from other eCommerce businesses.
• Customers do not take their rewards instantly because, usually, point-based loyalty programs require customers to accumulate a certain number of points over time in order to redeem rewards. This might be demotivating for certain people.

Example: SHEIN Loyalty Program

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The loyalty program of SHEIN depends on bonus points, which have proven to be extremely successful in attracting customers. Here’s how it works: 

• Customers earn
• 100 points for verifying their email on their profile page.
• 1 point for every US Dollar that they spend on a purchase.
• Up to 12 points for posting reviews on their purchased products: 5 points for posting a comment, 10 points for posting a comment with pictures, and 2 additional points for posting a comment with information about the size. 
• Additional points for engaging with different website activities and participating in contests.
• Special points for checking into the website every day for seven days consecutively. 
• Every 100 points are equal to 1 US Dollar, and customers can use these points to have up to 70% discount on the total amount of their purchase. 

 2- Tiered loyalty programs

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Tiered loyalty programs are another type that you can use for your eCommerce business. They are similar to point-based loyalty programs in that they usually allow customers to gain points with their purchases and accumulate them. However, what makes this type of program different is that it has several levels or “tiers”.

To better illustrate, in a tiered loyalty program, when customers join, they start at the lowest level, which allows them certain types of basic rewards. After that, the more customers purchase, the more they earn points, which allows them to move to a higher level and earn better rewards. 

Tiered loyalty program pros and cons

Pros:

• It leverages FOMO marketing because customers engaged in this type of program usually fear missing out on greater rewards available only in higher tiers; hence, they spend more money, make more purchases, and accumulate more points in order to reach them.
• Allows more opportunities for rewards customization; and hence, more room for differentiation.
• Encourages additional purchases, which contributes, eventually, to an increase in sales.

Cons:

• It might not be as easy to implement as points-based loyalty programs.
• Demotivation can happen here because some customers may feel that it is difficult for them to reach higher tiers and better rewards. 

Note That: Most tiered loyalty programs can also be considered hybrid loyalty programs because they combine points and tiers. 

Example: Ulta Beauty

Ulta’s tiered loyalty program requires customers to spend $500 per year to reach the Platinum tier and $1200 per year to reach the Diamond tier.

 3- Paid or subscription-based loyalty program

This type of loyalty program is also called a “subscription-based loyalty program”, “fee-based loyalty program”, or “Premium loyalty program”. Wherever the name is, the idea is still the same: customers have to pay a certain amount of money to be members of the program and earn exclusive VIP rewards.

Pros:

• Members of premium loyalty programs earn their rewards instantly. They do not have to accumulate points or wait for anything because their rewards are already guaranteed by their paid membership.
• Research shows that customers enrolled in a paid loyalty program are 43% more likely to buy weekly from the brand, 62% more likely to spend more on it, and 59% more likely to choose the brand over its competitors (McKinsey & Company, 2020).

Cons:

• It can sometimes be challenging to convince customers that the costs of joining your paid loyalty program do not outweigh the values. 
• Paid loyalty programs do not appeal to all customers because sometimes customers are just not willing to pay a fee; therefore, you have to review your customer segmentation results and make sure that this type of program is the right one for your target audience. 

Example: Amazon Prime

We all know that Amazon is a leading American multinational company in eCommerce, among other things. Amazon has one of the most successful eCommerce loyalty programs, which is called “Amazon Prime”. It is a paid loyalty program in which customers pay an annual subscription in return for additional services, such as unlimited free two-day shipping on millions of items, exclusive sales, and other benefits. 

4- Value-based loyalty program

In value-based programs, there are no points and no tiers, and the customers are not rewarded directly. Here, eCommerce businesses reward customers by making them a part of a social or charitable cause. In other words, with every purchase a customer makes, a percentage of the money is donated to a charity or is dedicated to the support of a good cause.

Pros:

• It creates a deeper connection between customers and your eCommerce business.
• It provides you with an opportunity to fulfill your corporate social responsibility.

Cons:

• Some customers might not be interested in this type of loyalty program and might not perceive donations are rewards for them. You might want to consider creating a hybrid loyalty program that includes additional rewards other than just donations. This means more effort from your side. 
• It can be challenging to choose social causes that align with your target audience’s values. 

Example: TOMS loyalty program

TOMS is an American business that sells shoes for women, men, and children. This is an example of an eCommerce business that uses value-based loyalty programs. Every time a customer makes a purchase, the business donates a pair of shoes to unprivileged children in underdeveloped countries all around the world.

5- Rebate loyalty program

Rebate loyalty programs are also known as “Cashback loyalty programs”. This is a type of program in which customers have to spend a certain amount of money to be rewarded cash back or in some cases, store credit. In this program, it is best that all the detail be disclosed from the beginning, meaning that customers should be fully aware of the amount of money they need to spend to earn cash back and the amount of the cashback they will earn. 

Pros:

• It is easy to understand, implement, and manage, just like point-based loyalty programs.
• It attracts customers that consider cash as the best reward.

Cons:

• There is no room for reward customization because, in this type of eCommerce loyalty program, all customers get the same type of rewards. 
• Just like point-based loyalty programs, cashback loyalty programs do not provide opportunities for you to differentiate yourself from your competitors’ loyalty programs. 
• Unlike paid loyalty programs, cashback loyalty programs do not offer instant gratification. 

Example: FAMOUS Footwear

FAMOUS is an American retailer that sells footwear. It is an example of eCommerce businesses successfully using a rebate or cash-back loyalty program. It is called “Famously You Rewards”. 

The brand’s loyalty program gives customers cashback rewards when they make purchases and on other occasions as well, such as their birthdays. 

 6- Coalition loyalty programs

Coalition loyalty programs, also known as “shared loyalty programs”, reflect a form of partnership in which multiple brands work together on offering a joint loyalty program. 

Before talking more about coalition loyalty programs, it is important to highlight the difference between them, and what is called “umbrella or group loyalty”

Now back to coalition loyalty programs; like any other type of loyalty program, they have pros and cons.

Pros:

• For customers, a coalition loyalty program is very attractive because it provides them with options to redeem rewards at the brand of their choice (of course, the brand has to be part of the coalition). 
• Coalition loyalty programs are a great way for your eCommerce business to expand its network and its customer base.
• All the risks and the costs of running and managing the loyalty program are shared between you and your partners in the coalition. 

Cons:

• Opportunities for differentiation do not exist here. Of course, the coalition loyalty program as a whole can differentiate itself from other coalition loyalty programs. However, what we are talking about here is that your eCommerce brand, as an individual eCommerce business involved in the coalition, cannot differentiate itself from its partners in the program.
• With coalition loyalty programs, your eCommerce business will not be able to leverage the customer data collected because it is usually owned by the coalition itself and not accessible to individual retailers.

Example: Blue Loyalty Program

Blue is the Al Futtaim Retail Group's coalition rewards program. Blue enables users to shop across various brands in the GCC & Egypt, Singapore & Malaysia and rewards their shopping experience. Some of the brands involved in the program and that have strong eCommerce stores include Guess, KIABI, Marks & Spencer, Maje Paris, Sandro, Ted Baker, The Watch House, and others. 

The program allows customers to earn points at one brand and to have the option to redeem these points at any other brand available in the coalition. 

7- Punch card loyalty programs

Punch card loyalty programs can be seen as similar to point-based loyalty programs; however, instead of collecting points after each purchase, customers collect a punch or a stamp on a card, whether virtually or physically. Traditional punch cards were physical; however, with the rise of eCommerce businesses, most punch cards today are virtual and accessible from mobile devices, which greatly leverages mobile commerce. 

Pros:

• It is interesting, and, for some customers, it is the perfect motivation to make more purchases.
• It is very easy for customers to understand and for your eCommerce business to implement.

Cons:

• Customers do not earn their rewards immediately. They have to wait until they collect the required number of stamps, which might lead to customers losing interest and abandoning the whole process. 
• Does not provide you with customer data like other types of loyalty programs do.

Example: Flour Bakery

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Flour is a bakery that has an online store through which it sells baked goods, pastries, and other things. The brand has a virtual punch card program. Every time customers make a purchase, whether from the online store or the physical store, they earn a digital stamp on the punch card. After collecting a certain number of stamps, customers earn rewards, such as discounts. 

 8- Hybrid loyalty programs

Simply speaking, a hybrid loyalty program is one that combines two or more types of loyalty programs. This is a very good choice if you want to create a loyalty program that perfectly fits the strategy of your eCommerce brand.

Pros:

• Hybrid loyalty programs provide the best opportunities for differentiation. Here, you get to integrate the best elements from different loyalty program types into a completely new form of program that is differentiated from your competitors’ programs.
• Hybrid loyalty programs are more flexible than traditional loyalty programs, and they can be customized to the specific needs of your eCommerce business.
• Hybrid loyalty programs make things interesting for customers and provide a more exciting customer experience.

Cons:

• The process of designing, running, and managing a hybrid loyalty program can be complex. Therefore, it requires time, effort, and other resources. 

Example: Sephora Beauty Insider

As a leading brand in the beauty industry with an eCommerce store in addition to the brick-and-mortar stores, Sephora is considered to have a successful loyalty program. It has a very attractive hybrid loyalty program that combines point-based loyalty programs, tiered loyalty programs, and value-based loyalty programs. Here, customers earn points as a reward for each and every purchase that they make and are allowed to move upward through tiers. 

The Sephora eCommerce loyalty program was originally named the “Beauty Insider,” and customers could join it for free. In 2009, Sephora added a new level called “Beauty Tier (VIB)” which can be unlocked when you spend $350 within a year. A third level was created, in 2013, called the “Rouge Tier”, which can be reached when you spend $1000 within a year. Additionally, in 2016, Sephora added something called the “Beauty Bazaar” where customers can spend their beauty insider points.

As for the value-based aspect of Sephora’s hybrid loyalty program, as we mentioned before, Sephora gives its customers the option to donate their points to charity.

Tips To Choose The Right Loyalty Program For Your E-Commerce Business

• Know your audience. You have to conduct proper customer segmentation, identify your target audience, and understand the buying motivation of your customers. 
• For example, if you are targeting young male customers, consider including gamification in your loyalty programs. If you are targeting high social classes, consider having a paid/premium loyalty program. 
• If your customers are people who believe in charity work and love to be involved in making a difference and supporting good causes, consider having a value-based loyalty program.
• Review your eCommerce brand’s goals, objectives, and KPIs and choose a loyalty program that is aligned with them.
• If you are pursuing omnichannel marketing, consider incorporating omnichannel loyalty programs among your omnichannel marketing strategies. Omnichannel loyalty programs connect rewards across your different channels and platforms and across different devices as well.
• Test different types of loyalty programs, evaluate your results to see which type appeals better to your customers, and then work on optimizing these results.
• Consider the size of your eCommerce business.
• For example, if you are a small eCommerce business, a punch card loyalty program might be suitable for you more than tiered loyalty programs, which are more right for mid-size and large retail businesses. 
• Consider the type of rewards that you are willing to offer.
• If you do not want to put effort into developing creative rewards, you can always have a cashback loyalty program.
• If you do not have enough time or resources to manage rewards on your own, you can join a coalition loyalty program and share this responsibility with other eCommerce brands.
• If you are willing to provide different types of rewards, you can establish a point-based loyalty program, a tiered loyalty program, or even a hybrid loyalty program.
• If your eCommerce business allows you to offer instant gratification, consider having a paid/premium loyalty program. 
• Take into consideration if you are following any digital marketing trends.
• For example, if you wish to pursue artificial intelligence, virtual reality, and other technological trends, game-based loyalty programs are your way to go. 
• At the end of the day, a loyalty program is considered an investment for your eCommerce business. Therefore, make sure you always calculate your return on investment (ROI) before making a final decision about the type of loyalty program that you will implement. 

Read this article to discover the best strategies to create a successful eCommerce loyalty program.

Final Thoughts:

You are now aware of the crucial significance of loyalty programs for eCommerce, you know the most important types of eCommerce loyalty programs, and you learned some tips that can help you choose the right type for your business. 

However, we are offering you one more thing to make this whole process much easier for you. Converted.in is providing you with a great automation tool that will help you:

• Segment your target audience, which is an indispensable step to choosing the right loyalty program. 
• Gather your customers’ data, which may be scattered across different places, into one place, like a hub.
• Create, customize, launch, and automate personalized ads, SMS, and email marketing campaigns in which you can tell your customers about your loyalty program and its benefits. 

Book your Demo now and start developing your loyalty program.