Effective tiered loyalty programs

Building strong and lasting relationships with customers has become more critical than ever. A well-designed tiered loyalty program with strategically crafted tiers can be a big deal, offering a powerful incentive for clients to stay loyal to your brand. This piece provides valuable insights and practical tips for configuring and implementing an impactful tier-based loyalty scheme that will meet your business objectives.

Key takeaways

Loyalty program tiers are a powerful tool to enhance engagement, increase retention, and drive long-term allegiance.
Tier schemes are known for their easy-to-understand mechanisms, thanks to which members can quickly grasp the benefits associated with each tier, making it more likely for them to strive for higher ones.
Loyalty tiers naturally segment customers, enabling you to target different groups with personalized offers and experiences.
Successful tiered programs follow these steps: deciding on clear reward methods, determining the optimal number of tiers, differentiating benefits, engaging through direct communication, and monitoring and optimizing.

What will you find in this tiered loyalty program guide?

In this guide, we'll explore the concept of a tiered loyalty program and its various advantages. You'll learn the main loyalty mechanisms that drive customer engagement and motivation. What's more, you'll discover the value of optimizing for profitability when managing loyalty benefits and how tiers contribute to natural customer segmentation.

This guide also explains what a tiered loyalty program matrix is and shows you the best practices for preparing it. You'll be walked through establishing clear loyalty scheme objectives, identifying and segmenting your customer base, and determining your business's most suitable tiers.

To provide you with practical insights, the guide concludes with the five best examples of loyalty program tiers implemented by successful businesses. These real-world examples will inspire you to design your own tiered loyalty scheme tailored to your unique needs and client's expectations.

Without further ado, let's dive into the world of loyalty program tiers and discover the immense potential they hold.

What is a tiered loyalty program?

A tiered loyalty program is a structured customer loyalty strategy where participants receive varying levels of rewards and benefits based on their level of engagement or spending with a company or brand. These levels, or tiers, are typically structured in ascending order, with each higher tier offering more exclusive or valuable rewards.

The key characteristics of a tiered loyalty program include:

Multiple tiers/levels. The program is divided into several levels, often with names that indicate status.
Earning criteria. Loyal customers advance to higher tiers through specific actions, such as spending a certain amount, earning a set number of points, or frequenting the business within a certain period.
Progressive rewards. Higher tiers offer better or more rewards. This could include discounts, free products, exclusive services, early access to sales, or special customer service options.
Encouragement of increased engagement. The structure incentivizes customers to work on their brand loyalty to reach higher tiers and obtain better rewards.
Clear communication. The criteria for advancing and the benefits at each tier are clearly communicated to users.
Dynamic engagement. The program often includes mechanisms for downgrading members who don't maintain the required level of engagement, encouraging consistent interaction with the brand.

This kind of program is effective in fostering customer loyalty, encouraging repeat purchases, and increasing overall customer lifetime value.

What are loyalty tiers?

Loyalty tiers, also known as membership levels, are a system used by businesses to reward and incentivize their faithful clients. These levels are structured based on customer participation, engagement, and spending behavior to foster long-term allegiance and encourage repeat transactions. As participants move up through the tiers, they unlock increasingly attractive benefits.

You can choose the name of each loyalty level based on your brand's image, creating a more personalized experience. However, traditional tier names (such as brown, silver, and gold) clarify the customer's position in the loyalty journey.

Naming nomenclature examples from Marvel Insider. Source: https://www.marvel.com/insider

The main benefits of loyalty tiers

Let's discover the significant benefits of properly set loyalty levels, from better retention and increased customer value to obtaining actionable data.

1. Increased engagement and motivation

Program tiers act as a source of motivation for clients to stay connected with your brand. As consumers progress through the tiers, they unlock valuable rewards and benefits, creating a gamified experience. This progression-based approach taps into human psychology, triggering a desire for status and recognition and incentivizing customers to maintain their loyalty and repeat purchases.

Visible progress tracking in tier loyalty programs is a key factor to motivate customers, as seen in examples from Starbucks, Booking, and Hyatt. Source: Private collection.

2. Easy-to-understand mechanisms

Loyalty tiers offer members both simplicity and transparency by categorizing benefits into different levels, each representing a specific degree of fidelity or spending. This straightforward approach replaces complex reward structures, making it easy for customers to understand the program's setup and what they need to do to move up to a higher tier and unlock better benefits.

Clear tier achievement and maintenance conditions proposed in the H&M loyalty program.Source: https://www2.hm.com/en_gb/member/info.html

Transparency is key in loyalty programs. Your customers need to understand the requirements for achieving and maintaining each tier. Communicate the actions or spending thresholds necessary to advance or stay in a specific tier. Whether based on the number of purchases, total spending, or other criteria, participants must be assured of what they have to do and when to reach/maintain a tier. Additionally, they should be informed when the conditions change. Providing clear messaging in this area is demanding for marketers, but it's vital.

3. Optimized profitability and discount management

Tiers enable you to optimize your scheme's profitability and effectively manage discounts. You can target your most valuable and active clients by reserving premium benefits and exclusive offers for higher tiers. This strategic allocation ensures that discounts and rewards are distributed where they'll have the greatest impact, maximizing the return on investment for your loyalty program.

The best tiers' benefits that customers can get

Free delivery is essential in e-commerce programs and remains one of the most valued benefits for customers. Offering free delivery within the loyalty program has often successfully driven member acquisition.
Early/exclusive access is prevalent in the fashion, events, and hospitality industries. It provides loyal customers with a VIP experience, granting them access to sales or limited collections before others, creating a sense of exclusivity.
Birthday gifts are a common feature highlighted in most tiered loyalty programs. The range of birthday benefits is broad, including free rewards (e.g., Starbucks), discounts (e.g., Peek&Cloppenburg, Douglas, Adidas), and bonus points (e.g., Sephora).
Prolonged periods for returns/guarantees provide the most loyal customers with an extended window for returns or additional guarantees on products.
Special events/services are highly popular, especially for higher/VIP tiers. Brands invite their loyalty program members to exclusive events they organize or sponsor, further enhancing the sense of exclusivity and appreciation.
Additional discounts/points include more opportunities to collect bonus points on designated days or extra discounts (e.g., an additional 5% off on sale products). These benefits enable members to reach rewards quicker or save more on their purchases.
Welcome-to-tier benefit is a one-time customer reward upon reaching a higher tier in the loyalty program. As tiered programs aim in motivating members to engage more and unlock more excellent benefits, this one-time benefit is an essential event in the customer journey.‍
Anniversary benefit rewards members who maintain their higher tier status beyond the initial achievement. To appreciate the member's loyalty, brands offer additional benefits for keeping the tier for the next period.

Examples of tiers' benefits according to loyalty experts and usage popularity. Source: Internal presentation prepared by Open Loyalty.

4. Natural segmentation and enhanced customer lifetime value

Loyalty program tiers provide a seamless and natural segmentation to your analytics tool and also enhance customer lifetime value (CLV). As participants move through the tiers, you gain valuable insights into their behaviors, preferences, and spending patterns. This data-driven segmentation allows for personalized and targeted marketing efforts, tailoring promotions and offers to specific segments.

The result is an enhanced customer experience, greater relevance of marketing communications, improved retention rates, and an increase in the long-term value of each customer.

5. Customer retention, long-term loyalty, and customer engagement

Loyalty program tiers foster long-term devotion and customer engagement among customers. Creating a multi-tiered structure can cultivate a deeper emotional connection with your most dedicated audiences.

‍As loyalty scheme participants progress and unlock higher-tier benefits, they develop a sense of commitment to the brand, enhanced by engaging activities and loyalty points. This emotional bond helps protect your business from competitive forces and reduces the likelihood of clients switching to competitors.

Additionally, tiers within the loyalty scheme play a crucial role in preventing churn. By offering escalating rewards, loyalty points, and exclusive perks as customers move up the tiers, you incentivize them to stay engaged and continue patronizing your brand. The desire to maintain and enjoy the privileges of their current tier encourages clients to remain loyal over time, thus reducing the chances of churn.

6. Enhanced customer experience

The ongoing loyalty management at different levels enables you to deliver a more personalized and rewarding experience.

With each tier, clients can access exclusive perks, customized offers, and unique events tailored to their preferences. This elevated and immersive approach strengthens your relationship with your valued customers.

7. Fuel for data-driven decision-making

The ongoing loyalty management at different levels, particularly in successful tiered loyalty programs, enables you to deliver a more personalized and rewarding experience. With each tier, clients can access exclusive perks, customized offers, and unique events tailored to their preferences. Loyalty points and tier-specific rewards further enhance this experience. This elevated and immersive approach strengthens your relationship with your valued customers, making them feel appreciated and understood.

Program levels provide valuable data insights you can use to leverage data-driven decision-making. Analysis of tier-related data, including customer engagement and loyalty points accumulation, helps identify trends, behavior patterns, and the effectiveness of different rewards.

Armed with this information, you can refine your loyalty scheme strategies, tailor benefits, and continuously improve the program to better meet people's expectations and preferences, thereby ensuring the success of your tiered loyalty programs.

How to prepare a successful tiered loyalty program? 5 top practices

A well-structured and enticing tier matrix lies at the heart of any impactful scheme. To put it simply, a tier matrix is a table that lists the tiers and the corresponding benefits. This carefully crafted framework encourages customer commitment and paves the way for increased retention and higher revenue.

In this part, we'll delve into five best practices and strategies to create a compelling loyalty program tier matrix that will leave your clients eager to climb the ladder of rewards and benefits while, at the same time, driving your business toward new heights of success.

1. Decide on clear rewarding methods

When designing the tier matrix, the first step is deciding on the specific behaviors you want to reward. These can include customer purchases, engagement actions (such as writing product reviews or referring friends), or a combination of both. To make these rewards more appealing, consider integrating relevant rewards that directly correlate with the customer's actions, ensuring they feel directly recognized for their specific contributions.

The primary rewarding mechanism you choose will drive the most important behaviors for your organization. For example, if you want to increase customer referrals, you might offer more rewards for successful referrals, incorporating exciting rewards to create a sense of enthusiasm and anticipation among customers. On the other hand, if you aim to boost repeat purchases, you may offer points for every dollar spent, perhaps using experimental rewards to test new methods of engagement and retention.

2. Set up an optimal number of tiers

Determining the number of tiers and their corresponding thresholds is crucial for creating an effective loyalty program tier matrix. The number of levels should strike a balance between simplicity and effectiveness. Too few tiers might not offer enough differentiation to motivate customers, while too many of them can make the program overly complex and challenging to manage.

Start by defining a basic structure, such as three to five levels, with increasing benefits as members advance. The lowest tier should be easily accessible to all new customers, while the highest tier should be reserved for your most valuable and loyal buyers.

The dynamic tiering provided by Nordstrom inside the Nordy Club loyalty program. Source: https://www.nordstrom.com/browse/nordy-club

Consider using your knowledge about average customer behaviors, such as purchase frequency, average basket value, and engagement frequency, to set achievable thresholds that motivate members to strive for higher levels in your tiered rewards program.

Utilizing customer data and insights is crucial in designing an appealing loyalty program. Analyze purchase patterns, customer preferences, and the overall profitability of the program at each tier. By understanding people's behaviors and their value to the business, you can tailor benefits that align with their interests and your brand's objectives. Data-driven estimations also enable you to allocate resources more effectively, ensuring that the company's rewards are sustainable while still providing significant value to end users.

3. Differentiate the benefits

Each tier in the loyalty program should offer unique and desirable benefits that entice participants to move up the ranks. Benefits and perks should reflect the increasing value of each tier and provide clear incentives for customers to achieve higher status.

For instance, the entry-level tier might offer modest discounts or exclusive access to sales, while the top tier should provide significant rewards, such as VIP treatment, personalized offers, and enhanced customer service.

By clearly differentiating the benefits between tiers, you encourage members to engage with your brand more frequently, as they can see the tangible rewards they will receive for their affiliation.

4. Engage through direct communication

A tiered loyalty program, pivotal in building a strong brand community, introduces various milestones and events along the customer journey, such as reaching a new level, being close to reaching the next one, or facing a potential downgrade. To enhance the customer experience and foster a sense of belonging within the brand community, it's essential to establish direct communication channels to engage with your members during these critical moments.

Utilizing targeted messaging and notifications, integral to maintaining a vibrant brand community, keeps customers informed about their progress and the benefits they can unlock at higher levels. Additionally, personalized communication, a key strategy in strengthening brand community engagement, can incentivize members to take specific actions to maintain or upgrade their status. This approach not only boosts the customer's loyalty but also reinforces their connection to the brand community.

An example of a communication path for the tiers' validity. Source: Private collection.

5. Monitor and optimize

The work doesn't end there once your tiered scheme is live. Regularly monitor the performance of the tiered loyalty program to understand how it's influencing customer behavior and loyalty. Analyze redemption rates and overall loyalty program metrics to make data-driven decisions.

Also, keep track of the distribution of members across different tiers, as this can give insights into the program's appeal and effectiveness. Analyze whether customers are achieving the various tiers and if they're taking advantage of the advantages granted.

If you notice that customers are struggling to reach higher levels or not enjoying the benefits, consider adjusting the program. Regularly optimize your tiered program based on collected insights to ensure it remains relevant, engaging, and aligned with your objectives. But remember that balancing tiers will likely affect the progress of users who spent time and money to reach their current stage. At this stage, it’s critical to communicate upcoming changes clearly so users don’t feel blindsided.

By continuously refining the tier matrix, you can enhance the loyalty scheme's impact and drive better results for both your customers and your organization.

‍Adjust for average shopping frequency and basket value. Analyze how often shoppers make purchases and the average value of their carts to set realistic and attainable tier requirements. These metrics provide valuable insights into customer spending habits and what is considered typical within the industry. Setting tier targets that align with these averages ensures that a wide range of clients can engage with the rewards program and find value in participating.