Do tiered loyalty programs work?

“Are you a member of our loyalty program?”

It’s one of the most common questions we get when making a purchase these days. It’s become a standard step in the purchase process to scan a QR code or provide an email address or phone number to start earning points and rewards with your favorite brands.

The member provides the brand with their basic information and makes purchases. In return, the brand provides rewards like points towards discounts, exclusive benefits or free products. They may even reward them for their purchases and other engagements at different levels of appreciation (tiers) throughout the customer journey.

What is a tiered loyalty program?

Tiers are a feature within loyalty programs that deliver additional levels of value based on customer behavior and generate deeper brand connection.

Loyalty program tiers address several key business needs and objectives. The first is the ability to grow market share by helping brands lock in future spend from loyal customers as they engage with the brand through their tier levels, creating ongoing momentum and incremental spend.

Secondly, tiers create exclusivity by offering tiered status to customers who are highly engaged with specific brands. It allows them to enjoy perks and special benefits, potentially prompting other customers to also want those rewards.

Finally, tiers help brands to allocate their marketing dollars efficiently based on customer preferences and segments to see a greater return on investment.

Examples of tiered loyalty programs by industry

Tiered loyalty programs have been leveraged across industries for decades. The travel & hospitality industry was one of the pioneers of tiered loyalty with the launch of airline “frequent flyer programs” with status tiers. American Airlines established one of the first programs, AAdvantage, in 1981.

These programs now provide experiential rewards both in-flight and through other non-airline partnerships. For example, as part of the loyalty construct of higher status tiers, American Airlines partners with other brands that allow AAdvantage members to reach or secure elite status levels for their engagement with preferred car rental and hotel brands.

Hotels follow a similar structure using tiers to provide members with additional soft benefits like priority check-in, upgrades and accelerated earn rates on hotel bookings after an incremental number of booked nights.

In retail, many clothing brands have been able to successfully establish tier-based loyalty programs that reward incremental visits and provide member-only benefits as participants continue to make purchases and reach higher status. Benefits in this sector tend to take the form of free shipping, early access to new products and special discounts for members, all increasing in value as the member reaches higher status tiers.

In restaurants, brands may offer points per visit that accumulate for certain rewards like discounts, free drinks and restaurant swag.

This brings us to the ultimate question of whether these loyalty structures actually work.

Do tiered loyalty programs work?

Tiered loyalty programs have a few critical outcomes, including customer experiences that benefit the shopper and translate to incremental purchases and ultimately revenue growth. To this end, tiers are effective when the tiers feel achievable to the customer. Otherwise, brands risk members becoming detached from not only the program but also the brand.

How brands have made tiered loyalty work well is by using tiers to inspire members to reach ‘the next mountain top’ and earn the trust of their most reliable members. At the same time, tiers are a tool to distribute rewards and value in a worthwhile manner for the brand and the program member. It is not financially feasible for brands to give the same benefits to all members. This is a key reason why brands may strategically shift the value propositions of tiered loyalty programs ensuring that resources are managed effectively while maintaining value for the member.

For example, let’s say a retailer says it takes $50 in purchases for a member to reach their first tier. Within that first tier, the member receives access to limited edition merchandise. Based on average prices within the store, the $50 threshold is not challenging to hit after their first purchase. Therefore, most customers that have opted-in to the program would automatically have access to the limited-edition merchandise after completing an average transaction, which would no longer make this benefit exclusive. Brands should establish tiers that are tangible to customers but also challenging enough to create a strategic distribution of benefits to not create strain on limited resources and keep customers engaged with benefits that remain exclusive to their tier or spend level.

And do they work for members? When tiered loyalty programs were first introduced, it was a novelty for members to receive ‘free’ products, discounts or rewards for being a loyal member. However, today’s customers expect an easy, value-driven tiered loyalty program that delivers rewards and status while shopping with their favorite brands.

Advantages and disadvantages

What are the advantages of tiered loyalty programs?

The key advantages of tiered loyalty programs to brands are threefold.

Boost in revenue: Program mechanics like tiers help the business encourage repeat purchases and higher spending to meet revenue goals. Well-designed loyalty programs with effective mechanics not only benefit the business but also foster long-term brand loyalty by providing customers with compelling rewards for their transactions.

Personalized customer experience: Tiers offer a way to thank members for their patronage and to continue deepening the relationship. Tiers are most commonly constructed based on consumer behavior, using research and focus groups to understand what customers value most, and then building an incentives ladder to encourage their repeat business based on their preferences.

Improved customer retention: Tiered programs help members set goals and aspirations, leading to retention and more satisfied customers who will represent and advocate for the brand.

What are the disadvantages of tiered loyalty programs?

Having enough customer differentiation: Tiers do not always work for brands with little differentiation in customer segments. Without differentiation, it’s challenging to move customer groups out of one tier and into another, which puts a strain on resources. This could lead to all customers receiving the same benefits and a company cannot function by giving away free product or services without profit growth.

Keeping it as simple as possible: With tiered loyalty programs constantly introducing new rewards, types of currency and new levels, the rules for earning and redeeming can be confusing to members. Consumers value simplicity, which means that program rules and tiers need to be understandable. Members want to know what rewards they get and how to get them. If a program is too complex and the tiers and navigation are too difficult to understand, the brand runs the risk of low attrition and engagement from its members.

Upkeep and communication: Finally, it’s important to consider the upkeep of tiers and how the program is communicated to members. If a brand regularly makes updates to the program tiers that might negatively impact the member, they must consider that it’s much easier to give something to the member than to take something away. This makes it essential for brands to keep a critical eye on how program changes could put them at risk of losing loyal members.

How many tiers should a loyalty program have?

While there is no magic number, it is common to see programs with 3-4 tiers. In the case of loyalty, success does come from a specific number of program tiers but more so from the way the brand is able to drive tier progression and incrementality.

A top tier should be small enough that it feels exclusive to its members. If that top tier gets too crowded with new members, adding another lower tier will help avoid the perception of diluting premium status. Brands end up with 3-4 tiers by controlling the size of the loyalty portfolio and maintaining exclusivity.

However, it’s also critical to have the right number of tiers to keep the customer motivated with rewards and thresholds to create incremental spend, influence repeat purchases and drive further brand loyalty.

How do points and currency play a role in a tiered loyalty program?

Tiers are built on top of the loyalty program. Often, two currencies are used: one for earning rewards and another for achieving status. This can confuse customers, so brands need to clarify how each balance is calculated from member activity. For instance, when customers spend at a brand with a tiered loyalty program, their spending converts into points or the brand's currency, helping them progress to higher tiers. Brands are now exploring creative ways to engage loyalty members, sometimes shifting away from point-based systems to new types of rewards.