Two numbers best explain the current customer loyalty landscape: According to COLLOQUY, each U.S. household has 22 loyalty memberships, but only 9.5 are active—just 40 percent. Essentially, U.S. consumers enroll excitedly in countless loyalty programs, but the majority fails to provide sufficient rewards to make customers’ efforts worthwhile. As a result, customers disengage, take their business elsewhere and merchants lose revenue.

Modern loyalty programs succeed by making loyalty a truly effortless experience and optimizing around the concept of “sufficient rewards.” Due to new developments in customer retention technology, the scope of rewards has dramatically increased. Merchants will succeed by crafting the optimal program for their consumers and concept.

The 3 types of customer rewards

Rewards take one of three forms: cash back, experiential, and specific. Each comes with its own pros and cons:

1. Cash back

Customers receive cash in exchange for engaging (i.e., not limited to making a purchase) with the brand. The upside is obvious: easy to implement, broad appeal, and customers may overspend upon redemption. On the other hand, cash back rewards are expensive, as merchants give away true revenue. More importantly, cash back rewards have only a surface-level impact on customer loyalty and behavior. Effectively, cash back rewards are the customer-loyalty equivalent of giving a friend cash on her birthday. Nice? Yes. Thoughtful? Maybe. Memorable? No, but very easy and can get the job done.

"Actively engaged customers receive an experience from the sponsoring brand. The upside of experiential rewards is that they’re valuable for customers, extremely flexible, and ideal for premium brands looking to eliminate discounting."

2. Experiential

Actively engaged customers receive an experience from the sponsoring brand. The upside of experiential rewards is that they’re valuable for customers, extremely flexible (i.e., not necessarily expensive), and ideal for premium brands looking to eliminate discounting. The perceived value of the reward often far exceeds the actual cost to the brand. The downside is that experiential rewards don’t scale as easily as other types of rewards. Getting Super Bowl access for every single customer in the world simply isn’t possible.

3. Specific rewards

Customers receive a unique item in exchange for engaging with the sponsoring brand. Merchants can promote particular items (e.g., new menu offerings) and only incur the cost of goods sold; when done right, there’s no impact on revenue – just gross margin. Though applicable for any merchant, specific rewards usually require unique codes and point-of-sale integrations. This prevents them from being easily implemented or, alternatively, they are implemented with minimal effort but subsequently hard to track.

Most merchants cannot depend on one type of reward to sustain long-term customer engagement. Value, cost and flexibility make such a singular focus ineffective. Instead, merchants should develop a multi-pronged approach suited for their particular business.

No matter what type of rewards offered to customers, the most effective loyalty programs all exhibit the following:  

  • Simplified redemption: remember, the concept of “sufficient rewards” is a two-way street. Yes, increasing the value of rewards will increase retention, but so will reducing the friction of participating in the program. Brands and programs that can minimize added steps at checkout and redemption will ensure maximum customer engagement.

  • Personalized content: according to a 2014 study from SDL, 80 percent of U.S. consumers are willing to share their personal info with a “trusted” brand. Why? A 2014 COLLOQUY/FanXchange survey found that 89 percent of consumers believe that their data is being used to benefit the organizations. However, a whopping 77 percent said they received absolutely zero benefit for sharing their information—merchants have to effectively use data to provide customers with relevant content. Otherwise, the two-way deal falls apart in the long term.

  • Tailored rewards: the same COLLOQUY/FanXchange survey found that 93 percent of customers rate the types of rewards offered as either “very important” or “somewhat important” to their participation, but 54 percent of U.S. consumers are dissatisfied with loyalty programs based on the reward offerings. Merchants have to develop tailored loyalty programs that draw on all three rewards types to not only maximize value, but also fit appropriately with consumers’ brand expectations.