The Gist

  • Loyalty programs need an overhaul. Customers and technology have evolved so much that loyalty programs need to make a transformative leap to keep up.
  • It’s not about more points. Think subscriptions, experiences, collaboration and the metaverse instead.
  • But there’s a twist. Customers expect "brand loyalty" as much as brands want "customer loyalty." Can next-gen loyalty programs deliver that balance?

Loyalty programs are a proven way to drive retention and boost customer lifetime value (CLV). Even in 2023, despite digital-age distractions, the lifetime value (LTV) of loyalty program members is still 6.3 times more than other customers.

But next-gen loyalty programs look nothing like the tier-based plastic cards and reward statements of yore. Both customers and technology have evolved so much that the design, deliver and rewards of loyalty programs are primed for a complete overhaul. 

As a result, not only do 68% of businesses plan to increase their investment in retention, but 70% of loyalty program owners also plan a major revamp of their loyalty programs in 2023. 

What direction will those revamps and overhauls take? Loyalty experts Paula Thomas, aka the "Oprah of Loyalty" and host of the “LetsTalkLoyalty” podcast, and Julio Lopez, senior director of strategy, retail practice lead of Movable Ink, a content personalization provider, weighed in. 

Here are the eight exciting areas that emerged.

1. Subscription-Based Loyalty Programs

Members of paid loyalty programs are 60% more likely to spend more on the brand after subscribing while free loyalty programs only increase that likelihood by 30%. 

Subscription-based loyalty programs are a huge trend, said Thomas. For instance, Panera Bread in the US, which chose subscription over a point or tier-based program, has seen incredible success with MyPanera, it's $8.99 per month unlimited coffee subscription. The program is one of the largest in the US, with a 45-million-strong subscriber base, and has increased member store visits from an average of 4 to 10 per month, as well as the “attachment sale” of food products. 

Younger consumers value convenience and prefer to pay for services on a recurring basis in exchange for an elevated experience and a deeper value exchange between the brand and the customer, said Lopez. The key to getting subscription-based loyalty programs right is the pricing model and providing ongoing and differentiated value in the form of new benefits, experiences or partner rewards. 

Related Article: Building a Next-Level Customer Loyalty Program

2. ‘Experiential Loyalty Programs’ for Distinct ‘Member Experiences’

Experience economy expert Max Lenderman calls “member experience” (MX) a “fundamental disruptive force” shaping loyalty because it brings customer experience (CX) and loyalty together to create new value. 

Traditional transaction-based loyalty programs incentivize customers with discounts, points or other vanilla rewards, he said. Experiential loyalty programs use engagement, exclusivity, access and community-led experiences to build an emotional connection. 

Customers spend more to earn exclusive experiences rather than to earn more points. 

For example, instead of the standard earn-and-burn, a sports store can give customers free pro lessons or game tickets, or a clothing brand can offer members exclusive in-store showings or style consults.

A Motista study found that customers with a higher brand affinity or emotional connection with the brand spend up to two times or more, have a 306% higher lifetime value, stay with a brand for an average of 5.1 years versus. 3.4 years, and recommend brands at much higher rates: 30.2% versus 7.6%.

As a result, 65.2% of companies with a loyalty program plan to add experiential rewards to their offering because of the exponentially higher ROI of experience-based loyalty, and 77% plan to reward nontransactional behavior.

3. Gamified Experiences

While gamification has been around for a while (and has not had spectacular results), new-age loyalty programs are making games customer-centric rather than putting customers on a hamster wheel of chasing rewards that glorify the brand. 

Lopez said incorporating game-like elements can include badges, levels and rewards for completing certain actions or reaching certain milestones — but they don’t necessarily have to be milestones related to spending. The gamified execution makes the experience fun and engaging, not transactional.

One legacy brand that has totally modernized its loyalty proposition to include gamification as a core mechanic is Kentucky Fried Chicken in the UK and Ireland markets. The “Rewards Arcade” program, which replaced the outdated Colonel Club program, plays on the nostalgia and history of arcade games in the UK, said Thomas, and allows KFC a way to celebrate the fun factor and engage diners with a fabulous range of games over time.

Related Article: How Customer Loyalty Programs Help Identify Buyer Motivations

4. Demographic Trends Impacting Loyalty Program Design

With age as the demographic, baby boomers were ideal loyalty program customers. But with each generation, notions of loyalty are declining. Only 37% of Gen Zers are ‘loyalists’, i.e., bought a product from the same brand they were considering at the start of the shopping journey, compared to 56% of boomers. 

Loyalty programs for younger shoppers need to deliver flawless, friction-free, omnichannel execution of the program both online and in-store and across social media, partner sites and possibly the metaverse. 

Younger shoppers also value convenience and instant gratification. Lopez said that with the majority of consumers using smartphones as their primary device, loyalty programs need to be mobile-first. “A lack of convenience is a key element that leads to program attrition, especially for younger generations. Mobiles are equated with convenience, and let customers easily access and manage their loyalty accounts on their devices.”

But age is not the only demographic factor. Thomas shares the example of a new-age loyalty program that’s designed for another specific demographic — home renters. Bilt Rewards is the first loyalty program to reward people for paying their rent on time. “Though launched only in June 2021, Bilt Rewards is already valued at $1.5 billion, and, honestly, it's the most innovative loyalty idea I've seen of late,” she added. 

5. Simplicity as Value

Customers no longer have the patience for distant promises or complex calculations to justify their time, attention or loyalty, said Thomas. For instance, Boots in the UK has recently restructured its loyalty program, reducing the reward rate by 25% and instead investing that reward budget in preferential member pricing. Amazon Prime, with its flat, all-in pricing is a pioneering example of simplicity in subscription-based programs.

The dimensions of simplicity are clarity, relevance, transparency, consistency and utility. In fact, 76% of customers are more likely to recommend a brand because it provides simpler experiences. 

Thomas added that brands should focus on strategic simplification — maximize for simplicity without dumbing down the brand. There’s a distinction between brands that focus on “buyers” — which tend to be more “promotion focused” and those that focus on “users” — which tend to take a longer-term view of simplicity focused on convenience and experience.

Learning Opportunities

6. Web3 and Tokenized Loyalty Programs

It was only a matter of time before Web 3.0 came up in a list of cutting-edge trends, so here we are. But I promise this will be worth it.

Consider some of the biggest pain points with traditional loyalty programs. For customers, the main challenge is complexity, not having control over the value or use of points, the risk of the points getting devalued or expired, and limited redemption options. 

For brands, challenges include low redemption rates, operational challenges with partner point redemptions and keeping complex loyalty program data secure. 

Web 3.0 technologies such as blockchain could help address those challenges by “tokenizing” reward points. 

Here’s a simplified explanation of how it works. Customers continue to earn rewards for their purchases. However, instead of points, they earn “tokens,” which act somewhat like a “common currency” in the blockchain. The customer now “owns” their reward — which means the issuing brand cannot devalue or expire them anymore. The tokens can be used across a wide variety of brands and products that accept the token, without the issuing brand needing to partner with them. 

Tokenization of loyalty points essentially puts control into the hands of customers and allows them to cross-trade or transfer their tokens. It’s built on the notion of “ownership, interoperability, portability of value, and community,” said Lenderman. But are legacy brands ready for this shift in the balance of power? 

New-gen brands with younger audiences and higher comfort with technology are already jumping on the bandwagon. But the December 2022 launch of Starbucks’ Odyssey officially marked the entry of mainstream loyalty programs into Web 3.0. In fact, Starbucks, Wholefoods, Crate & Barrel, Ulta and Nordstrom were already early to the crypto party, accepting payments through third-party apps. 

Brands need to find their compelling use cases based on a real understanding of their customer’s mindset. Additionally, partnering with the right technical companies is crucial. Companies such as Hang, DoinGud and Nameless are making it easy to explore the options.

Related Article: Tips for Measuring a Customer Loyalty Program That Delights and Delivers

7. Solving the World’s Problems Together: Socially Responsible Loyalty 

Did you know that 68% of Gen Z and millennials see their purchases as a reflection of who they are and what they care about? While linking social awareness to shopping choices is seen as a generational thing, Thomas added a different spin by citing Seth Godin’s blog, which says brands need to design for “Generation C,” where C is for Covid, C is for Carbon and C is for Climate.

More people today choose brands that have ethical sourcing and manufacturing, fair trade practices, transparent policies around data privacy, and a stated environmental, social and governance (ESG) policy around sustainability and impact. 

Socially impactful programs are set to be a transformative trend in loyalty marketing. In fact, 68% of loyalty marketers predict loyalty programs will support the company’s ESG causes in 2023, and 66% of businesses reward, or plan to reward, customers who display responsible behavior. 

8. AI Use Cases Beyond Next-Level Personalization

AI is how marketers can drive scalable, contextually relevant communications. Ironic as it may sound, AI is how brands can adopt the human-centered marketing approach at scale to drive deeper, longer-term relationships, said Lopez.

The no-brainer use cases include customized content, rewards, channels and conversational AI. But smart loyalty marketers are also using AI to separate “loyal” customers from “loyal and profitable” customers, for predictive analytics to help flag changes in user behavior, predict churn, detect the fraudulent use of privileges or rewards abuse and predict the reward structures most likely to succeed or fail.

“AI will underpin the next generation of loyalty programs,” said Lopez. “Traditional personalization and segmentation models focus on the next best action — missing a much bigger opportunity. Instead, marketers need to zero in on personalized experiences that encourage habitual purchasing. Loyalty programs provide a wealth of data tied to a single consumer that is unmatched by other marketing vehicles.”

For instance, he said, Delta SkyMiles has revamped its loyalty program to provide members with personalized offers based on their travel history and preferences, including extra miles on Starbucks purchases on travel days. Starbucks itself has gone the extra mile by offering not just personalized promotions, but personalized products, which is an innovative take on customization enabled by their business model. 

Loyalty Marketing 3.0 Starts Here

A major shift in the loyalty marketing narrative, concluded Thomas, is the idea of the brands’ loyalty to customers, instead of vice versa. “New-generation loyalty programs are incredibly focused on first being loyal to customers as a business strategy, rather than the traditional model where customers had to first demonstrate their loyalty for months or years, before being rewarded at the discretion of the brand.”

New-age loyalty programs may be driven by new technology, but they are more about connection, collaboration and customer-led control than ever before.