5 Types of Rewards Programs: How to Choose the Best Fit

Rewards programs give your business a competitive edge by fostering customer engagement, retention, and repeat business. As shoppers endure rising prices, many join rewards programs to get better deals on retail, travel, food, dining, and more. 

According to a 2020 McKinsey study, 80% of Americans are members of at least one rewards program—with 94% of U.S. consumers earning an annual household income of $100,000+ taking full advantage of rewards programs. 

Although discounts and free products may entice consumers to join rewards programs, they are not enough to retain them. To build brand affinity, experiential benefits—such as personalized experiences or members-only content—are more important factors in driving subscriber retention. 

In this article, we’ll review five common types of rewards programs and the pros and cons of each, so you can determine the best option for your business.

1. What are cash back rewards programs?

A cash back reward program is a retention program that offers incentives by charge or credit card issuers, banks, or online shopping platforms that give shoppers a percentage of their (qualified) purchases back in the form of cash or credit. This cash back can be redeemed for future purchases, transferred as cash to the customer’s bank account, or converted into an instant cash back card.

Why customers love cash back rewards programs

Cash back rewards programs appeal to shoppers because the more they spend, the more they earn. These programs offer immediate gratification by empowering customers to:

• Save money on everyday purchases by reducing the cost of purchases at the point of sale, making it a passive way to save money
• Easily redeem their rewards as a statement credit, deposit, or as points that can be converted into cash or used for other rewards
• Enjoy additional perks such as bonus cash back rates on specific categories, sign-up bonuses, or access to exclusive deals 

There are some downsides to cash back rewards programs, including higher interest rates or annual fees, which can eat into the value of the rewards. Consumers must decide if the amount paid in fees is worth the amount of the rewards they earn.

2. What are point-based rewards programs?

A point-based program is one of the most common types of rewards programs. Customers accumulate points and use them to redeem cash back, discounts, gifts, and other perks. Shoppers are rewarded points when they make purchases, leave a review, or share on social media.

How customers benefit from point-based programs

Points are flexible and brands can offer a variety of rewards that allow shoppers to choose rewards that align with their preferences and needs. Participants can accumulate points over time, encouraging repeat business by:

• Encouraging engagement with a brand or business, as participants have a vested interest in earning and redeeming points for valuable rewards
• Receiving tiered rewards where participants can unlock higher-value rewards or perks as they accumulate more points or achieve specific milestones
• Enjoy exclusive offers, discounts, or access to special events or promotions not available to the general public, so customers feel appreciated

While point-based rewards programs offer customers many benefits, some can be complex with tiered structures, varying redemption values, and restrictions on earning or redeeming points. This complexity can confuse customers and make it challenging to comprehend the full value of their rewards.

3. What are value-based rewards programs?

Value-based reward systems give back to causes that align with the business’s and consumer’s values. This type of program does not involve giving explicit rewards to customers but typically involves giving to charity or welfare causes. Studies show that Gen Z and Millennial consumers make more sustainable or ethical purchases than any other population segment.

How shoppers benefit from value-based rewards

Consumers who join value-based rewards programs that support causes they care about experience a stronger sense of alignment with their personal values. This alignment enhances their emotional connection to the brand, making them more likely to remain loyal and advocate for the business. Customers also benefit from:

• Making a social impact by contributing to charitable causes that benefit communities, the environment, or social causes 
• Feeling a sense of fulfillment and purpose in their purchases—without additional effort or expense—strengthening their bond with a brand
• Supporting socially conscious brands that prioritize ethical practices and contribute to society builds trust, affinity, and loyalty

Depending on the structure of the value-based rewards program, customers may find it challenging to comprehend how their actions contribute to the supported causes or how rewards are allocated. A lack of transparency or complexity in the program’s mechanics can deter participation and engagement.

4. What are tiered-based rewards programs?

In tiered-based rewards programs, customers are offered different levels or tiers of benefits and rewards based on their amount of engagement, spending, or loyalty to a business. These programs are designed to incentivize customers to increase their interactions and purchases with the company to unlock higher tiers and access more valuable rewards. The higher the tier the more exclusive and attractive the benefits received.

How customers benefit from tier-based rewards

Customers must meet specific criteria to qualify for each tier. This criteria often includes factors like purchase frequency, total spending, longevity of membership, engagement with the brand (such as social media interactions or referrals), or other predefined actions. Here’s how customers benefit:

• Feeling a sense of exclusivity when they progress and unlock additional benefits as they move up the tiers
• Unlocking higher-valued rewards motivates customers to make repeat purchases to maintain their status
• Experiencing deeper personalization because their data allows companies to customize offers based on preferences

While tier-based rewards programs offer many benefits, some customers may find them a bit complex and confusing, potentially leading to frustration or disengagement. Shoppers can also experience disappointment if they find it difficult to meet the criteria for higher tiers.

5. What are paid rewards programs?

With fee-based rewards programs like Amazon Prime, customers pay a membership fee to gain access to exclusive rewards. Loyal shoppers can receive free shipping options, streaming services, and earlier access to exclusive sales. Consumers will participate in this type of loyalty program if they think the benefits they unlock outweigh the expense of the fee. “A 2020 McKinsey survey on rewards programs found that members of paid rewards programs are 60% more likely to spend more on the brand after subscribing, while free loyalty programs only increase that likelihood by 30%.”

How customers benefit from fee-based rewards

Paid rewards programs often offer exclusive benefits that are not available to regular customers. These benefits may include exclusive services, personalized offers, early access to sales or products, and special discounts. Overall, paid rewards programs offer a range of benefits that enhance the customer experience and foster stronger relationships between customers and businesses. Here’s how customers profit:

• Enjoying premium benefits unavailable to regular customers, including exclusive services, early access to sales, and special discounts
• Earning enhanced rewards that could include higher cash back percentages or exclusive gifts and experiences
• Receiving priority service with dedicated customer support lines, faster response times, and personalized assistance

While paid rewards programs can increase customer engagement with a brand and create a perception of value for customers, some may find the cost of membership too high. While participating shoppers may feel a sense of exclusivity, non-members may feel alienated or less valued by the brand.

At-a Glance: 5 Types of Rewards Programs Pros & Cons

Type	Pros	Cons	Example of a Brand
Cash back	Flexible rewards, easy to understand, immediate value	May lead to dissatisfaction if credit card fees apply	Rakuten
Point-Based	Customizable rewards, relatively user-friendly	Less instant gratification, risk of overspending by the business	Starbucks Rewards
Value-Based	Appeals to ethical consumers, brand differentiation	Not all customers are motivated, requires careful cause selection	Patagonia Action Works
Tiered-Based	Fosters exclusivity, rewards top customers	Complex, can be demotivating for some, lacks instant gratification	Sephora Beauty Insider
Paid Loyalty	Enhanced customer experience, potential for strong bond	Needs compelling benefits to justify the fee, complex to implement	Amazon Prime

In this comprehensive blog article, we delve into the world of rewards programs, exploring five distinct types and their respective benefits and drawbacks for customers. From cash back rewards that offer immediate value to tier-based programs fostering exclusivity, each approach presents unique advantages and disadvantages for businesses and customers alike.

By understanding these nuances, you can make an informed decision on which rewards program aligns best with your business goals and customer preferences. The good news is that each reward program will help you build customer affinity, retention, and repeat business. To further explore the pros and cons of rewards programs, visit Finfare Connect to learn more.