How to boost engagement in your loyalty program with membership tiers

Introduction

Customer loyalty programs have begun to appear in a wide range of sectors in an attempt to develop customer relationships based on rewarding return customers. The advantages for a business to retain consumers are well known, and they include the lower costs of customer acquisition, long-standing customers who are more likely to be less price-sensitive which creates opportunities for receiving higher margins, and customers who buy a lot of products and services are more inclined to respond to marketing messages and other targeted offers.

At its most basic form, loyalty programs reward customers for each dollar spent and/or frequency of purchase. Until recently, most frequent flyer programs rewarded customers based on the distance traveled and not on the revenue generated by the customer. As a result, a customer x could get a cheap ticket at a fraction of the price from an affiliated website, at the same value as a customer y who would have paid the full ticket price. This inconsistency had a significant influence on the financial performances of airlines like Delta and American Airlines that almost turned their loyalty program into a failure. But to design, build & sustain profitable customer loyalty, airlines were pushed to revisit their frequent flyer programs' structure to align their loyalty programs based on profitability rather than distance. This trend was also seen in other industries where marketers are focusing their loyalty programs on customer spending (e.g. credit card companies, grocery stores, and departmental stores, etc).

To take it to another level, a tiered loyalty program can be used to reward customers based on membership level or spending threshold and give more to customers who go the extra mile for your brand, AKA your high-value customers.

Membership tiers could also provide you with an opportunity for a gamification approach for your loyalty program. You could offer membership tiers to your customers, and provide them with a status that is rewarding in itself. It gives the customer great value as membership can provide them with access to exclusive offers, events, and membership benefits. Not only that but it boosts customer loyalty by rewarding customers for staying loyal over time, while also increasing customer lifetime value.

In this article, we will explore the benefits of membership tiers and what they could mean for you as an eCommerce store. We'll also talk about how they influence consumer behavior and how that affects customer engagement and revenue based on some behavioral science findings.

What is a multi-tiered loyalty program? 

In a world where brands' focus shifted from simple transactions to building long-term relationships with their customers, loyalty programs came to play an important role to reward and reinforce longer-lasting customer engagement. Tiered membership loyalty programs for eCommerce stores are no different from the loyalty program membership models of offline businesses.

A membership tier is a hierarchy of customers with different membership privileges. It can also be defined as membership levels or membership ranks. Tiered loyalty programs offer the opportunity to reward key customers while providing a streamlined user experience for more casual customers. It is a membership program where members gain access to exclusive loyalty rewards and items if they reach a higher membership level.

In addition, a multi-tiered loyalty program recognizes that customers have different needs, purchase behaviors and provides different levels of engagement with the brand.

In a multi-tiered loyalty program, customers at higher levels get more benefits and rewards. For example, an airline may offer the basic membership tier of "Silver", which would include all the benefits of membership including discounts on flights. The "Gold" membership tier would include these benefits plus more perks like priority boarding and free checked baggage. On the other hand, a "Platinum" membership tier may include all benefits, with complementary upgrades to first-class on select international flights.

Why do membership tiers boost customer engagement?

As mentioned before, many brands adopt membership tiers for loyalty programs to enhance customer engagement and increase revenue from top buyers. We could see membership tiered loyalty program in the airlines' industry, where frequent flyers are offered different membership privileges, but also in B2B brands such as Bayers, who introduced membership tiers from which customers in different levels receive bonus points ranging from 10 to 50% at the end of the year, with Gold and Platinum access to VIP areas at events and agricultural trade fairs.

Multi-tier loyalty programs are designed to offer rewards that are worth more in higher tiers. The "goal-gradient hypothesis" -originally proposed by the behaviorist Clark Hull in 1932- states that when presented with an opportunity to earn a reward, customers frequently modify their purchasing behavior to gain access to these benefits, and the closer they are to receiving that prize, the stronger motivational urge becomes. For example, one research found that customers of a café (e.g., "buy ten coffees and get one free") purchase coffee more frequently the closer they get to the reward. Loyalty programs naturally follow the "operant conditioning" proposed by B.F. Skinner, or reinforcement theory, in which he states that the rewarded behavior is more likely to be repeated in the future with positive reinforcements.

Rewards are intended to elicit feelings of joy, enthusiasm, and thankfulness. Multi-tiered membership loyalty programs offer a feeling of accomplishment to customers, where top-tiered customers perceive the rewards they receive as more "valuable" and "fair" than those received by lower membership tiers since they "worked harder" to attain them. On the other hand, those in second or first level membership tiers do not view negatively the benefits received by top membership tiers, even when made aware of the benefits. Customers in lower tiers will feel more prompted to attain membership levels or ranks that they find more appealing and valuable, such as premium tiers. 

Tiered loyalty programs create a sense of fairness and equality since membership levels are usually achievable through the purchase of certain items or the completion of specific actions. It can even create a sense of exclusivity in membership, where members feel privileged to have access to certain membership benefits. Additionally -based on the reciprocity principle- When a brand shows positive customer treatment, especially towards high earners, it elicits an ethical debt that may lead to future positive actions on the part of customers, and return it through gratitude-driven changes in purchase behavior. We see this often, where customers are more likely to reward good service with referrals, loyalty, and repeat profitable business.

Behavioral loyalty (e.g., purchasing behavior) is crucial to businesses to create profit, while attitudinal loyalty (e.g., your customers' attitude towards your brand) helps to build an invisible exit barrier for their customers, especially with businesses where switching costs are low, such as Food and Beverage stores and retailers. 

Multi-tiered loyalty programs are an effective strategy for increasing customer engagement over time, as it offers a clear value proposition to customers in terms of the benefits they receive. It also offers brands the opportunity to segment their target audience and focus on specific membership tiers that offer a better fit with their customers' shopping habits and spending threshold.

Membership tiers and levels for growing eCommerce brands

As stated above, one of the benefits membership tiers can offer is increased customer engagement. For eCommerce stores, It provides rewards that are more appropriate for their customers, so they can better target them with membership options. For example, membership programs like "Hassle-free returns" or free shipping for VIP members only (i.e., top membership tiers) can be a great way to incentivize customers who are more likely to return purchase items. You can also create membership levels that are more suited for specific customer segments (e.g., students, senior citizens, or pregnant women).

In addition, your membership tiers should offer the perfect balance between value proposition and price. As such, membership fees or high-value rewards should be set following the value received by customers, and membership benefits should be accessible and appealing enough not to discourage customers from joining.

When setting membership tiers for your loyalty program, you need to carefully balance membership benefits with membership fees. To do that, you can carefully study your customer's shopping habits and purchase behavior in conjunction with the value they place on membership benefits.

You should also consider your eCommerce store size when designing membership tiers, as the cost of setting up a membership program may not be worth it for smaller stores. Membership tiers should also take into account the lifetime value of your customers and your programs' cost. The membership tiers you choose should be highly appealing to your target audience, but not prohibitively expensive. This will help ensure customer retention and membership growth over time.

Key benefits of multi-tiered loyalty programs for eCommerce stores :

• Allows you to identify your best clients through segmentation 
• Provides a unique experience to your top tiers
• Provides more incentives to customers to buy.
• Encourages customer-centricity.
• Cater to your customer's unique needs and wants
• Build a stronger connection with their clients 
• Allow members to have a sense of accomplishment as they progress through membership levels.

In addition, membership tiers can also provide your eCommerce store with increased visibility and brand awareness, since it allows you to reach a wider audience.

For eCommerce stores, membership tiers are an effective way of increasing customer engagement and loyalty while providing customers with membership benefits that are more appropriate for their shopping habits.

As membership tiers offer a clear value proposition to customers, an eCommerce store can better target them

This increased visibility and advertising of your store can help you grow your membership base, and increase the value of your loyalty program exponentially.

How to design outstanding membership tiers and levels? 

Membership tiers and levels are not just about having something to offer your customers; it's also about providing the right customer experience to the right segment. Exclusive membership privileges show that you care about the customer: membership is a way of saying "you matter", which will make customers want to come back again and again and drive more revenue. If done right, membership can help you gain new customers by building trust with potential clients who might otherwise have been too nervous to buy from you in the past.

Here are some key recommendations to  keep in mind for membership tiers and levels design :

Know your customer

An overused statement in marketing is that a retained customer costs less than acquiring a new customer, which stems from the principle that through repeated interactions, brands get to know their customers better. As a result,  membership tiers and membership levels can be specifically designed to match the needs of your most loyal customers. This benefits both business sides by increasing revenues, but also customers as they will receive better treatment.

So before you start designing membership tiers, it is most important to understand your customer base. This is the foundation of membership tiers and levels design because it will allow you to choose membership levels that are right for your customers.

You can use user analytics (e.g. tracking customer data such as lifetime value, retention rate, and revenue generated, etc) to see which membership tier might work best with certain types of customers. Another way is through feedback and customer surveys. This is a great way to get in touch with your customer base and see what they think about membership levels, whether or not the membership levels you currently have -if any- meet their expectations, and what membership levels they would like to see. With the help of your Database and transaction data, these types of surveys allow you to capture your customer’s attitude and purchase behavior towards your brand so that it could help you determine your rewards' objectives.

Furthermore, to be successful and selective in developing attitudinal loyalty -which impacts purchase behavior- businesses must have a thorough understanding of their customers. Customer profile information, which includes psychographic and demographic data, is essential in predicting future customer profitability. Another approach is to figure out the future customer profitability is by applying the metric of customer lifetime value (CLV). For example, If a loyal client has a CLV of $ 100 and is at risk to churn, you may consider giving him a maximum incentive of $ 100 worth to retain him.

Clearly define your tier structure objectives 

The membership tiers and levels you choose should help you achieve your business goals. They need to be linked to specific marketing and business objectives, so they need to be measurable. The membership tiers should be clearly defined to match the objectives of your loyalty program and business type and goals as well as your customers' spending behaviors so that you know which membership tier will work best.

The membership tiers should also be designed to bring in more revenue, while at the same time not causing any harm or reducing revenues for lower membership tiers. When membership levels are not designed to be profitable for businesses, it is easy to become confused about the number of membership levels that should have, which membership level should come first, and what membership levels should be created.

For example, in a structure where you could choose to have 2 membership tiers reward strategy :

1 — The first tier, which we'll call silver, would be designed for the objective of offering a standard and explicit baseline to reward customers for their past and current purchase, regardless of their shopping patterns (e.g., high-margin, low margin products, etc..). This ensures accessibility to a wide range of customers, as well as new ones, serving as a way for instant gratification, and scaling your loyalty program by rewarding spending. Another objective is to capture customer data and purchase behavior in your store so that you can move to your second tier. For example, in an eCommerce store where most customers are first-time purchasers, a membership level that is designed to be rewarding on the first purchase might exist as the first tier.

2 — The second, which we'll call bronze, would have an objective of influencing current and future purchase behavior, given the past data of the customer. As such, this tier will reward fewer selected customers than tier 1. Here, you can have more control over who gets and what types of rewards and incentives are given to your customers (Medium CLV). Moreover, you'll have more control over how much these rewards should be worth.

3 — The third we'll call gold, would take the Bronze tier to another level, with a higher degree of control -centered around profitability- and higher-value and differentiated rewards, to cultivate a positive attitudinal loyalty and offer rewards that feel "fair" to your most profitable and loyal customers (High CLV). Armed with customer knowledge, the rewards would be tailored to these customers' needs, and provide exceptional value. This tier could help customers feel special and cared for, and reinforce the reciprocity norm mentioned earlier.

Membership tiers and levels must be designed with a clear objective in mind, both for the short term and long-term. To do so, you must first be able to define membership tier goals in line with your company's profitability.

How many membership tiers should you have?

It depends on the type of membership program you are trying to design. For example, if your goal is to increase loyalty and retention rates among new customers, you might want to create an entry-level membership tier that encourages customers to make their first purchase as soon as possible. In this case, you may consider giving them instant gratification (Free sample with their first buy, a small complimentary product, xx amount of additional points in happy hour sales, etc..) to encourage future purchases, thus developing customer retention & loyalty.

On the other hand, when your membership program is defined by its ability to increase CLV through tiered membership levels, you may consider having three or more membership tiers -for example- by creating membership levels that are differentiated in terms of the value they offer to your customers (e.g., membership tier for repeat and high-margin purchasers, a membership tier for occasional purchasers and so on.)

Keep it simple (to create a clear value proposition)

Aiming to motivate customer behavior and increase their membership levels is a good idea if you want to make your loyalty program more engaging. However, it can be overwhelming for customers if they are receiving too many memberships offers at once. Your membership program must be simple, easy to understand, transparent -and at the same time- meet both short and long-term membership program objectives. Otherwise, you might end up with a tiered loyalty program that does not work for your eCommerce store or brand.

Be generous with your membership tiers and levels design

It might seem counterintuitive to offer membership levels with plenty of privileges and benefits, but if your goal is to build loyalty among customers who will spend money with you again and again, then membership levels are an opportunity to give them something in return.

Be fairly generous when designing membership tiers because it is a way to communicate that you are willing to give your best customers more in return for their loyalty through value rewards that make sense to them. Whether it's a free product, early access to sales, or discounts on future purchases; the goal is to give customers an incentive to keep coming back

To make membership levels truly enticing, they should set you apart from your competitors. So it's important to do your research on membership levels offered by competing brands. How are they different? What membership benefits are unique to them that you can offer as well? Customers want membership tiers that make them feel unique with benefits that aren't overlooked, and membership levels should be created with this in mind.

Customers are different, membership tiers should be too

This is the most common mistake that eCommerce stores make when designing membership tiers and levels. They aim to establish a standard membership level that can be utilized by all client types, but this is counterproductive to the notion of tiered loyalty.

The membership tiers should be designed in a way that matches the level of brand engagement between your customers and your business, which means you should look at loyalty programs as a tool to identify your most loyal & profitable customers (low, medium, and high CLV). For example, if you sell premium goods online, it might not make sense to send simple discounts to your customers who are already buying premium products and are not price sensitive. Instead, these customers might want to be a part of a quarterly private VIP sale with limited edition items or be the first ones to know about new products or brand launches.

Using membership tiers to identify your customers is the best way to ensure that loyalty programs are working for you, and membership levels are designed in a way that benefits your customers the most.  For example, customers shopping from an online grocery store may receive basic incentives in the form of discounts on particular goods and cashback for their everyday purchases. However, if the brand characterizes the client as a very loyal consumer with a high customer lifetime value, it may give out a premium reward such as early access to holiday sales, and exclusive membership rewards such as free express shipping or early access to limited items. 

Be creative, membership tiers can help differentiate your store from competitors

As membership levels are meant to reward your most loyal customers, they can be designed to include membership benefits that eCommerce stores find fun and interesting. If you are a brand that likes to engage with your customers and share the spirit of creativity, membership tiers could be a good way to show off this nature. For example, if you own an online store that sells art supplies, membership levels could be designed around famous artists and their work.

At the same time, membership tiers can help you go above and beyond what your competitors are offering. If you have membership tiers, they might be one of the most enticing loyalty programs in the industry. Your membership levels should be unique and tailored for your business

What membership benefits are available to the most loyal customers in your industry? How are membership levels different from your competitors? Do you have membership benefits that other brands don't offer? These are all questions eCommerce stores should ask when designing membership tiers and levels.

A membership program should be designed with the customers in mind, so it's important to understand what your customers want from membership benefits. This way, you'll ensure that your loyalty program will help drive more revenue for your business and improve customer satisfaction by rewarding them for their loyalty.

Be flexible, membership tiers are an evolving process 

By principle, membership tiers offer a great deal of flexibility to any loyalty program. They can help brands achieve and influence customer purchase behavior and attitude towards a business, and give your online store the ability to proactively respond and invest in your best customers based on their "future" potential -as opposed to just past transactions-. 

As a result, membership levels or tiers need to be flexible if brands want membership tiers to grow with their eCommerce store. So, whenever you introduce a new loyalty program membership tier, membership level, or program -or increase membership benefits for existing tiers-, you have to carefully monitor how membership levels affect your eCommerce store revenue and membership conversion.

— Membership levels should be reviewed regularly to ensure they are beneficial for both eCommerce stores and customers

— Membership benefits have to be relevant to your eCommerce store and customer needs

— Membership tiers should be designed in a way that matches the level of brand engagement between you & customers.

Your research & data will determine the rewards you can offer in membership tiers

To design membership benefits that add value for eCommerce stores and customers, it's important to do some research and data analysis. If your membership tiers and levels are not optimized, this could affect the growth of your loyalty program and revenue from your customer profitability -as membership levels should be reviewed regularly to ensure they are beneficial for both eCommerce stores and customers- Any loyalty program that focuses mainly on consumer goals’ would have scalability issues due to serious erosion of the bottom-line over time due to the increased reward redemption, and vice-versa.

As mentioned before, your collected customer data and KPI analysis enable you to have a deeper understanding of your customers and will help you determine these rewards based on balanced customer/brands' goals. As a result, you may be able to meet your clients' latent aspirational desires that would otherwise go unfulfilled through standard cash-back or price discounts. As a result, your brand's attitudinal loyalty may be amplified to new levels. The customer will see shopping in your store as a way to fulfill needs that would otherwise go unexplored.

As such, membership benefits that you offer in membership levels/tiers for eCommerce stores should strive to influence the behavioral and attitudinal loyalty of your customers, such as :

Rewards can that impact behavioral loyalty : 

Rewards that impact behavioral loyalty can be as simple as membership gifts with purchase, discounts or free delivery/shipping, etc. Rewards should be relevant to your eCommerce store and customer needs. For example, if you know a segment of your customers like getting discounts on everything they buy, then a baseline membership tier that offers discounts will work best for these customers.

Rewards that can impact attitudinal loyalty :

Rewards that impact attitudinal loyalty can be membership-based exclusivity; travel deals, exclusive brand dinners & experiences, VIP-only sale days, VIP customer service, etc. These membership levels/tiers create a magnetic pull for customers to want to stay loyal to your eCommerce store. This creates a strong bond between you and your customer, which will ultimately lead your brand to create its tribe of highly engaged consumers who identify with the membership level/tier that they have been placed in.

Conclusion

Customer loyalty is a vital construct to build and nurture customer relationships with a brand and thus increase business and customer retention. The rewards associated with your loyalty program should evoke positive emotions of joy and excitement from your customers as a way to say "hey, we see you! thank you for doing business with us, and come back again!".

However, many brands are still thinking about loyalty programs as a one-off campaign or just another promotion to increase sales and engagement. The challenge is to create profitability and sustain customer loyalty over time.  To do this, membership tiers/levels could be designed in a way that matches the level of brand engagement between you and customers, and differentiate your store from competitors. Experiential and intangible rewards are becoming more popular, linked to special treatment or special experience as opposed to just simple discounts for everyone, regardless of purchase patterns and CLV. These rewards influence the higher-level goals and attitudes of the consumers. This is the reason why, when customers receive a surprise gift from you, they are more inclined to remain loyal. But, these rewards don't come cheap, as they should be weighed against customer profitability (with higher CLV). This ensures that the value created does not exceed the cost of what is offered.

Membership tiers could be a great opportunity to close the gap between brand loyalty and eCommerce conversion rate. In other words, maintain a balance between customer goals and your stores' goals. You can create membership tiers based on your data/KPI analysis to give a clear picture of the type of rewards to include as well as the objective of each tier to your business.