In the DTC (Direct-to-Consumer) sector, we generally observe two prevailing models of loyalty programs:
Loyalty 1.0
The first approach, which we refer to as "Loyalty 1.0" embodies the "spray and pray" tactic. Brands following this model relentlessly employ a barrage of incentives, discounts, freebies, and more, all in an effort to re-engage their customer base and promote repeat purchases. This method revolves around constantly offering more and more incentives to maintain customer interest. Although it can bring short-term gains, an excessive reliance on this strategy can erode profit margins and dilute brand value.
Loyalty 2.0
"Loyalty 2.0" on the other hand, creates a sense of exclusivity without being inaccessible. Here, brands introduce more nuanced programs that are seamlessly integrated into the customer journey, utilizing more tangible benefits like store credits and including exclusive perks accessible only through certain engagement or spending levels, similar to tiered reward programs. This method is designed to foster loyalty from the outset and reward the most engaged customers with special privileges.
Traditionally, many DTC brands have turned to the first model, while a significant number of global players with large loyalty programs have preferred the latter. These major players aim to minimize discount promotions and gimmicky offers to improve their contribution margins and foster long-term relationships with their key customers. They strive for a loyalty program that feels both seamless and exclusive.
Due to recent system updates from platforms like Shopify and corresponding software providers, it has recently become possible for "smaller" brands to implement a Loyalty 2.0 program.
These brands can now use store credits as a more effective and engaging mechanism instead of relying on traditional models like points programs. With a Loyalty 2.0 program, brands can move away from opaque, points-based incentives and instead opt for an easy-to-understand mechanism centered around store credits, combined with earned or paid memberships that grant early access to new products, exclusive perks, express shipping, and more for their most loyal customers.
Another advantage of a Loyalty 2.0 program is the protection of profit margins from uncoordinated discount promotions, which can act as "phantom costs" on the balance sheet. Most brands struggle to predict the impact of their discount promotions on the balance sheet, which is crucial for the brand's growth and sustainability.