Loyalty Program Tiers

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Many loyalty programs are based on a multi- tiers structure - from 1 and 2-3 tiers to 10 tiers and more.  For example, tiered program AliExpress now has 4 tiers - Silver, Gold, Platinum, Diamond (previously there were 5 tiers, but 1 tiers was abolished). Customer bonuses are arranged in a hierarchical order and can vary significantly depending on the tier, although usually the difference is only a percentage of the discount. Bank loyalty programs can offer from 3 or more levels each of which is supplemented with special offers from partners in addition to the discount (cashback). Club loyalty programs usually contain only two levels - membership and VIP levels.

Interestingly, the close multi- tiers systems are role-playing games. The principle of switching between tiers and encouraging the player at each new level in the form of bonuses and new opportunities encourages the continuation of the game. The same thrust is incorporated in some loyalty programs, arranged on the principle of the game.

The very idea of dividing into tiers is based on the Pareto principle, also known as the 80/20 principle (20% of clients contribute the most to the firm's revenue). The essence of this principle was described in the work of Wilfredo Pareto, The new theories of economics. (Journal of Political Economy 5:485-502, 1897). Dividing into levels allows you to divide, filter and identify the most valuable clients and arrange the best way to work with them. To date, studies on the impact of program levels have identified two main issues:

  • the impact of the number of tiers on program efficiency
  • changing consumer behavior when moving between levels.

Number of tiers

The availability of tiers does not always guarantee efficiency. Many companies have abandoned the tiered programs, providing a democratic level playing field for all clients. This is mainly true for large retailers and grocery supermarkets, where the customer makes routine purchases and is not interested in raising the status, as it involves additional information and, accordingly, extra effort for the client. Tiered programs are present mainly in the service sector. Their effectiveness in this area can be explained in two ways: based on the tendency of consumers to classify themselves, and on the other hand, based on the ability to provide a conscious choice of rewards. In other words, membership at a certain tier gives clients a sense of sustainable identity and alignment with the firm and the community of peers educated at that level. For example, boarding a red carpet is an attempt to turn this type of exceptional identity into a material attribute and to trigger a sense of belonging to a higher level of society. Such feelings of identity can lead to increased commitment to the program and the company. Such dependency can be explained based on a person's sustainable need for identification, and if a company provides privileged conditions for self-identification, the client is more likely to take advantage of them and eventually gain a sense of satisfaction. Second, tiers can be used to further segment clients and ideally provide differentiated and precisely calculated rewards for different client levels. Clients divided into groups by tiers will receive more precisely calibrated rewards. Based on these frameworks, it is possible to notice that three- tiers programs are most effective. They develop greater satisfaction than two-tier systems, as a third tier increases the sense of status for elite members and allows a clearer understanding of relative positions for lower tier customers.  

In fact, the problem of determining the optimal number of program tiers is open for future research.  Here you should outline such tasks:
- research is necessary explaining how program tiers can improve identification with the company
- research on how identification affects social comparisons (assessment of members within and outside the group).
- More research is needed on the impact of the total number of tiers and the response of consumers to changes in levels
- studies that explain how the optimal number of tiers can change when consumers are faced with an action that lowers or increases their tier.
- Studies of changes in consumer attitudes and behavior after switching between tiers.

That is, further research is needed to help us better understand the optimal number and structure of levels. Finally, there is an opportunity for further research on transition strategies that firms can use when changing consumer status.

Tier transitions

In addition to the number of tiers present in the program, the organization of transition between tiers can have a huge impact on the effectiveness of the loyalty program. An interesting side effect of customer loyalty programs is their influence on the behavior of consumers when they approach the transition through the tiers in the system, in particular, consumers can change both the frequency and the amount of consumption in order to reach the imaginary limit as soon as possible. These effects are based on the goal-gradient hypothesis, which suggests that people accelerate their behavior as they approach the goal. The principle was described in Clark Hull’s work “The goal gradient hypothesis and maze learning” (Psychological Review 39:25-43 1932) in which he documented similar effects in rat behavior as they approached food. Recent studies have shown a similar phenomenon in the context of loyalty program tiers - consumers accelerated the buying process when they approached a certain reward threshold. Interestingly, even the illusion of progress in obtaining rewards stimulated faster buying activity.

So, there are a number of areas for future research. On a basic level, reactive resistance theories assume that consumers will change their behavior, waiting and receiving changes in their benefits. In the context of the loyalty program, this suggests that consumers will adapt their attitudes and behavior after the changes in the program. Studies conducted so far confirm that consumers will adjust their loyalty program behavior, but do not take into account the changes in the entire buying portfolio. Future studies may investigate changes in consumer behavior among competitive alternatives as consumers approach rewards from a particular supplier. Essentially, this would shed light on whether consumers are increasing their net purchases in categories or simply redistributing allocations to receive rewards. Once they reach a level, consumers can actively manage their loyalty portfolio and adjust their behavior to maximize rewards for each program, rather than in isolation.

Georgetta F. Palsen

Georgetta F. Palsen

About the author

Georgetta F. Palsen spearheads the Loyalty Programs Project, aiming to unravel the global impact of loyalty programs. Leading a dedicated team, she adopts an interdisciplinary approach to explore these programs' influence on consumer behavior and capitalism, offering critical insights for academics and businesses navigating the complexities of today's societal dynamics. More info


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