Tiered Rewards: What Type of Tiers to Use When

Whether you’re building an end-to-end customer loyalty program or a single dedicated referral program, the concept of tiered rewards regularly comes up. However, the truth is without the correct planning and terminology, program tiers often end in confusion and then in tears.

In today's article, I want to provide some clarity on what type of tiers exist, how they work and when they might be best used.

Related Article: Referral Reward Tiers: The secret to a better ROI

The Devil is in the Details

Hopefully, you’re at the start of your loyalty program planning right now. However, if you aren’t, you’ve likely discovered that there is more than one type of tier.

People typically speak about tiers as if it means just one thing and everyone understands what they are referring to. In an attempt to clear the muddy waters, I have put together a list of definitions along with a helpful graphic to show how they’re all related.

A word to the wise. It can be fun and feel like you’re adding more and more value by creating increasingly complex reward programs. However, remember that the easier it is for your customers to understand the program the more likely they are to participate. Additionally, if your program is so complex that customers get confused, your support costs and possibly reputation costs will soar. KISS. Keep It Simple, Stupid.

Flat Tier

Primary Market: Consumer and B2B Services
Example Program: $10 credit for each new customer you refer.

A Flat Tier is effectively a single tier program. I’ve included it here for completeness and to build from as we explain other tiers.

With a Flat Tier, you earn the same rewards every time the reward conditions are met. This could be something simple like “Get free shipping on all purchases over $50” or something like “Get 10% off when you buy on Black Friday”.

Programs using a Flat Tier are simple to explain to customers and easy to support.

The downside is that customers rarely feel incentivised to do anything beyond what they would normally do. With a single tier program, customers may not be enticed to increase their purchase frequency or spend more than usual – after all, they already get the same rewards regardless.

Threshold Tiers

Primary Market: Consumer and B2B Services
Example Program: Earn $20 of credit when you book 5 rides. Earn an additional $40 of credit when you book 20 rides.

Threshold Tiers are likely the most common type of reward tiers in consumer loyalty and rewards programs.

With Threshold Tiers, you earn different rewards when you accumulate or achieve some business relevant metric above a certain defined amount or threshold. Reward threshold holds can be based on metrics such as amount spent, miles flown or orders made. Additionally, some threshold programs use multiple thresholds such as “Spend over $1,000 or make 5 purchases.”

These programs are more complicated to communicate to customers than a Flat Tier program. To make it easier for your customer to understand I recommend investing in visuals and strong user interfaces/user experience whenever possible.

Additionally, the support for these programs is slightly more complex than Flat Tier as you need to know how much progress an individual has made before you can address their questions or concerns.

With Threshold Tiers, you may also want to consider if the metric being accumulated resets after a certain time period or at a specific time each year. This can help bring loyal customers back in at regular intervals and continue their engagement with the program.

At the end of the day, Threshold Tiers are a great way to reward your loyal customers for reaching certain milestones or goals. Just make sure you have solid communication and UX/UI set up behind it so that your customers don’t get lost on their way to achieving the rewards!

Cascading Tiers

Primary Market: Consumer and B2B Services
Example Program: Earn 3% commission of all referred purchases. Additionally, earn 3% of 3% of all purchases made by customers referred by people you referred.

Cascading Tiers are almost exclusively used in referral-based sales programs such as affiliate marketing or network selling. However, they can be found in certain financial consumer products where users are already thinking about money.  

In Cascading Tiers, you earn rewards based on what people you referred have done, as well as what the people they refer have done and so on. Typically, Cascading Tier programs reward referrers with a cash commission, based on the amount spent by referred users. The commission amount gets smaller and smaller as the degrees of separation increase.

Communicating Cascading Tiers to your network of sellers is fairly simple. To make it easier for your customer to understand and to reduce any expectation mismatches I recommend providing a worked through financial example.

Support for these type of programs is more complex than the Flat Tier and Threshold Tiers models. To support these programs you need to be able to see all the purchases made, and refunded, by every connected individual. Additionally, you need to understand what the percentage payout should be at the level of separation between individuals and then calculate total payout for all connections.

To manage your profit and liability I recommend you consider limiting the number of levels you will cascade rewards for and also if you want to stop rewarding people after a referred customer has been a customer for a given period of time.

Bottom line: Cascading Tiers can be a great way to increase your sales through referrals, but you need to make sure you have the right system in place for tracking and managing rewards. Additionally, setting limits on both levels of separation and reward timeframe can help manage your profit margins.  Now go forth and cascade!

Stepwise Tiers

Primary Market: Consumer Services
Example Program: Earn $5 credit when you submit a review, earn $10 credit when you record a video testimonial, earn $25 gift card when you purchase 3 times a month.  

Stepwise Tiers are used in a variety of situations ranging from customer referrals to user activation campaigns. They are typically used to encourage users to progress through a known path, such as trial signup to pay.

Stepwise Tiers, reward you with different rewards when different specific actions are taken. These actions can be taken either by yourself or by another referred user. Unlike other tiered programs, a Stepwise Tier program can earn rewards from different tiers multiple times.

In a referral program, this means you may earn a $5 credit when a referred user signs up, then a $10 gift card when they purchase but then earn another $5 credit when you refer another friend.

Stepwise Tier programs are more complicated than Flat Tiers to explain but simpler than Cascading Tiers. These programs also benefit from highly visual explanation wherever possible.  

Support for these programs is fairly simple if you’re rewarding users for their own actions but is more complicated if you’re using Stepwise Tiers in a referral program. No matter what type of reward program you’re running with Stepwise Tiers, you need to track and report on all the actions taken by the user.

This can be done with a reporting tool that shows you each user’s activity.

In short, Stepwise Tiers are a flexible way to reward users for their actions in a variety of ways. Plus they look really cool when you show them off! So go ahead, give it a try and make your rewards program stand out. It won’t be long before your customers will be clamouring for more.

Combining Tier Types

I regularly speak with people who are thinking of combining 2 or more types of tiers. While this can work, certain pairs of tiers work better together than others.

To simplify terminology and to increase understanding I suggest the following naming convention. Combine the two tiers so that the first tier type you read acts on the second tier type. The second tier type acts on the reward structure.

EX: Threshold Cascading Tiers: When all of your cascaded referred customers have spent over a threshold your cascading payout percentage will increase.

The results can be really positive. So, if you’re considering combining tiers, make sure to get creative and think outside the box!  You never know what kind of rewards structure could work best for your business.

Wrapping it Up

There are fine details to each tier type that we have not discussed in this article. But, I hope these definitions help you and your team design your loyalty program quickly and effectively.

Whether you plan to use tiers in your next rewards program or you just want to make sure you understand your team members in the next meeting remember to clarify; Are we building tiers based on:

1. Total accumulation of some metric?
2. Specific steps someone takes?
3. Actions taken by someone more than 1 degree separated from the person being rewarded?  

For more information about loyalty, acquisition, activation, referral and retention incentive programs check out the SaaSquatch Blog.

If you’re looking to launch your own loyalty rewards program effectively and without building it from scratch, SaaSquatch has built the ultimate Loyalty Platform for digital services. Request a demo below and see what we can do together.