How Loyalty Programs Work

Loyalty programs attract and retain customers by rewarding brand loyalty.

For example, every dollar spent on brand food gives you 2 points and for 125 points you get a free reward. Or, every dollar spent on brand gas gets you a point and for 100 points you get 10 cents off per gallon.

You can cultivate extreme brand loyalty by blending these rewards into everyday routines. When a customer trusts the consistency of the experience, they will choose to further engage with their selected brand when there are rewards. However, many aspects of loyalty programs are hard to get right.

What Loyalty Programs do

  1. Create a barrier to exit
  2. Create greater reason to buy your product or service
  3. Prompt additional purchases
  4. Provide insight into customer behavior and preferences
  5. Create an additional revenue line

How Loyalty Programs Create Barriers to Exit

Loyalty programs effectively work as a form of currency for your service or product. If customers acquire that currency, the sunk cost fallacy can kick in—they continue to purchase your product or service due to previously invested resources. The sunk cost fallacy makes it harder to switch and, if valued enough, creates vendor lock-in because if they were to leave, they would lose out on all their acquired status and currency.

How Loyalty Programs Provide Greater Reason to Buy

Loyalty programs encourage purchase consolidation into your other products or services. The most common way of doing this is rewarding points for a purchase. For example, offering a point for every dollar spent provides a customer who might shop around a reason to favor your product and influence them to go back to your shop. If other sellers offer loyalty programs, customers have a greater incentive to consolidate purchases at one store.

How Loyalty Programs Prompt Additional Purchases

Loyalty programs encourage customers to make additional purchases, most commonly done through tiered loyalty programs, where each loyalty level brings further benefits. Customers on the cusp of the next level—or near a lower one—are influenced to spend more to secure a higher status. Even without tiered loyalty programs, valued rewards drive consumers to increase purchases, leading to greater consumption.

How Loyalty Programs Provide Insight into Customers

Loyalty programs can track customer transactions for data and insight into buying behavior and preferences that enable individual customer segmentation for promotions. Continuously providing personalized rewards and incentives to your customers is required for a robust loyalty program. Going into predictive analytics lets companies understand driving behaviors behind high-value customers.

How Loyalty Programs Create an Additional Revenue Line

Loyalty programs can function as revenue lines for influential companies by selling points to other businesses, which give the points to their customers as rewards. Selling to other companies is the model airlines use. As airlines plunge into debt, they profit by selling miles to other businesses like banks, restaurants, and hotels. A company with a large customer base should consider leveraging its loyalty program this way, while smaller companies often have trouble finding the right offer.

Loyalty Program Examples

The Mobile App

With over 17 million U.S. members, the Starbucks Rewards Program is one of the most popular loyalty programs in the restaurant industry.

The Starbucks Rewards program delivered through the Starbucks mobile app allows customers to earn points on every purchase. These points are redeemable for future purchases at any Starbucks location.

The app provides customers the ability to order ahead, pay in-store, and more. It further cements Starbucks in place for every coffee drinker and even sends notifications for promotions and when you’re near a store.

The Starbucks Rewards program undergoes continuous changes to reinvigorate customer satisfaction. The new rewards program in 2019 gave rewards at 25 stars and eliminated point expiration to raise long-term brand loyalty and reduce the churn from disappearing points.

The Punch Card

The expected and most basic loyalty program is the punch card. Only after a determined amount of purchased product or spent money are rewards given.

With no technical overhead or software to manage, this is utilized by many small businesses due to its simplicity. All that is needed to launch and manage your loyalty program is to design and print out cards. This loyalty program method often doesn’t build as much loyalty due to providing a generally less enjoyable experience. It places the overhead of rewards on customers keeping track of their cards and lacks much of the exclusiveness and personalization required to build a brand.

Improving the Value of Loyalty Programs

In May of 2020, in the middle of the global pandemic, third-party appraisals had the American Airlines AAdvantage loyalty program valued at $18-$30 billion dollars.

How was the loyalty program worth so much?

Unlike normal expectations of a loyalty program, flying does not generate the majority of airline miles. Instead, cross-brand partnerships create the bulk of airline miles.

Points are earned through partner promotions like co-branded credit card spending or buying a partner product. This type of loyalty program protects against downturns because people are still supporting through everyday purchases.

Collecting data for marketing research further increases the value of loyalty programs, where over time, this data provides customer favorites and preferences.

Where Starbucks and airlines make use of loyalty programs, many other retailers use paid memberships. Loyalty programs differ from paid memberships because while they can offer similar rewards, paid memberships require payment before you can fully gain rewards.

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