What Is a Loyalty Program?

Loyalty programs, sponsored by retailers and other businesses, offer rewards, discounts, and other special incentives as a way to attract and retain customers. They are designed to encourage repeat business, offering people a reward for store/brand loyalty (hence the name). Typically, the more often a customer patronizes the merchant—and the more they spend—the greater their rewards.

Key Takeaways

  • Loyalty programs are offered by retailers and other corporations as a way to attract and retain customers.
  • Loyalty programs offer rewards, discounts, or other special incentives and are designed as a reward for a customer's repeat business.
  • Loyalty programs benefit companies not only by developing customer loyalty but by providing crucial information on how customers are spending and what products or types of offers are most appealing.
  • While companies like Starbucks make great use of loyalty programs, some retailers such as Costco and Amazon rely instead on annual memberships.

How a Loyalty Program Works

Loyalty program incentives vary. Typical incentives include:

  • advance notice of/early access to new products
  • early access to sales
  • free merchandise or enhanced services
  • special services, like free or expedited shipping
  • members-only discounts

To join a loyalty program—also known as a rewards program or points program—customers typically register their personal information with the company and are given a unique identifier, such as a numerical ID or membership card. They use that identifier when making a purchase.

Purpose of a Loyalty Program

Loyalty programs provide two key functions: They reward customers for their repeated patronage, and they provide the issuing company with a wealth of consumer information and data. While companies can evaluate anonymous purchases, the use of a loyalty program offers additional details on the type of products that may be purchased together, and whether certain incentives are more effective than others.

Loyalty programs particularly apply to high-volume businesses that thrive on return customers. And since it's more expensive to acquire a new customer than to sell to an existing one, the prospect of creating a loyal following is fundamental to adding value. When appropriately executed, repeat customers will help recruit new ones at a fraction of the cost of traditional marketing methods.

When these programs are integrated into the customer's everyday routine, they can cultivate true brand loyalty. Often, customers get invested in the program—and they will stick to a hotel, store, restaurant, credit card, or airline because of points or rewards they've accrued in its loyalty program, more than anything else.

Retail loyalty programs can trace their roots to the stamp or boxtop collection and redemption programs that date back to the 1890s. But the modern model was born with airlines' frequent flyer programs. American Airlines' AAdvantage, launched in 1981, was the first; United Airlines' Mileage Plus debuted shortly afterward.

Loyalty Program Example

Loyalty programs, like everything else, have joined the Digital Age. Interestingly, they are incorporating tech not just as a means of purchase things to get rewards, but as a source of rewards themselves: urging patrons to text or Instagram photos for points, or offering a discount if you shop via the merchant's new app.

The Starbucks (SBUX) Rewards program remains the default case study of how a brand can retain customers through interactive offers. The app operates much like any other rewards program, in that customers earn points (called "stars") to use for future coffee purchases. It differentiates itself from other loyalty systems by providing customers a convenient way to order ahead, pay in-store and even access exclusive music playlists. For the most part, the app solidifies Starbucks as a basic necessity for every coffee drinker. If you add funds via the app onto your digital rewards card, you'll "earn Stars twice as fast," Starbucks says.

Loyalty Program Alternatives

Loyalty programs aren't the only way to win customers' allegiance. Retailers like Costco (COST) and Amazon (AMZN) have achieved great customer loyalty through membership programs. Even though they carry an out-of-pocket cost, many shoppers happily pay the annual fees to access the variety of products, free shipping (in Amazon's case), and other perks and privileges offered by the two retailers. And for those who take advantage of all the available services included in a membership, the benefits can often outweigh the costs.