1. Loyalty programs have been used in commerce for many years, originating in Germany
where price based competition was disallowed by governmental restrictions in certain
industries. In the 1950s, S&H Green Stamps rewarded grocery store and gas station
customers with stamps redeemable for appliances and other merchandise. The modern
day loyalty program was launched in 1981 by American Airlines, and was quickly
duplicated by other airlines and other hospitality industries including hotels, car rental
companies, and credit card organizations.
Only 12% - 15% of customers are loyal to a single retailer, according to the Center for
Retail Management at Northwestern University. But that small cadre of shoppers
generate between 55% - 70% of company sales.
The basic benefits of using a loyalty program to obtain customer information are summarized below:
- Shift - Acquire new customers
- Lift - Increase the spending of existing customers
- Retention - Improve the natural churn rate of customers
- Profit mix - Shift spending to higher margin products.
One common mistake Marketers make is in currency selection. Too many decide the value proposition prior
to customer research. Ask the question as to whether the currency fits the frequency and the size of the
transaction. And does the currency fit with the brand i.e. cash is a pure discount?
In general, many retail loyalty programs are converging into a blend of each particular value proposition.
That is, many programs offer points, rebates, discounts or a combination of the program offerings.
Rebate Programs/Cash Back
Although similar to discount programs, which are immediate rebate programs allow participants to accrue
financial benefits from purchases that are saved up and redeemed after a set threshold or time period.
These benefits can be tracked over time but often involved a rebate of a percentage of total purchases over
a month or quarter. The rebate is often in the form of a gift certificates to drive customers back to the store.
Rebate can be in the form of a dollar value or a percentage value.
Pros
- Relatively simple to communicate and understand, depending on the offer structure
- Although discount based, it avoids the "discount on every purchase" mentality
- Rebates in the form of gift certificates can often drive customers back to the store
- Does not require much administration
- Cheaper to administer than a points based scheme (although difference can be marginal dependent on
size of rebate/cash back
- Can allow tiered offers for highest value customers
Cons
- Does not provide instant gratification
- Rewards profitable and unprofitable customers alike
- Can be expensive depending on the rebate thresholds
- Disguised discount program affects margins
- Can alienate infrequent shoppers

2. - Easily emulated by competition
Rebate/Cash back programs have become increasingly popular because while avoiding immediate
discounts, consumers often feel they are accruing value. Although the program can be expensive, the rebate
dollars often drive customer back to the store.
Discount Programs
As is implied by the name, discount programs are programs that offer a specified percentage off (or a dollar
amount for large purchases) of the retail purchase price. This can be product specific or offered on the total
basket of purchases. The distinction from rebate programs is rather than accrue the benefits, discount
programs typically apply instant benefits to participants at the point of sale.
Pros
- Simple to consumers
- Instant gratification
- Deeper discounts can be used tactically
- Usually easy to administer
Cons
- Discount implies that regular prices are too high
- Difficult to exit the program
- Can be easily duplicated in the marketplace
- Can alienate infrequent shoppers
- Discounts affect margins
Discount programs are typically the easiest to administer loyalty program offering. However, discounting
products for members is expensive and it is difficult to exit such a program once it is launched. An example
of a successful discount program is Canada's oldest, best known, best loved reward program - Canadian
Tire Money - often suggested as a replacement for the nation's weak currency.
Points Programs
To avoid the negative connotations of discounting, many loyalty programs us a points "currency" to allow
participants to keep track of their earned benefits. Typically, consumers earn additional points by buying
goods and services from the issuing retailer and can include bonus products, bonus thresholds and partner
opportunities
Pros
- The basic premise is simple for consumers to understand
- Can be difficult to match because earning and reward thresholds can be easily adjusted - therefore can
offer greater competitive advantage
- Can allow more targeted, flexible and imaginative promotions e.g. points for special purchases
- Avoids price discounting
- Can use points promotions on brands that do not allow discounting
- Can use to reward employees
- Currency can be resold to vendors to help support the program
- Enable the collection of customer data to put in place targeted promotions and cross-selling opportunities
- Breakage (The difference between points issued and points redeemed)

3. Cons
- The proliferation of points programs is confusing for consumers
- The "halo effect" of programs where thousands of points are required to earn a benefit devalues all points
programs
- Depending on the community, loyalty program fatigue can be an issue
- Requires investment in redemption opportunities
- More complex to put together and manage an attractive customer proposition - requires management of
the currency including customer service
- Need to put a contingency on the balance sheet for outstanding points
- More expensive than cash back
Program Perceived Value
Your gross margin is going to dictate how much you have available for investment into your loyalty program
for both hard and soft benefits. As a rule of thumb, if you have a 10%+ gross margin, you should be
returning at least 100 basis points. Retail loyalty programs vary in terms of perceived value - the magical
threshold tends to be around a 3-5% perceived value. A point-per-dollar offer tends to have a higher
perceived value than gift certificate or discount offers (even if they have the same perceived value of
approximately 3% - go figure).