Trends: Loyalty Programs

There are frequent-buyer programs, frequent-flier programs, frequent-player cards and frequent-dining coupons. There are points-at-the-pump schemes, turkey giveaways at Christmas (along with $100 copper roasters in which to cook them) and, as of November 2003, donations to charities for people who use their Starbucks loyalty card to buy coffee.

There are plastic cards, smart cards, thermal cards and magnetic strips. Virgin Mobile Australia, a wireless arm of U.K.-based Virgin Group, is using 802.11: Flash your mobile device at a reader as you whiz through checkout at a Virgin music store, and you’ll get a couple of dollars knocked off your bill.

For more on this topic, see Loyalty Programs: How 4 Companies Manage Loyalty

Call it the loyalty craze. According to Jupiter Research, more than 75 percent of consumers now have at least one loyalty card, and the number of people with two or more is estimated to be one-third of the shopping population. Cap Gemini Ernst & Young CTO John Parkinson says his family has 37 loyalty cards, and surveys by information technology analysts Gartner Inc., Forrester Research Inc. and META Group Inc. suggest the data-for-dollars explosion is showing no signs of letting up anytime soon. According to Gartner analyst Adam Sarner, U.S. companies spent more than $1.2 billion on customer loyalty programs in 2003, and he expects that to increase next year.

What’s up? While loyalty cards and prizes have always been, first and foremost, a cheap way for businesses large and small to start tracking their customers’ shopping habits, more customers than ever now consider themselves entitled to special treatment, a marketplace psychology spawned in the 1970s by the airline industry’s invention of frequent-flier miles, one of the first modern-day loyalty programs. Originally devised to generate better data on the most popular routes, the airlines broke what was a one-price-fits-all standard and introduced a some-people-are-more-special-than-others psyche that has changed the American, and global, marketplace forever. Says Brian Woolf, president of the Retail Strategy Center in Greenville, S.C., and author of Loyalty Marketing: The Second Act, "Loyalty programs are now a price of doing business."

But do they really work?

The short answer: not as well as they might. To be sure, it’s all in the execution. Ohio grocer Dorothy Lane Market Inc., Harrah’s Entertainment Inc., eBay Inc. and a handful of others say their loyalty programs are key to new revenue growth. Thanks chiefly to the kind of data they’ve reaped, these companies boast retention rates and profit-per-customer numbers among the highest in their respective industries–despite tough economic times and cutthroat markets. But the majority of companies are still struggling to get it right.