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Loyalty Programs: What Are They and How Do They Work?

Customer loyalty programs are everywhere these days, especially in retail stores. Here’s what to know about a rewards program before you decide to sign up.

September 23, 2021

When you approach the checkout counter at a store, how often do they ask you if you’re a member of their rewards program? 

Let’s put it this way; if you got loyalty points for every time you were asked to join a rewards program, you’d probably have a heck of a lot of points. 

The average consumer belongs to 14.8 loyalty programs, so chances are pretty strong that you’ve joined at least a few (or even more). 

Loyalty programs have come a long way in recent years, and businesses continue to update them to stay fresh and in line with the times. 

Here’s what to know about how today’s loyalty programs work, where they got their start and whether it makes sense for you to participate in a rewards program.

What is a loyalty program?

A loyalty program is a reward system a business uses to attract new customers and encourage repeat visits. Because they’re so common in the modern world, people have come to expect them from most brands, especially more established companies.

For example, Target’s loyalty program offers the following:

  • 1% cash back on purchases

  • Voting to direct Target’s giving initiatives

  • Personalized deals and perks, including a birthday gift

  • Early access to special sales throughout the year

Target probably hopes these perks will:

  • Convince you you’re saving money

  • Appeal to your sense of social responsibility

  • Make you feel appreciated by their brand 

Over the years, there have been many different approaches to customer loyalty programs, but they’re all designed to convince customers to return for more business. 

How do loyalty programs work?

Traditionally, loyalty marketing programs have used point-based systems, where customers get rewards for purchases they make or dollars they spend. After enough of these purchases or dollars stack up, they can redeem the points for unique offers, products or discounts.

These systems track customer activities with a unique identifier. Retailers used to give out a plastic card with a barcode for customers to scan at each visit, but more and more are moving their loyalty programs online. 

These retailers can track customer rewards using the consumer’s phone number or email address, allowing them to access key data in the process. Some even create exclusive mobile apps and offer coupons or complimentary products for downloading them.

Digital incentives like these give businesses the ability to track consumer behavior like never before. They can view what and when you buy, analyze your trends and create advertising that’s uniquely curated to you.

How did loyalty programs start?

Loyalty programs have been around for so long; it’s hard to say when the first vendor started rewarding people for buying from them more than once.

However, the modern form of customer loyalty programs started in the 1980s with American Airlines. They introduced the first frequent flier program, AAdvantage, to gain a competitive edge after the Airline Deregulation Act of 1978.

While traditional loyalty programs have focused on monetary rewards based on repeat business, modern businesses recognize these programs don’t quite cut it anymore. That’s because every company offers a discount for coming back these days, and consumers aren’t as easily impressed. 

Here are some of the most popular rewards programs and the appealing loyalty program benefits that keep their customers coming back for more: 

Starbucks Rewards

With 21.8 million members, Starbucks has one of the most successful loyalty programs in the world. 

  • Starbucks Rewards members earn one star for every dollar they spend and two stars for every dollar they preload into their digital Starbucks cards

  • Starbucks Rewards Visa credit cardholders get even more perks, earning three stars for every dollar they spend in-store, plus points for all other purchases made with their card

  • Starbucks Rewards members can redeem 25 stars for a complimentary drink customization, 50 stars for a cup of coffee, and 150 for a handcrafted drink

  • They can also receive exclusive offers like buy-one-get-one (BOGO) deals, a complimentary drink on their birthday and bonus stars for purchasing specific items

While part of Starbucks’ success seems to be that everyone is loyal to their brand anyway, they’re also reducing the number of purchases needed for rewards. 

Even at their lowest reward level, you only need to buy five $5 lattes to see a return on your purchases. If you’re a coffee-lover, you could do that in less than a week! 

Sephora’s Beauty Insider

With the Sephora mobile app, members can sign up for the complimentary Beauty Insider rewards program and earn one point for each dollar they spend. Five hundred points will get them a coupon for $10 off a future purchase. 

Sephora also offers its members extra points for purchases made if they sign up for the Sephora credit card.

These kinds of perks may be all well and good, but they’re par for the course as far as customer loyalty programs go. What Sephora does differently is they offer increasingly valuable “samples, services and one-of-a-kind experiences” depending on how much money you spend. These include:

  • Early access to products

  • Complimentary shipping for increasingly small purchases

  • Potential meet and greets with brand founders

  • Entrances into sweepstakes

These twists on the traditional loyalty program benefits help them stand out from the pack in today’s hyper-competitive environment.

What is the relationship between loyalty programs and credit cards?

Retailers have been tying their loyalty programs to credit cards for years, and there are many impressive offers to choose from, including thousands of airline miles, extra cashback on purchases and sign-up bonuses that can be worth hundreds of dollars or more.

Companies often reward cardholders using the traditional point system but with much higher rates. Unfortunately, this can make some people more prone to overspending.

For example, one common credit card incentive is to offer something like $200 cash back for spending $1,500 in three months. It can compel some customers to make significantly more purchases than they would have otherwise, just to get the reward.

Should I participate in loyalty programs?

Whether or not you should participate in loyalty programs, especially those tied to customer loyalty cards, depends on your lifestyle and budgeting discipline.

It’s not necessarily wise to take on debts you can’t afford just to receive customer loyalty rewards. If that’s too enticing for you to avoid, it might make sense to stay away from loyalty marketing programs altogether. 

Some people may also choose to avoid loyalty programs because they believe they endanger their privacy or contribute to identity theft. Many companies collect more than just your email address and phone number (although even that’s enough to scare off some consumers). They may also ask you to download an app on your phone that can access your contacts, track the websites you visit or read what you type.

Ultimately, it’s up to you to decide which loyalty programs are worthwhile. If there are brands you genuinely love, trust and turn to frequently, it might make sense to sign up for their programs and reap the benefits of being a loyal customer. 

If you’ve accumulated credit card debt thanks to too many customer loyalty cards, Tally​​† can help you manage your credit card payments all in one convenient spot. Find out more about what Tally can do for you today.

​​†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.