Marketing & Branding

Are Loyalty Cards and Customer Reward Programs Worth It?

Take out your keys right now; I bet you have at least one customer loyalty card looped on there. I have three on my keychain — CVS, Jewel and Panera Bread — and I use them whenever I spend money at those stores. After all, why not? If I chose their location over one of their competitors, then can’t I be rewarded at least a little bit?

I don’t expect to receive free groceries or free asiago cheese bagels for a month (hint, hint Panera), but I wouldn’t turn down some points for every purchase. That could rack up to one free bagel or extra discounts off of my favorite cereal! Loyalty cards seem like a no-brainer idea to me: increased business for you and a deal for me as a reward.

However, a study out of Ryerson University in Toronto suggests that some retailers may not be feeling this same love. According to the research, some loyalty programs may not be so profitable for certain brands and companies may be better off not offering this type of customer incentive at all. Saeed Zolfahari, a professor and director of the university’s industrial engineering program, was the leader of the study along with PhD candidate Amir Gandomi. They developed a mathematical model to measure loyalty programs’ effectiveness, and they found that if you have a band of loyal customers already, you don’t need to spend extra money to keep them loyal.

Discounts are another form of rewards.
Discounts are another form of rewards.

The study examined the price of a product sold in two separate periods and the amount of the loyalty reward offered at those times. Customers who made a purchase in the first time frame got a reward in the form of a discount for their purchase in the second period, like 15% off your next purchase. The study found the company had to raise the initial price at some point in order to still make a profit. This was due to the size of the discounts being offered in the second period.

Research also uncovered that a lot of marketers who suggest using loyalty programs at their businesses don’t have much to back up their claims of these programs being successful. They think that since their competitors use them, that they should as well to increase traffic into their company. Zolfahari and Gandomi’s model suggests that if average customer satisfaction increases over time, there is less incentive for the company to offer a loyalty program. Basically, if your customers are already happy then you don’t need to keep encouraging them to buy from you.

I had a professor in college tell us (repeatedly) how important it was, once we entered the business world, to consider having a customer loyalty card to improve our customer relation management. Her enthusiasm for loyalty cards was impressive, but it’s clear that not every company out there benefits from providing them.

Have you seen a company that offers a loyalty card that you really like? What about a company that surprised you by offering one? Do you agree with this new research, or are loyalty programs as beneficial as ever?