Are customer loyalty programs a good thing for retail? Should you have one? Do you participate in any? In part two of this article, I’ll tell you a story about a hotel’s loyalty program from my own experience, and share with you both rational and emotional conclusions.

You will, of course, decide for yourself.

My story starts with a hotel in Austin, but the story of loyalty programs goes back to 1896, when Thomas Sperry and Shelly Hutchinson came up with an idea to improve retail cash flow.

Sperry and Hutchinson sold S+H Green Stamps to retailers, who gave them to customers that paid in cash instead of using store credit.

The First Loyalty Program

Customers flocked to stores that gave stamps. Filling stations, gift shops, and grocery stores gave them as bonuses with every purchase, based on the dollar amount of the purchase.

Eventually shoppers saved up books of stamps and redeemed them for gifts from the S+H Green Stamp catalog. Stamps could be redeemed for anything from furniture, to appliances, to life insurance. During the 1960s the S+H catalog was the largest publication in the US, and the company issued three times as many stamps as the US Postal Service.

S+H made money selling the stamps, and even more money because so many stamps were never redeemed. (Note to loyalty program planners: paper gets lost. Computer records don’t).

During the recession of the 70’s when customers were afraid that each dollar they spent might be the last for a while, and retail sales were taking a beating, retailers cut every available cost of operation. The ongoing expense of Green Stamps became hard to justify. When the competition dropped the stamps and lowered prices by the same percentage, thrifty shoppers voted with their feet to forgo the reward and take the lower price.

By the time Sperry’s and Hutchinson’s heirs sold the company in 1981 only about 100 stores were still offering the stamps.

Why is Customer Loyalty Important?

Fred Reichheld, author of Loyalty Rules, says an increase of customer retention of only 5 percent can result in a 75 percent improvement in customer value.

Reichheld cites other values from customer retention including greater sales, higher profitability, better word of mouth, and the ability to identify service problems earlier.

It’s no wonder that retailers are so enamored of customer loyalty programs.

Punch Cards

The simplest loyalty program is the wallet-sized card which can be punched or stamped with each purchase. Buy eight sandwiches and the ninth is free. Stay a dozen nights in our hotel and the thirteenth is on us. Sorry… the hotel story helped to shape my view on loyalty programs, but I’m not quite ready to tell it, yet.

A variation of the punch card is the magnetic card which gets swiped in the credit card reader. It provides discounts on selected items to members of the store’s loyalty club. At least, that’s what they want you to believe. The actual purpose is to record data on your personal purchase habits, in order to tailor future offers that you’re more likely to respond to.

Improve your punch card response rate.

Professors Xavier Drèze of Wharton, and Joseph Nunes of USC’s Marshall School of Business have concluded in a paper titled The Endowed Progress Effect that people are more likely to buy eight sandwiches to get the free one if you increase the total required to ten, but give them three punches on their first purchase.

To quote the study: “By converting a task requiring eight steps into a task requiring 10 steps, but with two already complete, the task is reframed as one that has been undertaken and incomplete rather than not yet begun. This increases the likelihood of task completion and decreases completion time.

Are you rewarding the wrong customers?

Many credit card companies are now offering airline miles when you apply for, and are granted their card. It’s a variation on those first three punches on the ten punch card.

But again and again it’s been statistically shown that the least loyal customers are those who are drawn to you because of special pricing. The special pricing usually kills profitability. The last thing you should attempt is to make an unprofitable customer loyal.

Does this hotel offer airline miles?

Are you a member of any airline’s frequent flyer program? Several of them? Do you use them all? So, which of the airlines are you loyal to? Or, like most of us do you shop for best price and purchase that ticket?

When all of the competitors use the same rewards, we’re back to a level playing field. Frequent flyer miles are now part of the airlines’ cost of doing business. Having one won’t increase sales, but not having one may actually decrease them.

Can you buy customer loyalty?

Or, more specifically, can you purchase customer loyalty with premiums and discounts?

This is the basic flaw in the whole concept of customer loyalty programs, and a hint of the conclusions to expect in Sperry, Hutchinson, and the Hotel, Part II.