Group Seminar

Rewards and Loyalty Programs Made Simple

Helia Arabi (3703416)

Morva Mohammadzadeh Dogaheh (3769981)

Khue Vo (3745233)

University of New Brunswick: Faculty of Management

ADM 4326: Customer Satisfaction and Loyalty

Dr. E. Stephen Grant

May 29th, 2024

Introduction...........................................................................................................2
Data Collection Through Rewards and Loyalty Programs.......................................................4
 Types of Loyalty Programs.......................................................................................5
Limited loyalty programs:........................................................................................6
Open loyalty programs:..........................................................................................6
Benefits of Loyalty Programs to customers.......................................................................7
 Hard benefits:...............................................................................................7
 Soft benefits:................................................................................................7
 Utilitarian benefits..........................................................................................8
 Hedonic benefits............................................................................................8

 Symbolic benefits:..........................................................................................9

Benefits and Constraints of Loyalty Programs to the Company................................................9

Example of Successful Loyalty Programs........................................................................10

Costco Wholesale Loyalty Program:...........................................................................10

Sephora’s Loyalty Program – Beauty Insider.................................................................11

Measuring Customer Loyalty......................................................................................13

Net Promoter Score...........................................................................................13

Customer Lifetime Value.....................................................................................13

Repurchasing Rate............................................................................................13

Multiple Products Purchasing Rate..........................................................................14

Customer Loyalty Index......................................................................................14

Ways to improve customer loyalty...............................................................................14

Outline the Customer's Buying Journey....................................................................14

Provide Excellent Customer Service........................................................................15

Engage Customers Online...................................................................................15

Request Feedback from Customers........................................................................ 15

Monitor Activities from Competitors........................................................................15

Innovative Strategies to Increase Customer Loyalty for Future...............................................15

Blockchain-Based Loyalty Programs........................................................................16

AI-Powered Predictive Customer Service.................................................................. 16

Virtual and Augmented Reality Shopping Experiences.................................................. 17

Emotion AI for Customer Feedback.........................................................................17

Eco-Friendly Reward Programs..............................................................................18

Conclusion...........................................................................................................18

References..........................................................................................................19
Introduction

Rewards and loyalty programs are strategic marketing tools used by businesses to maintain and

foster customer loyalty, encourage repeat purchases and boost customer engagement. Businesses

offer various incentives to their customers through these programs for their ongoing support and

loyalty, in which both the businesses and their customers mutually benefit from (Uncles et al.,

2003). This paper explores the definition, purpose, history, types, benefits and challenges, and

future of rewards and loyalty programs, with references to relevant literature.

According to Wijaya (2005), in terms of academic and journal literature, the exact definition of

customer loyalty has not been given by marketing experts and researchers; instead, loyalty

programs are defined based on their objectives. Loyalty programs’ primary purpose is to build

emotional attachment between customers and the brand, ultimately increasing the customer

retention rate of the brand. Loyalty Programs can have different names; however, the main

differentiator is not the name itself but rather the types and benefits offered by the programs.

In exchange for purchases and engagement with the business, reward programs offer customers

points, discounts, or other benefits that can be accumulated and later redeemed for different types

of rewards. Moreover, by providing continuous incentives for repeat business and purchases,

loyalty programs aim to build and sustain customer loyalty, which often encompasses rewards

programs as a core component. While the primary focus of rewards programs is to provide

immediate and short-term incentives, the ultimate goal of loyalty programs is to build long-term

relationships with the customers through offering ongoing benefits, as well as creating deeper

emotional connections with the business and the brand (Kumar & Shah, 2004).

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History and Evolution

The concept of rewards and loyalty programs can be traced back to several centuries ago,

precisely to the late 18th century. Over the years, these programs have evolved from simple and

informal agreements to sophisticated and technology-driven systems (Berman, 2006; Butscher,

2002). Kim et. al (2020) suggests that rewards and loyalty programs have become a fundamental

aspect of modern-day marketing strategies that aim to attract and retain customers and increase

their lifetime value to the businesses. According to the New York Times, the earliest form of

loyalty programs can be found in 1793, when a merchant in Sudbury, New Hampshire started

rewarding customers with 'copper tokens’ that could be collected and used for future purchases.

This concept quickly spread among other merchants into the 18th century (Shelper, 2020).

Conversely, Professor Barry Kemp argues in “Ancient Egypt: Anatomy of A Civilisation” that

the ancient Egyptians had implemented a reward system much like today’s rewards and loyalty

programs, which included status tiers and a diverse range of redeemable rewards. As money had

not yet been invented during the reign of the pharaohs, individuals such as citizens, conscripted

workers and slaves would receive commodity ‘tokens’, alike to modern loyalty points or miles,

in exchange for their labor and temple service. Beer and bread tokens were the most common

forms of these rewards. These tangible tokens were made from wood, covered with plaster,

painted over, and then shaped to resemble a jug of beer or a loaf of bread (Shelper, 2020).

The birth of modern-day loyalty programs can be attributed to the American Airlines’ American

AAdvantage launched in the 1980s. By bypassing travel agents (who handled 95% of bookings

at the time), American Airlines aimed to enhance direct relationships with their customers. In

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return for signing up, fliers were incentivized with a free flight after accumulating 25,000 miles

(JoinReach, n.d.).

Data Collection Through Rewards and Loyalty Programs

In the present age of digitalization, businesses across different industries and sectors are utilizing

rewards and loyalty programs to both retain data and collect valuable information and data. By

incentivizing customers to engage with a business and brand repeatedly, it provides companies

opportunities to collect data on consumer behavior, preferences, and purchasing patterns. When

tracking their customers’ interactions with the programs, businesses gain access to consumer

insights through the collection of data on the purchasing frequency, product preferences, and

spending habits. This can facilitate and inform companies with targeted marketing strategies and

product development initiatives (Rawat 2024).

Another benefit gained from the data collection through rewards and loyalty programs is that it

enables businesses to personalize the customer experience. By allowing companies to understand

individual preferences and purchasing history, they can tailor the promotions, recommendations,

and communications to meet the specific needs of each customer better. Furthermore, businesses

can forecast future trends and anticipate customer needs by analyzing the data accumulated from

these loyalty programs. Companies can enhance their operational efficiency and profitability by

optimizing inventory management, pricing strategies, and marketing campaigns using predictive

analytics (Rawat, 2024).

Lastly, businesses could gain competitive advantage if the data collected through these programs

are utilized effectively. Leveraging customer insights to deliver superior products and services

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allows companies to differentiate themselves in the marketplace and attract and retain customers

in a competitive market (IncentiveSmart, 2024).

Types of Loyalty Programs

Rewards and Loyalty Programs come in many different types and forms. The conceptual and

review paper about Customer Loyalty Programs conducted by Dr. Muhammad Tariq Khan

mentions different types of loyalty programs from different research studies; the following is a

list of some common programs.

Wijaya (2005) categorized loyalty programs into limited loyalty programs and open loyalty

programs.

Limited loyalty programs: customers must undergo a formal procedure or fulfill specific criteria

to become members of the program, such as paying joining fees, a certain purchase volume, and

a minimum income.

Open loyalty programs: every customer can join this type of program.

Gudonaviciene & Rutelione (2009) mentioned six types of programs from Debelak (2005)

 Evaluation: provide more products and services than expected.

 Discounts: present money for customers when they purchase more.

 Partnership: allow customers to choose the award from other possible companies.

 Reward: give awards to customers not linked with products or services of the company.

 Cooperation: create long-lasting relationships with customers based on mutual benefit

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  Coalition: associate with other companies to share customer information and aim to new

potential customers.

Gudonaviciene & Rutelione (2009) also mentioned Berman’s (2006) study in which he grouped

all functional customers’ loyalty programs into four main types.

 Type I: Registered members get additional discounts

 Type II: Members are rewarded with free products when they purchase the estimated

amount of products

 Type III: Members get points depending on the purchase amount

 Type IV: Members want to get offers and discounts only for them

Benefits of Loyalty Programs to customers

Wijaya (2002) mentioned Butscher’s (2002) definition of two types of benefits that loyalty

programs offer, namely, hard or financial benefits and soft benefits.

 Hard benefits: tangible, easy to recognize, lead to savings in some form or another.

Example: discounts, coupons, etc.,

 Soft benefits: intangible, company and product-related, less copied by competitors.

Also, in Gudonavinciene & Rutelione's (2009) study, where they mentioned the four types of

loyalty programs, they also provided the benefits and constraints of each type.

 Type I: Registered members get additional discounts:

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 o Benefits: open membership; every member receives the same discount of the

individual purchase history; personal information is not required, easily to

register.

o Constraints: loyalty behaviour is not rewarded, only members with loyalty cards,

and it is not stimulating repeat purchases.

 Type II: Members are rewarded with free products when they purchase the

estimated amount of products:

o Benefits: open membership; customers can receive free products when they

purchase a certain amount; customers are in control of their account.

o Constraints: competitors can easily copy.

 Type III: Members get points depending on the purchase amount:

o Benefits: Individual offers are based on purchase history.

o Constraints: personal information is required.

 Type IV: Members want to get offers and discounts only for them:

o Benefits: personalized offers based on market segments.

o Constraints: personal information is required.

Mimouni-Chaabane & Volle (2010) study about customer-perceived benefits of loyalty programs

mentioned three categories: Utilitarian, Hedonic, and Symbolic.

 Utilitarian benefits: instrumental, functional, and cognitive, provide value to customers

by offering a means to some end; relate to basic motivation and usually correspond to a

product’s tangible attributes. Utilitarian benefits relate to loyalty programs in two

dimensions:

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 o Monetary savings: spend less and save money; provide financial advantages

o Convenience: reduce choice; save time and effort

 Hedonic benefits: non-instrumental, experiential, emotional, and personally gratifying

benefits. Hedonic benefits relate to loyalty programs in two dimensions:

o Exploration: discover and try new products sold by the company

o Entertainment: enjoy collecting and redeeming points

 Symbolic benefits: external advantages that relate to the needs for personal expression,

self-esteem, and social approval, the advantages come from intangible and non-product-

related attributes. Loyalty programs with symbolic benefits can provide customers with

two things:

o Recognition: a special status, a distinguishing feeling and better treatments

o Social: belong to a group that shares the same values.

Benefits and Constraints of Loyalty Programs to the Company

The cost of acquiring new customers is higher than the cost of retaining existing customers,

which is one reason why companies are utilizing loyalty programs to increase their customer

retention rates. Loyalty programs provide companies with multiple benefits:

 Increase customer retention

 Increase the customer lifetime value

 Enhance repeat purchase rate

 Increase sales while saving costs of acquiring new customers

 Maintain the competitiveness

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Benefits always come hand in hand with constraints, and customer loyalty programs are no

exception. Some limitations on loyalty programs:

 Copy-paste is not a good idea: different industries require different types of loyalty

programs

 The cost of designing and launching the loyalty program: Since different industries

require different loyalty programs, companies need to invest a lot of money in developing

one suitable for their business and customers.

 The customer-perceived risks make introducing a new loyalty program difficult: With

customers’ growing concerns about their personal information getting leaked to third-

party companies, customers can refuse to join a loyalty program that they think will harm

their personal information. The company's job is to reassure customers that their personal

data will be protected at all costs.

Example of Successful Loyalty Programs

Costco Wholesale Loyalty Program: Costco is one of the largest member-only warehouses in the

world; to shop at Costco, customers need to pay a fee to join Costco’s membership and present

their membership each time they want to enter Costco. With a Costco membership, customers

can buy various products from quality brands at an affordable price.

Behind Costco’s success

 Annual Membership Fees: Instead of being open to the general public like other retail

stores, Costco asks their customer to pay an annual membership fee, the role of paying to

join gives customers a sense of belonging and exclusivity. Giving customers a sense of

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 privilege to be a part of the Costco community is one of the key factors contributing to

Costco’s success.

 Bulk Buying Concept: Costco allows its members to buy products in large quantities at an

affordable price, unlike Walmart or Sobeys. Costco is committing to providing value to

its members. Buying products in larger quantities gives Costco the power to bargain for a

lower price, which is then passed on to its members, allowing their members to purchase

products at a significantly lower price.

Various factors contribute to Costco’s success, but overall, the main factor is to give customers a

sense of inclusivity and show them that they can save more at Costco instead of other retailers.

Costco allows its customers to buy large quantities at a lower price, ultimately leading to repeat

purchases. Moreover, members who choose to sign up for the ‘Executive Membership’ get 2%

cashback with each purchase. This incentive further promotes repeat purchases and, in turn,

increases customer loyalty. Most Costco members ultimately turn into true loyal customers, the

type of loyalty every business seeks.

Sephora’s Loyalty Program – Beauty Insider

Sephora is a multinational retailer originally from France. The company is committing to

creating a welcoming beauty shopping experience for all its customers. Sephora’s loyalty

program – Beauty Insider is one of the most successful loyalty programs in the beauty industry.

Beauty Insider is basically a community for customers who value their beauty and want to share

their knowledge with other customers. Beauty Insider is an open membership; every customer

who shops at Sephora can create a Beauty Insider account simply by giving their first and last

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name, their email address or phone number, and if they want to update more information, they

can easily do that through the Sephora app.

The Beauty Insider community has 17 million members in North America alone, and these 17

million members are responsible for 80% of the company’s sales. When you join the Beauty

Insider community, you can get access to exclusive promotions, gifts on your birthday, discounts

and other perks. After every purchase, you will also gain points, which will help move you into a

higher tier with more exclusive promotions and offers. You can also trade points for discounts

and gifts.

Behind Sephora’s success

Members can share their valuable opinions: Beauty Insider is a beauty-lovers community where

all members can share their opinions, ask questions, trade information, and discuss each and

every product offered by Sephora. This gives customers a sense of power since they can voice

their opinions to other community members and the brand.

Different perks with exclusive offers and promotions: The Beauty Insider community has three

perks, the first one is called “Inside.” customers can join for free and enjoy multiple benefits

such as free shipping, 10% on seasonal savings events, and if they spend $350/year, they can

move up to “VIB”, in this tier, customer can enjoy the same benefits as the “Inside” tier,

however, for seasonal savings events, they will get 15% off and on point multiplier events, they

get 3X points. The final tier is called “Rouge”, customers in this tier will have to spend

$1,000/year, will get 20% off on seasonal savings events and on point multipliers events, they get

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4X points, members who are in the “Rouge” tier can also get access to the “Rouge Reward”

where they can exchange 2,500 points for $100 off their purchase.

Tailored product recommendations: When joining the community, customers can complete a

“Beauty Preferences” quiz, and Sephora will personalize their recommendations based on

customer’s answers.

Online members-only community: Sephora offers the Beauty Insider members a forum to connect

with other members and discuss, review, and share their opinions. This gives customers a strong

sense of belonging.

Costco’s loyalty program and Sephora’s Beauty Insider program are just two of the most

successful loyalty programs. There are also multiple successful loyalty programs, such as

Starbucks’s loyalty program or Air Canada’s Aeroplan. Loyalty Programs are effective when it

comes to retaining existing customers and attracting new customers.

Measuring Customer Loyalty

Below are five metrics used to measure customer loyalty for a brand.

Net Promoter Score

The Net Promoter Score (NPS) is an indicator of customer satisfaction. Surveyors often use NPS

to reveal the likelihood of consumers recommending products or services to others. A high NPS

exemplifies strong customer support for the business. For instance, administering a questionnaire

that asks respondents how likely they are to recommend a service, with answer choices ranging

from "0" (not likely) to "10" (extremely likely), can show a high likelihood of recommendation if

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respondents select "9" or "10." This indicates appreciation and satisfaction with the company’s

offerings (Reichheld, 2003).

Customer Lifetime Value

Customer lifetime value (CLV) tracks a customer's long-term relationship with a brand. It allows

businesses to observe how customer loyalty changes over certain periods. CLV is calculated by

determining the total revenue generated by a customer's spending over a year, multiplying that by

the total number of years the customer has supported the brand, and subtracting the total cost of

acquiring customers. A high CLV suggests significant customer loyalty (Gupta et al., 2006).

Repurchasing Rate
The repurchasing rate (RPR) measures the number of customers who repeatedly buy products.

The higher the consistency of purchases, the more loyal customers are likely to be. To calculate

RPR, select a period, find the total number of customers at the beginning and end of that period,

subtract the number of new customers, and divide the remaining number of customers at the end

by the number of customers at the beginning. Multiplying the result by 100 gives the

repurchasing rate percentage (Reinartz & Kumar, 2000).

Multiple Products Purchasing Rate

The multiple-products purchasing rate tracks loyal customers buying various products from the

inventory. A high rate indicates customer confidence in the brand's quality. For instance, if a

customer buys apparel, accessories, and home goods from the same brand, it demonstrates

consistent positive experiences and willingness to support the business in multiple areas (Verhoef

et al., 2001).

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Customer Loyalty Index
The Customer Loyalty Index (CLI) measures customer loyalty over time, showing if customers

would buy again, recommend the company, or try other products offered. CLI questionnaires can

be distributed to assess changes in customer retention and forecast business growth. For

example, if a business expands to a new market, CLI can help determine if the current customer

base can support this growth (Griffin, 2002).

Ways to improve customer loyalty

Outline the Customer's Buying Journey

Outlining the buying journey helps identify touchpoints that influence loyalty. Understanding

these touchpoints from the consumer's perspective can help improve customer engagement

(Court et al., 2009).

Provide Excellent Customer Service

Quality customer service inspires repeat purchases and word-of-mouth marketing. Measuring

customer service effectiveness through dedicated email accounts or in-store interactions can

assess customer loyalty (Zeithaml et al., 1996).

Engage Customers Online

Engaging target audiences on online platforms through social media, blog posts, and email

marketing can boost customer retention. Positive online engagement indicates satisfaction and

strengthens consumer-brand relationships (Mangold & Faulds, 2009).

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Request Feedback from Customers
Customer feedback offers insights into consumer feelings about the brand. Designing surveys to

gauge service helpfulness and product satisfaction helps strategize improvements in consumer-

brand relationships (Parasuraman et al., 1988).

Monitor Activities from Competitors

Monitoring competitors’ activities helps strategize how to maintain strong customer

relationships. Observing competitor product releases and customer reactions can inform

strategies to retain customer loyalty (Porter, 1980).

Innovative Strategies to Increase Customer Loyalty for Future

Blockchain-Based Loyalty Programs

Blockchain technology can revolutionize traditional loyalty programs by enhancing transparency,

security, and ease of reward redemption. It provides a decentralized and immutable ledger to

store customer data and rewards, enabling customers to earn and redeem rewards across a

network of participating companies (LinkedIn, n.d.; Open Loyalty, n.d.).

 Singapore Airlines launched KrisPay, a blockchain-based digital wallet that allows customers

to convert airline miles into digital currency for shopping with partner merchants (TADA,

n.d.).

 American Express and Boxed partnered to offer a blockchain-based rewards program,

enabling customers to earn and redeem rewards seamlessly across both platforms (Street

Fight, 2021).

 Chanticleer Holdings, a restaurant chain investor, implemented a blockchain-based loyalty

program for its burger brands like BGR and Little Big Burger (TADA, n.d.).

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AI-Powered Predictive Customer Service
Artificial Intelligence (AI) can analyze customer data and interactions to predict their needs and

preferences, enabling proactive and personalized customer service (LinkedIn, n.d.). AI-powered

chatbots and virtual assistants can provide instant support, while predictive analytics can

anticipate issues and offer tailored solutions.

 Retail companies use AI to analyze customer purchase history and browsing patterns to

recommend relevant products and offer personalized discounts.

 Airlines employ AI-powered virtual assistants to assist customers with booking flights,

managing reservations, and addressing queries in real-time.

 Banks leverage AI to detect potential fraud and proactively alert customers about suspicious

transactions.

Virtual and Augmented Reality Shopping Experiences

Virtual Reality (VR) and Augmented Reality (AR) technologies can enhance the shopping

experience by allowing customers to virtually try on products, visualize furniture in their homes,

or explore virtual showrooms (Deloitte, n.d.). These immersive experiences can increase

customer engagement and satisfaction.

 Fashion retailers offer virtual fitting rooms where customers can try on clothes using AR and

get personalized size recommendations.

 Furniture companies provide AR apps that allow customers to visualize how different pieces

would look in their homes before making a purchase.

 Automotive brands create virtual showrooms where customers can explore and customize

vehicles in a realistic 3D environment.

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Emotion AI for Customer Feedback
Emotion AI, also known as Affective Computing, can analyze customer emotions through facial

expressions, tone of voice, and other cues during interactions (Open Loyalty, n.d.). This

technology can help companies understand customer sentiments and tailor their services

accordingly.

 Call centers use Emotion AI to detect frustration or dissatisfaction in customers' voices and

escalate the call to a human agent for better resolution.

 Retail stores analyze customers' facial expressions using AI-powered cameras to gauge their

interest in products and provide personalized recommendations.

 Online platforms leverage Emotion AI to analyze customer reviews and social media posts,

identifying areas for improvement or potential issues.

Eco-Friendly Reward Programs

Companies can incentivize sustainable behavior and promote environmental consciousness by

offering eco-friendly rewards in their loyalty programs (Street Fight, 2021). These rewards can

include discounts on eco-friendly products, carbon offset credits, or donations to environmental

organizations.

 Airlines offer bonus miles or discounts to customers who choose to offset the carbon

emissions from their flights.

 Retail stores provide loyalty points or discounts to customers who bring their own reusable

bags or containers.

 Hotels reward guests with loyalty points or discounts for opting out of daily room cleaning or

using energy-efficient practices during their stay.

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Conclusion
In summary, rewards and loyalty programs are crucial for businesses to cultivate customer

loyalty, encourage repeat purchases, and drive customer engagement. Evolving from simple

systems to sophisticated digital frameworks, these programs offer both tangible and intangible

incentives to build long-lasting emotional connections with customers. In today's digital age,

loyalty programs enable businesses to collect valuable consumer data, personalize experiences,

and forecast trends. Examples like Costco's membership model and Sephora's Beauty Insider

illustrate how such programs can foster a sense of belonging while driving sales.

Metrics like Net Promoter Score and Customer Lifetime Value help measure the effectiveness of

loyalty initiatives. Innovations such as blockchain-based programs and AI-powered services

promise to further enhance customer engagement. Ultimately, rewards and loyalty programs

remain essential for businesses seeking to thrive in competitive markets by fostering long-term

customer relationships and driving sustainable growth.

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