This History of Loyalty Programs, Part One

Jun 22, 2015


THE HISTORY OF LOYALTY PROGRAMS PART ONEOver the past 120 years, “customer loyalty” has evolved from a personal relationship between storekeepers and shoppers, to a 20th Century monologue delivered by mass media, and back to a new kind of one-to-one relationship – a dialogue driven by empowered consumers. This series will break it down into several distinct eras. Let’s start at the beginning.

Mass advertising in the 20th Century

The rise of mass media placed the radio, magazine and TV between marketers and customers.

Corporations delivered one-sided messaging to the masses, with crude if any segmentation

or targeting. Loyalty programs arose to disintermediate – to help marketers re-connect directly with their customers, seeking to counteract the skepticism that eventually characterized the consumer’s view of advertising. 

The very first loyalty programs were simply “gifts” from merchants – mostly supermarkets and gas stations – to their customers, to establish an opportunity cost for shopping elsewhere. One of the first such national programs was S&H Green Stamps, launched in 1896. Green Stamps and their imitators allowed customers to collect stamps and redeem them for free gifts.

Have a smoke…get a free card table!

CPG companies got into the act, too. Notably – and perhaps notoriously – Brown and Williamson Tobacco sold Raleigh Cigarettes from the 1950s through the 70s, with a coupon on every pack, redeemable for household goods and other merchandise.

Disposable diapers in the 1980s carried manufacturers’ coupons for free or discounted toys from Tyco and other manufacturers.

Today there is a strong movement among CPG companies and others with indirect selling models to develop relationships with end consumers.

The modern loyalty program was not designed to reward customers, but to acquire data

As the distance between marketers and consumers grew, companies no longer knew their customers. This was especially true in the airline industry, where travel agents owned 95% of the market and had the direct relationship with the traveler. Airlines introduced modern loyalty programs, but not to reward fliers per se. The miles, free trips and upgrades were there simply to motivate customers to share data.

The first modern program was American Airlines’ AAdvantage, launched in 1981 after more than a year of careful planning. But what came to define the emerging loyalty environment was United Airlines’ near-instant match with the introduction of Mileage Plus, over the weekend after the AA launch.

Loyalty programs became a me-too proposition virtually overnight.

Marketers started to one-up each other, bidding up the stakes with double and triple miles and costly share-shift promotions. To quote one early loyalty pioneer, “You were only as smart as your dumbest competitor.”

Programs grow more sophisticated

As memberships grew, marketers increasingly segmented their programs, adding status tiers to provide aspirational motivation for members to level up. Tiers were a badge of honor, and a way to provide increased benefits to more valuable customers.

Two movements in loyalty programs emerged during the late 1980s, both of which are still growing today.

  • Earning based on spend, status based on frequency. Hotel and credit card programs allocated earnings in proportion to dollars spent, rather than shopping events or visits. Some more sophisticated programs, especially in the hotel industry, used both frequency and spend to reward multiple kinds of customers for specific behaviors. In many programs guests earn rewards based on their spending, but earn recognition based on how many times they visit.
  • Focus on customer experience in addition to material rewards. A pioneer in this kind of program was Hertz, which introduced its Number #1 Club Gold in 1988. It was the first major program based entirely on the customer experience.

When research showed that what renters really wanted was the quickest possible way from their airplane to their car, Hertz created the first program in the industry that allowed members to skip the counter.

In a legendary win-win, customers loved the program, and Hertz served them more cost-effectively, because stopping at the counter was not just a hassle for renters – it was also a cost for Hertz.

A final pioneering feature of Hertz #1 Club Gold was that there was a fee for the program – which was waived for the vast majority of renters, who were valuable frequent travelers. Charging a benchmark fee established an official value for the program and provided ancillary revenue to offset program costs.

From their beginnings in the late 19th Century, by 1990 loyalty programs had matured in what they offered to consumers and marketers, setting the scene for unprecedented growth and creativity in customer engagement strategies.

Up next in The History of Loyalty Programs, Part TwoNew benefits, better economics and more holistic CX.