What is a reward program?

Alex Cohen

A reward program, or otherwise known as a loyalty program, is a marketing tool designed to get customers engaged with a company’s brand to drive repeat sales and beat out the competition. By offering customers a way to get rewarded for shopping and being loyal to that brand, people shop more and spend more.

How They Work

Reward programs can take on a few different setups:

  • Virtual currency issued by the company (miles, points, etc)
  • Giveaways, promotions, unlocked discounts, coupons
  • Cash value that gets accrued (either as cash back or a discount)

Reward programs can share multiple of the above characteristics. For example, The CVS rewards program offers discounts and coupons but also has you accrue a cash reward based on the amount you spend.

As a consumer, you start by signing up for that company’s loyalty program. Because the whole nature of these is to show you how being loyal pays off, the brand will sometimes pay for a sign on bonus to get you signed up.

At the minimum, you’ll need:

  • Name
  • Phone number
  • Email

For other programs you may also need:

  • Address
  • Affinity for certain products
  • More personal details like your favorite stores or airports

Why do companies offer loyalty programs?

Quite simply - it’s because the cost to acquire a new customer is usually more expensive than it is engage an already acquired customer to spend more and spend more frequently.

Take Nordstrom for example. Their loyalty programs has millions of people signed up who are very engaged. The cost for them to acquire that 10 millionth user is really expensive because they have to explore more marketing channels and the likelihood of the 10 millionth person really liking Nordstrom enough to sign up is lower than the 1st customer. Instead, it’s cheaper for Nordstrom to offer existing customers special shopping days, freebies, unlocked discounts and bonus rewards. These member experiences also play a big part of marketing to potential new customers.

Are they a scam?

No, reward programs are definitely real. But, be mindful of the value you’re actually getting. Many programs make their money on giving you a perceived value that’s high but really doesn’t cost them anything. It’s business economics 101 and it’s great for the brand, bad for the consumer.

Banana Republic is a good example. They may give you 5000 points = $5 after spending $500 at the store (these are not real numbers). In this case the value of those points is $.001 and you’re earning 1% back on Banana Republic purchases. 1% is low and consider it even lower when you realize the margin you’re paying on their clothing. With many brands, the loyalty programs are subsidized through large margins.

About the Author

Alex Cohen

Alex is the founder of Birch and lives in San Francisco with his two dogs, Duncan and Miller, and his fiance, Sarah. Follow him on Twitter @anothercohen