Cultivating Customer Loyalty: The Evolution of Loyalty Programmes

10/07/2024 by Newman Staff

Next time you are at a Starbucks outlet paying for your favourite coffee or smoothie, it is highly likely that you will receive some benefits offered to you in the form of points. These points can be collected and redeemed on future purchases. This is part of Starbucks’ loyalty programme, which aims to reward repeat customers and enhance their overall experience. Tesco (Club Card), Shell (Drivers Club) are similar initiatives and programmes.

What is a loyalty programme?

A Loyalty Programme is a strategic marketing initiative designed to encourage repeat business and foster long-term relationships with customers. By offering rewards, discounts, or other incentives, businesses aim to encourage repeat customer purchases thereby aiming to enhance customer retention and increase customer lifetime value. These programmes come in various forms, such as points-based systems, cash-back rewards and tiered memberships, and are prevalent across many industries, including retail, hospitality, and travel.

What is an example of the first-ever customer loyalty programme?

The evolution of customer loyalty programmes dates to 1793 when an American merchant handed out copper coins or tokens to revisiting customers. These tokens were then used to redeem against future purchases in the store. This idea flourished and became the foundation of the “Spend and Get “customer loyalty programme that flourished in the early 20th century.   

Representative image of copper tokens used in the early days
Representative image of copper tokens used in the early days.

Whilst businesses realised the importance of repeat purchases, the cost of copper tokens became increasingly prohibitive. The second important development in the evolution of Loyalty Programmes is the development of paper-based tickets or stamps.  Trading Stamps as they were popularly called were small paper coupons with gummed backing, cut into perforated squares which could be collected by sticking them in a ‘Savers Book’.

The most famous campaigns from that time are attributed to  two US-based businesses , the Grand Union Tea Company who introduced tickets in 1872 and later in 1892 Sperry and Hutchinson (S&H)  who introduced the famous S&H stamps.

 Representative image of early days of paper stamp issues by Grand Union Tea Company
 Representative image of early days of paper stamp issues by Grand Union Tea Company. One had to collect four tickets to exchange for a pound of tea!
Representative image of a Sperry and Hutchinson (S&H) stamp ‘saver book’
Representative image of a Sperry and Hutchinson (S&H) stamp ‘saver book’

S&H stamps had become so popular in their time, that in the 1960’s, S&H reportedly issued three times as many stamps than the US postal service

 However, it was not until the early 1960’s that such stamps made their way to the UK with the introduction of Green Shield stamps.

The copper tokens and stamps were based on the concept that customers had to spend if they wanted to get something and to incentivise repeat purchases.  However, for the merchant or the brand it was all built on hope; hoping that the customers would return for repeat purchases. There was no way of tracking or monitoring returning customers or on what and when they redeemed their stamps.  There was no way to collect and analyse customer data for the merchant other than relying on the storekeeper’s memory.

1970s and the birth of the modern Loyalty Programme

It is widely believed that the modern-day loyalty programme traces its origins to the growth of air travel in the USA. Texas International Airlines is often credited with introducing the first formal loyalty programme through its ‘frequent flyer programme’ which rewarded points to customers for their flights redeemable for future flight tickets.  However, the growth and popularity of airline frequent flyer programmes are largely attributed to American Airlines and their American AA Advantage frequent flyer programme which they launched in the 1980s.

Until then, the airline did not know anything about its customers as almost all flight tickets were sold through travel agents.  With American Airlines AA advantage, customers had to register their names and addresses and allow the airline to capture and monitor their travel data. To incentivise flyers to register with American AA Advantage the airline offered new registrants a set number of complimentary points and the promise of free flights upon accumulating a minimum number of points. This programme laid the foundation for the modern-day loyalty programme, influencing many other industries to adopt similar strategies

Soon other airlines, hotels, banks, credit card companies, and supermarkets all joined in to launch their own customer loyalty programmes.

Another type of loyalty programme is the business membership programme. The most famous business implementing this type of programme is Costco. To purchase from Costco, one must apply for a membership first and must pay a certain annual membership fee.  What customers look for in such programmes are price discounts, special deals, good customer service and aftersales. Amazon Prime is another example of a business/ service membership.

 What was the first supermarket loyalty card in the UK?

TESCO was the first supermarket to launch a loyalty scheme in 1995. Today, almost all supermarkets and big retail establishments in the UK have their customer loyalty programme.

Representative image of a TESCO Clubcard
Representative image of a TESCO Clubcard

How do these businesses benefit from their loyalty scheme?

Businesses benefit from loyalty schemes primarily through the personalisation of rewards. By collecting detailed purchase data every time a customer uses their loyalty card, businesses gain valuable insights into individual customer preferences and behaviours

This enables them to tailor promotions and rewards to each customer’s specific interests. Personalised rewards and exclusive benefits significantly enhance the relevance and appeal of their offers leading to higher engagement and repeat purchases, fostering stronger brand loyalty, enhancing customer experience, driving sales, and providing a competitive edge in the market.

The insights gained also help optimise inventory management and guide product development. Additionally, anonymised customer data can be sold to other interested businesses, generating significant extra revenue.

Personalised rewards increase customer satisfaction and loyalty, as customers feel recognised and valued. This approach not only strengthens customer relationships but also maximises the efficiency of marketing efforts, ultimately driving sales and fostering long-term loyalty.

Influence of Technology:  Customised loyalty programmes via mobile apps

The nature of loyalty programmes continues to evolve.  Technology advances have enabled merchants to shift their means of customer loyalty from paper stamps and plastic cards to mobile apps and other digital forms.

Customers now only need a smartphone to download these apps, offering convenience and ease of use. In turn, merchants can engage more proactively with app users, sending personalised notifications and special offers that enhance customer engagement and loyalty. This shift not only simplifies the customer experience but also allows merchants to gather valuable data for targeted marketing, ultimately maximising profits and fostering stronger customer relationships.

The future

The advent of new technologies allows the modern business to design, create and operate personalised loyalty programmes.  However, the modern consumer is becoming more discerning and increasingly discerning about sharing their personal data. They want to know what data is being collected and how it is going to be used. Data protection regulations, such as GDPR in Europe have been implemented to mitigate these risks.

The success of a modern customer loyalty programme no longer hinges primarily on what the business has to offer but increasingly on its ability to anticipate and meet customer expectations regarding privacy, data control, personalised offers, experiences and rewards.   Today’s consumer demands greater privacy protection, more control over how and with whom their data is being shared, and tailored engagement that meets individual needs and preferences.

Key points

  • Loyalty programmes are offered by retailers and other businesses to attract and retain customers.
  • Loyalty programmes offer rewards, discounts, special offers and incentives and are designed as a reward for a customer’s repeat business.
  • Loyalty programmes benefit businesses not only by developing customer loyalty but by providing crucial information on how customers are spending and what products or types of offers are most appealing.
  • While some companies like Starbucks, TESCO, and SHELL, make great use of loyalty programmes, some retailers such as Costco and Amazon rely instead on programmes that require annual memberships.
  • Today’s consumer demands greater privacy protection, more control over how and with whom   their data is being shared, and tailored engagement that meets individual needs and preferences

Dr Gautam Rajkhowa, Senior Lecturer in Business Management. To contact: