Why Loyalty Programs Are Bigger Than Ever

It may be hard to imagine early settlers and pioneers collecting their own version of box tops, but the history of loyalty programs dates back further than many people realize.

In this segment from Industry Focus: Consumer Goods, Motley Fool analyst Vincent Shen and senior Fool.com contributor Asit Sharma delve into the fascinating history of these programs and discuss the two-way street they present for the companies that create them and the customers who sign up.

A full transcript follows the video.

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This podcast was recorded on Nov. 1, 2016.

Asit Sharma: Loyalty programs date back, apparently, to the Revolutionary War period in the United States. Both before and after the war, coins often came into acute shortages, so folks produced these copper tokens, and you would use the tokens to buy merchandise, the goods that you needed to get through the week. After the coins would resume in circulation, some savvy merchants started handing out tokens with purchases. After you had amassed a certain amount of tokens, you could trade those in for goods. Does that sound familiar?

Vincent Shen: That sounds pretty familiar to me. The coins that you mention, I couldn't believe it dates all the way back to the Revolutionary War period, but eventually the coins gave way to other forms of tokens, like stamps, box tops, which were still around when I was a kid, paper coupons and more. I think, the more modern age of the loyalty program movement definitely was ushered in with the airline industry. American Airlines introduced its frequent flyer program in 1981. United Airlines very quickly followed suit. When we look at these loyalty programs, the core idea behind such an offering is that they get customers to come back over and over again, typically with the allure of some type of award or benefit.

On the flip side, I think it's really important as investors to look at what these companies get out of offering such programs. The airline industry's a really good example of that, especially in the early years. They had an issue, especially if you think back to flying 30 to 40 years ago, where travel agents dominated the industry. They were the ones that you contacted as a traveler, as a consumer, if you needed a flight for a vacation or a business trip. The airlines felt very far removed from their own customers, and the loyalty programs, the frequent flyer programs that they created in the early 1980s, were a way of re-establishing that connection -- and to get a much better view of travel patterns, price points, things along those lines. I think that expansion, that data element of it and the insights that it offers into customer behavior is super important, and is the main driver behind why loyalty programs in general have become this huge trend across consumer retail and other industries. What do you think?

Sharma: Man, you brought up so many great points there, where do I start? Let me start with the main takeaway from what you just said. There's another term that we use, which is more in vogue with the industry, rather than loyalty programs, we call these affinity programs. If you were to look these two words up in the dictionary, "loyalty" means standing by somebody, being there for them. "Affinity" is a little bit more subtle of a concept. It means that you have a sympathetic view of something, or you have something that you share with somebody. What you're talking about is reciprocity between brands and consumers that happens when you have something the consumer can get out of the equation, and on the flip side, something that the manufacturer/retailer can get out of it. That's what we saw out of the airlines. They increased frequency flights, made more money, and consumers, with those miles, were able to travel to see things they hadn't seen before. That's a really powerful reason to show up with an affinity program for your customers.

Diving into your second point, we like to look at why things are super-trends. Loyalty has come up very strongly in the last couple years due to the availability of big data to retailers. Retailers now can create customized dashboards. These dashboards don't just give aggregate statistics. They can drill down to the personal level. So, they can look at Asit Sharma, and have a profile of his sex, his age, their best guesses at his income, and on that same dashboard, combine that with statistics of how much he purchases every week or every month. Most of the companies that are out there offering affinity programs don't do this themselves, they hire third-party software companies which specialize in CRM -- customer relationship management -- software to do this. This is why the trend has exploded and become a super-trend, because you can really operate on a much more precise level as a retailer, and you can then drive the behaviors you want using the data you collect.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.