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The Right Way to Run a Loyalty Program at Your Business

Stocks in this article: SBUX

NEW YORK ( MainStreet) -- Whether you prefer a stamp card, a keychain or an online check-in to give your customers rewards, loyalty programs are hot -- but do they work? Most of them follow a simple model: Customers earn a free product or service after making a certain number of purchases. Companies may advertise them as "Buy 10 ice cream cones, get one free, or, "Your sixth cup of coffee is on us." No matter how you phrase it, the concept is simple: Loyal customers get rewarded.

We checked in with experts to find out whether businesses see the benefits of these programs, and which rewards method is most effective.

"We know that customer excitement around loyalty programs continues to grow," says Fred Thompson, retail practice lead at LoyaltyOne Consulting. "Companies are definitely seeing the benefits -- some of them have had sales increase by 10% to 15%. The real question is how you set yourself apart."

There were 2.65 billion members of loyalty programs in the U.S. last year, according to the 2013 Colloquy Loyalty Census. That's up from 2 billion in 2010 -- an incredible 26% growth in the past two years. The study also showed that the average consumer is a member of 22 loyalty programs, but is active in only around nine of them.

Smart companies won't try to offer the "richest, craziest, most outlandish" rewards, but will seek instead to offer something "compelling enough to get the customer to raise their hand," Thompson says.

"The whole point is to get customers to change their habit and make you a part of their daily or weekly routine," he explains. "You're not out for that customer who would have bought their 11th cup of coffee from you regardless; you're out to change the minds of new customers and build your brand."

When the customer is already loyal to you, a program won't help build your brand, he says -- you are just giving them a "thank you" discount.

"You want customers who will act, who will have a behavior change," he says. "If you spend your valuable marketing dollars on people who were coming to the store anyway, then it's just dilutionary and you should have spent your money elsewhere."

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