Customer loyalty programs are marketing initiatives that businesses use to incentivize repeat customers.  It started in the 70s, when airline companies initiated mileage rewards for frequent travelers. Under the program, flyers earn points for every number of miles they travel. Once they reach a required amount of mileage, airline passengers can then redeem their points with a choice of benefits, typically in the form of free trips.

Over the years, the concept has been adopted by other industries as well with retail accounting for the vast majority of usage.

Loyalty card programs have two-fold benefits. They enable merchants to track customer habits while concurrently providing more satisfying products or services to loyal shoppers.

Let’s look at how big box retailers are maximizing their loyalty card programs:

Personalized Offers – Shoppers are hardly a homogenous bunch. They don’t spend the same amount of money, nor do they spend it on the same items, and the frequency of their store visits vary greatly. The benefit of loyalty cards, therefore, is in the ability to segment customers by analyzing customer data. Segmentation enables the retailer to put the right amount of effort and send out the right offers at the right time to the correct customer. A health conscious shopper, for example, who frequently buys salad, would get coupons for fruits and low calorie snacks, while a shopper whose basket is packed with meat and cheese could receive vouchers for a stack of pizza dough and a case of beer.

Decision Making– With data collected from its loyalty card program, retailers are able to see the big picture that allow them to make or avoid decisions that could positively or negatively impact their bottomline immensely.  U.K. supermarket chain Sainsbury's, for example, learned that a specific brand of cereal, although selling poorly, was very popular among its most loyal customers who are also the chain’s biggest spenders. Without access to this data, the retailer would have gotten rid of the brand and inadvertently alienated its most devoted shoppers. Worse, they would have driven them away towards the doorstep of competing stores.

Cross Marketing – The benefits of loyalty card analytics isn’t limited to the sales floor alone. Some retailers use big data in their other marketing channels as well. Best Buy, for example, recently revamped its Rewards Zone customer loyalty program. Now called My Best Buy™, the new program focuses heavily on mobile, offering incentives such as exclusive offers, free shipping for qualified orders, and bonus points for “checking in” using the app at stores. This is significant as the big box retailer can tailor ads and offers shown in their mobile app based on past transactions like a special offer on Blu-ray players for a shopper who recently bought a widescreen HDTV.

Marketing Sandbox– Customer loyalty programs enable retailers to test and learn. They present an opportunity to find niche customer segments that could be extremely profitable and may not otherwise be obvious to marketers. By testing offers on a specific subset of customers at a smaller scale, new customer demographic can be developed and marketed to in a larger way. Target, for example, was able to develop a pregnancy-prediction system using customer analytics culled from customer loyalty and other programs. As a result, it was able to capture the highly lucrative “mom and baby” market by sending out offers for baby products at exactly the right time to expectant mothers.

Many small businesses don’t consider a loyalty card program as a cost-effective way of boosting their bottomline. They have this notion that loyalty programs are only effective at larger retailers, like Target or Walmart. Truth be told, these programs are just as beneficial and crucial to small businesses as they are to larger ones.