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All businesses are increasingly focusing on loyalty programs: How did these programs evolve and what’s their future?

July, 2022

Businesses have been transforming their customer relationship strategies across the globe owing to the digital transformation. Hence, the market for loyalty programs has been consistently evolving, giving rise to innovative solutions. According to Mordor Intelligence's study, the APAC loyalty management market was worth USD 946 million in 2020 and is predicted to expand to USD 3643 million by 2026, an almost fourfold increase in just six years. Both, the customers as well as the companies seem to be benefitting from these loyalty programs.

Loyalty programs have evolved significantly since the initiation of their use. The loyalty programs started out as generic rewarding mechanisms to gain increased purchasing frequency and value from the company’s most loyal customers. Now loyalty programs are about personalisation, utilising data-driven insights to first map a user persona, then tailor the rewarding mechanisms and touchpoints in accordance to people’s purchase behaviour. This is just one of the ways in which loyalty programs have evolved over the decades. This report discusses other aspects of this evolution with respect to the design of the loyalty programs, their redemption requirements, level of interaction with consumers and the dynamic role of technology.

Loyalty programs are increasingly being utilised in different forms across all industries. While they began as a tool for the travel industry, more sectors have introduced such programs such as restaurants, gas stations, the financial sector, etc. While some brands are relaunching their loyalty programs for the second or fourth time such as Air India, there are other brands, introducing these programs for the first time. But how profitable are these loyalty programs? Why are companies spending money on such programs instead of just using it for marketing? This report also discusses the economics of loyalty programs, its applications across the retail, hospitality and financial sector as well as key factors that influence the design of the loyalty programs.

Why are consumers willing to pay for such loyalty programs? Why are more and more consumers associating loyalty programs as a way of feeling a connect with the brand? How should you design a highly profitable loyalty program? If you require answers to such questions, the section of this report on understanding consumer behaviour, discusses the behavioural drivers for adoption of such programs. At the end of this section on consumer behaviour, either you would leave as an informed business or an informed consumer. The psychology of consumer behaviour is at the core of understanding why these loyalty programs work or fail.

In a world where competition increases every day and there is increased pressure on market share, brands are targeting implementation of loyalty programs to sustain their loyal customers and onboard more. Rewards are an integral part of the life of a customer, especially in this digital age with targeted marketing taking over the social handles and search engines. This report discusses the market for loyalty programs in depth, focussing on its evolution to understand the influences of the historic programs on today’s market and discussing the industries and consumers it applies to. 

Evolution of Customer Loyalty Programs

India is a developing country where about 2/3rd of the population lives in rural and suburban areas where the payments have been dominated by paper-based transactions. So, the adoption of digital payment tools was low till very recently. During this time, it was dominated by traditional loyalty programmes with plastic cards where users could earn points that could later be redeemed for awards. With demonetisation coming into place in 2016, the scenario shifted.  As the government promoted digital payments there was an inclination towards loyalty programmes. There was greater acceptability of credit and debit cards where customers could earn better rewards like instant cashback. There was also a push towards e- commerce websites. It was made with realisation about the ease of shopping anytime and anywhere. Here, with traditional rewards some retailers are also starting thinking about additional things they could do in this space.

For this they directly used customer data to understand the barricades that may stop a customer from shopping online. One of the key concerns was the shipping costs. This gave rise to premium loyalty programmes. First with where customers could buy a membership and get free shipping across multiple online retailers.

This gave a further opportunity for brands like Amazon to also launch Prime Membership. Amazon as a brand really leveraged the premium model. First beginning with free shipping, they realised that customers wanted more and that customers saw the potential and value of these loyalty memberships and were willing to pay for it. It started adding more and more sugar to the package including media library access, prime photos, quick grocery delivery services in a few states, etc.

Future of Loyalty Programmes 

The best customers of a retailer are looking for the best perks and experiences that will make their life easier. They want it all the time, whether it's a shipping refund or a streaming video. Thus, businesses are required to look beyond complex reward systems and create an exceptional and personalised experience for their customers using strategies and technology.

Customer Satisfaction Vs Customer Loyalty  Is customer loyalty leading to customer satisfaction instead of the other way round?

One of the key expected outcomes of providing any good or service is to fulfil the needs of a consumer such as a certain level of satisfaction. It is expected that once such demands are fulfilled up to a certain expected standard it gives a company a loyal customer who guarantees repeat sales whenever a similar demand from the same consumer arises. However, as customer loyalty programmes gain importance there has been a shift. Companies are relying on Customer Loyalty programmes to rope in consumers and satisfy needs that they may not know exist. 

Take the case of Air India. They turned their customer base around by providing a fabulous Frequent Flier Miles Membership where, as a member, you can earn FR points when you fly Air India and 27 Star Airline partners on eligible fare paying tickets, and redeem them for award travel faster than most programmes. On higher fares, such as full fare economy, and on Business/First Class, you earn bonus FR points, and clock FR points faster. Would Air India continue to spend on improving their customer loyalty programs or would their focus shift to improve services like flight experience, the food and beverages and the overall comfort? Is it because the costs of the former change are much cheaper than bringing operational changes? Find out in our detailed research: Lure of the Loyalty Leverage. Throughout the report there are examples given from different industries with distinct loyalty programs.

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