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Loyalty Rewards Work Best for Online Businesses

Loyalty Rewards Work Best for Online Businesses
Credit: Designer491/Shutterstock

Online businesses benefit most from offering loyalty rewards programs, new research finds.

Shoppers typically don't need an added incentive to continue visiting their favorite brick-and-mortar retailers, however, online shoppers can be much more persuaded by a loyalty reward to revisit a merchant's website, according to a study recently published in the Decision Support Systems journal.

Online shoppers tend to search the Internet for the best bargains they can find, with little sense of loyalty to one retailer or another, said Sanghee Lim, one of the study's authors and an assistant professor at Johns Hopkins Carey Business School. By offering discount programs, online retailers can turn choosy Internet shoppers into repeat buyers.

"Offline stores may be giving away profits when they offer loyalty rewards to customers who will keep coming back anyway, regardless of any discount that’s offered," Lim said in a statement. "Online shoppers, on the other hand, may use a coupon to revisit a retail website even when it’s not one of their preferred sellers."

For the study, researchers used a model that examined how shoppers might behave after making a purchase. Once buyers made that initial purchase, they looked at whether they would revisit that business – both brick-and-mortar and online – after considering factors such as price, potential rewards (like coupons) and possible expenses (like transportation.) [Customer Loyalty Programs: A Must-Have Retention Strategy ]

Researchers also investigated the value of the transaction data collected through loyalty programs, such as the information about consumer habits and preferences that triggers the mailing of coupons to regular buyers of particular products.

Lim said retailers have been this type of transaction data for years, but were never clear on what to do with it.

 “Only in the past decade have they begun to study their data and introduce these reward programs as a way to retain customers," Lim said. "And the companies are getting more sophisticated about it all the time."

Using this transaction data pays off most for online retailers trying to build loyalty programs, according to the research. For brick-and-mortar stores in the study’s model, this information can lead to the offer of rewards. However, price competition has a greater potential to soak up any profits that offline merchants might make from their rewards programs, Lim said.

The study was co-authored by Byungtae Lee, a professor of the College of Business at KAIST in Seoul, South Korea.

Chad Brooks

Chad Brooks is a Chicago-based writer with more than 20 years of media experience. A graduate of Indiana University, Chad began his career with Business News Daily in 2011 as a freelance writer. In 2014, he joined the staff as a senior writer. Currently, Chad covers a wide range of B2B products and services, including business phone systems, time and attendance systems, payroll services, and conference call services. Before joining Business News Daily and business.com, Chad spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago. Chad's first book, "How to Start a Home-Based App Development Business," was published in 2014. He lives with his wife and daughter in the Chicago suburbs.