By Tom Van Riper
NEW YORK - Shoppers' heads couldn't be spinning any faster if they'd decided on a trip to the amusement park instead of the store.
Reward points, discounts, free shipping and gifts--it's all there for the taking, as the big players in the hypercompetitive retail industry fight to outdo each other to buy off the loyalty of customers blessed with more choices than ever. Many stores now fear that customers not formally rewarded for their patronage will walk out the door.
Typical programs include Best Buy's (nyse: BBY - news - people ) "Rewards Zone," where members pay $9.99 per year to redeem discounts earned through regular purchases, plus sign up for notifications of special discounts. Shoppers at Gap's (nyse: GPS - news - people ) Gap, Old Navy and Banana Republic stores get free shipping and coupons as they accumulate purchase points on their store cards. And Amazon.com (nasdaq: AMZN - news - people ) partners with Visa to offer a program that gives users $25 discounts by earning points through an Amazon Visa card that comes with 0% interest for the first six months.
"Shoppers are spoiled," says Mark Goldstein, president of Loyalty Lab, a company that helps retailers build rewards programs for their online businesses. "People have come to automatically ask, 'If I give you my business, what will you give me?'"
But with so many in the industry caught up in the arms race of who can give out more rewards, no one has stopped to notice that most of them aren't particularly effective at building customer loyalty or returning profits. That's according to a recent Jupiter Research study
The study also predicts that two-thirds of all retailers with an online presence will have a formal rewards program in place within a year, although there was no discernible difference in investment returns between companies that put resources into a formal rewards program and those that don't.
Segmenting return on investment for various retail companies as high (11% and up), medium (between 4% and 10%) and low (less than 4%), there was little to no difference in the number of loyalty programs across each segment, the study found. In other words, a company with a high ROI was no more or less likely to have a customer rewards program than one with a low ROI.
"Too much sameness," is how Jupiter analyst Patti Freeman Evans sums up the enormous and still-growing customer loyalty landscape. "Giving people points means competitors can undercut you, and you lose your customer anyway."
Building unique rewards programs that differentiate the brand--along with integrating in-store loyalty programs with Web shopping--is what figures to pay off in the future, Freeman Evans and other experts say. Retailers that get the most payback from loyalty programs are careful to measure vital metrics, like gross margin per customer and the lifetime value of a customer, which is tracked by using surveys and following forwarded emails to see who's recommending your store.
"Most are just too focused on frequency," Freeman Evans says of retailers' propensity to track people's store visits and Web hits above most else.
For examples of rewards programs that work most effectively, Freeman Evans cites Neiman Marcus' InCircle program, which gives favored customers unique goodies, such as invitations to private parties and free wrapping. Harrah's Entertainment (nyse: HET - news - people ), which responded to customer surveys to offer free food and shorter lines for casino guests, also wins high marks. And the best part of Best Buy's Rewards Zone, she says, is the feature that notifies members of price specials available only to them, along with little extras, like a free holiday-sounds compact disc in December.
What those features have in common is representing a response to customer preferences while being unique to the particular retailer that's offering them.
"Points for the sake of points is just buying off the customer, it doesn't drive loyalty," says Gartner Research analyst Adam Sarner, who tracks customer loyalty programs. True loyalty, Sarner says, means getting increasing amounts of information from a customer who's happy to give it in return for a benefit. Surprising good customers with a sudden, unexpected discount or upgrade would go miles toward making them swear by a brand for life, he believes.
"That would be a religious experience for most people, compared with having to calculate, 'Let's see, I have 5,995 points, when do I get something?'" Sarner says.
And even for retailers that effectively use customer rewards programs to their advantage, the work won't be finished until those programs are fully integrated into their Web businesses. High infrastructure costs that make it expensive to merge store and online programs have too many stores running their in-store and Web promotions separately, experts say.
Best Buy customers, for example, can track their rewards points on the company's Web site but can't count online purchases toward accumulating those points. Goldstein of Loyalty Lab says customers will no doubt demand having their Web purchases count toward their rewards as they come to see a store as one entity across both channels.
"That's especially true for smaller items, such as Apple iPods, that are commonly purchased online," he notes, while acknowledging that bigger products, like refrigerators or stereos, are usually purchased at the store anyway. Still, people will expect Web research to at least include the number of reward points they can expect when they show up to buy it.
"If you want to sell across lines, this is the model you need," Sarner says. "There's an expectation on the part of the customer that they will get this [reward] no matter how they came to you."