Research shows that it costs up to five times more to acquire a new customer than retaining an existing one. It has also been proved that a 5 percent reduction in customer defection rate can increase profits by 25 to 85 percent, depending on the business. In the US, only 12 to 15 percent of customers are loyal to a single retailer, but even this small percentage generates between 55 to 70 percent of the sales, according to the Center for Retail Management at Northwestern University.

For a long time, retail businesses focused on expanding their customer base without any particular attention towards retaining them. But businesses now realize that it is more important and profitable to focus on customer retention and building customer loyalty.

Foundations of Loyalty Programs

A key contributing factor to this shift in focus is the shift in customer buying behavior. Today, customers are smarter and more aware of their buying options. The increase in market choices and accessibility of information to the customer posed a difficult problem to retailers -- how to make the customer come back.

Companies came up with a unique marketing strategy that led to the worldwide phenomenon of loyalty programs. While these programs today have become a system of advanced analytics, the idea of customer loyalty can be dated back to 1793 when a US merchant started giving out copper tokens which could be collected and exchanged for items in the store later. This rudimentary practice was lost in the course of industrial developments, until 1981, when American Airlines launched the first full scale loyalty marketing program of the modern era with their frequent flier miles. The airline industry was the first to adopt this practice and it took another two decades for the system to become a necessary part of retail business.

Today, some retailers find that as much as 65 to 95 percent of their sales go to members of loyalty programs. According to the Colloquy Loyalty Census 2013, loyalty program memberships totaled close to 2.65 billion in the U.S. in 2012.

Avoid the 'Points' Trap

There are multiple reasons for a customer switching brands -- better products, better discounts, accessibility, individual or personal reasons of the customer and so on. Though it is difficult to map and take into account the preferences of each customer in a retail set-up, there are modern loyalty programs with advanced analytics and mobility that are capable to understand customers, increase accessibility and map competition. However, when marketers get to engage a loyalty program, it mostly turns out to be another "points" program, which is hackneyed and jaded. These programs end up as a promotional method of offering delayed discounts.