Do loyalty cards work for small businesses? An honest look
Loyalty cards are everywhere, from national chains to the café on the corner. But do they actually make a small business more money, or do they just give free stuff to people who’d have come anyway? The honest answer: it depends on how you run them.
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What a loyalty card is really for
A stamp card does two jobs. The obvious one is a reward: buy a number of coffees, get one free. The less obvious one is a reason to choose you. Most people have two or three places they could go for a coffee, a haircut or a takeaway. A half-filled card tips the decision your way on the days it could go either way.
That second job is where the money is. If a card only rewards customers who would have come anyway, it’s simply a discount. If it nudges an occasional customer to come back a few extra times a month, it pays for itself many times over.
The evidence for stamp cards
There’s good research on why stamp cards influence behaviour. The best known is a 2006 study by Joseph Nunes and Xavier Drèze in the Journal of Consumer Research, run with real customers of a car wash. Half received a card needing eight stamps; the other half a card needing ten stamps with two already filled in. Both needed the same eight paid washes – but the people who started with two stamps already on the card were more likely to complete it, and completed it faster.
The researchers called it the endowed progress effect: people are more motivated to finish something when they feel they’ve already started. It’s the reason many good schemes give new members a welcome stamp.
Starts empty.
Two stamps given on day one.
The wider lesson is that the design of a scheme matters as much as the reward. Two shops can give away the same free coffee and get very different results.
When loyalty cards work well
Stamp cards tend to work best when:
- People buy the same thing repeatedly. Coffee, lunch, haircuts, car washes, takeaways.
- There’s real choice nearby. Customers could easily go elsewhere, so a small nudge matters.
- The reward is close enough to feel real. A reward months away is easy to forget.
- Joining takes seconds. Every extra step loses people.
- Staff actually offer it. A scheme nobody mentions is a scheme nobody joins.
When they don’t
They tend to disappoint when:
- Visits are rare. If people come once a year, a card won’t change much.
- The reward is tiny or complicated. “10% off your 15th visit, excluding weekends” won’t change anyone’s mind.
- The card gets lost. Paper cards end up in the wash or the bin, and people stop bothering.
- It’s easy to cheat. If anyone can buy a matching stamp online, your reward becomes a giveaway.
- Nobody ever hears from you. A card in a drawer does nothing.
Isn’t it just giving money away?
Every reward has a cost, so it’s fair to ask. Think of it like this: if your card is “buy eight, get the ninth free”, the reward costs you one item for every eight sold to people who complete it – and many won’t complete it at all. If the card brings an occasional customer back even once or twice extra a month, those visits are worth far more than the free item.
The point isn’t the free coffee. It’s the extra visits from people who might have gone elsewhere.
Digital or paper?
Paper cards are cheap to start, but you can’t see who uses them, they’re easy to forge and easy to lose, and you can’t talk to the people who carry them. Digital cards solve those problems, but only if they’re as easy as paper. An app most customers won’t download doesn’t help. A card that goes straight into Apple Wallet or Google Wallet usually does, because it lives on the phone they already have out at the till. We compare the two in detail in digital vs paper stamp cards.
How to tell if yours is working
You don’t need to run an experiment. Watch these over a few months:
- Sign-ups. Are staff offering it? If few people join, look at the counter, not the card.
- Second visits. Of the people who join, how many come back for another stamp? This is the clearest sign the card is changing behaviour.
- Completed cards. If almost nobody finishes, the reward is too far away.
- Quiet-day traffic. If you send an offer for a quiet afternoon, do more members turn up than usual?
If sign-ups are healthy and members keep coming back, it’s working. If people join and vanish, change the reward or the number of stamps before giving up on the idea.
The honest verdict
Loyalty cards work for most small businesses that sell something people buy again and again – as long as joining is effortless, the reward feels close, and you use the card to stay in touch. They don’t work as a substitute for good coffee, good service or a good haircut. But for a business that already does those things well, they’re one of the cheapest ways to turn “sometimes” customers into regulars.
Thinking of starting one? Our step-by-step guide to starting a café loyalty scheme works for almost any counter-service business.
Sources
- Joseph C. Nunes and Xavier Drèze, “The Endowed Progress Effect: How Artificial Advancement Increases Effort”, Journal of Consumer Research 32(4), 2006, pp. 504–512. Record on EconPapers.