Dunkin’ Donuts shares rose nearly 2% last week after they announced that their loyalty program had enrolled over 5 million people. Here’s why a healthy customer loyalty program is cause for investor optimism.

Why loyalty programs boost company valuations

Customer retention is one of the most valuable initiatives a company can pursue; a 5% increase in customer retention correlates with a profitability increase of about 80-100%. So, if repeat customers mean increased profitability, then a well-executed customer loyalty program can increase the value of a company, plain and simple.

From CBS Money: “Today, Wall Street recognizes that successful investment in customer-centric marketing is one of the most certain signs that a company has its house in order. A loyalty programme isn’t a cure-all, and many retail brands face challenges that a programme alone can’t fix. But investment in loyalty does tell analysts that a company has its attention fixed on the most certain driver of profits – its best customers.”

So, the Dunkin’ Donuts’ loyalty program is working. What makes it tick?

5 million people signed up… they must be doing something right. One of the things that defines a great loyalty program is customer adoption and usership. The fact that Dunkin’ Donuts is acquiring data from 5 million people means that they have the ability to make really powerful decisions based on that data. As a company, Dunkin’ Donuts is more than just a coffee + donut shop; they’re a customer data powerhouse.

“The number of DD Perks members has more than doubled in less than two years, which has surpassed all of our goals,” said Sherrill Kaplan, VP of Digital Marketing and Innovation @ Dunkin’ Donuts USA.

Here’s where Dunkin’ is knocking it out of the park:

1) They offer an incentive for signing up

Every loyalty program is essentially an agreement with a customer: you give me your loyalty, and I’ll give you something of value in return. Consumers what to know immediately that something’s in it for them — that’s where the sign-up bonus comes in.

DD Perks awards new customers with a free coffee for enrolling. Why? Every single customer that Dunkin’ has signed up is a source of data for them moving forward — whether it’s email addresses, visit frequency, or unique purchase preferences, there’s value to that info. While some brands don’t have a sign-up bonus (or an intro offer, as we call it at Thanx), enrolling customers in a loyalty program is a surefire way to increase spending, increase visit frequency, and increase customer lifetime value. Now that’s worth a donut or a small coffee, don’t you think?

2) They’re collecting customer data

There’s a reason why Wall Street isn’t throwing money at companies that use basic punch cards — punch cards don’t drive significant repeat business and don’t offer any valuable customer data. Customers who take a punch card in March and use it in April appear exactly the same as customers who take a punch card in March and use it in December (very problematic for lifetime value calculations, and not that attractive for investors).  Additionally, they treat all customers the same, which is a bummer when VIPs can account for about 75%of your revenue.

So, DD Perks (along with many other great loyalty programs) have ditched the ol’ punch card and gone totally mobile. This is well-aligned with customer interests: customers prefer loyalty programs that are app-based. 59 percent of customers, for instance, said they would be more likely (or much more likely) to join a rewards program that offered a smartphone app.

3) They add value for consumers

Dunkin’ Donuts is all about the consumer experience; they are constantly looking for ways to make it easier and more convenient to spend money at Dunkin’. Their app even includes functionality such as Apple Pay & order-ahead, and they reward customers liberally. Loyal customers want enhanced experiences and up-to-date apps, and Dunkin’ Donuts delivers on this front. All of this functionality, however, is rooted in the core goal of increasing customer retention: users want to be rewarded for their repeat business, and Dunkin’ wants to reward customers for their loyalty.

The takeaway?

Ultimately, one of the most important things about a customer loyalty program is usership; you can have the coolest app with the most generous rewards, but if customers aren’t actually signing up with the program and staying engaged long-term, then it’s not worth much to your business. For Dunkin’ Donuts, 5 million customers seems to be the usership sweet spot that has caught Wall Street’s collective eye. Looking forward, the value of the company will be determined in part by how well they can continue to engage and retain this huge customer base.