With an influx of new customer rewards programs and technologies, multi-location merchants find themselves experimenting with all sorts of promotions. One characteristic separates those that work from those that don’t.

At the simplest level, customer rewards and promotions attempt to change customer purchasing behavior. Brands experiment with seemingly every type of promotion, whether monetary (e.g. discounts or BOGO offers) or non-monetary (e.g. exclusive access or brand-relevant experiences) to drive customers to spend more or spend more often.

“Experiment,” of course, being the operative verb. If nothing else, marketing success comes from iteration. In order to iterate, however, marketers have to know what’s actually working – and there’s only one way to do that: close the loop. Here’s what “close the loop” means and why it’s so important for loyalty and rewards programs.

The Open Loop: A Traditional Customer Rewards Program

There’s one rewards program more widely-known than any other: punch cards. Every person I know has used one at least once in his or her life (interestingly, the one I most recently used was for sandwiches and burritos at Whole Foods). Here’s another my colleague Tracy had sitting on her desk:

The spirit of punch cards makes sense. Loyal customers receive an incentive to continue making return visits. Once customers reach a certain threshold, they receive a reward that incentivizes them to continue their stellar purchasing behavior. Ideally, with a hat tip to Pavlov, the customer sees the card in his or her wallet and starts to “salivate” even when not in the store. Long-term customer relationship locked and loaded.

As we all know, however, this idyllic scenario simply doesn’t exist. 72% of customers only make one visit over the course of six months and 70% of previously loyal customers have not returned in 4 months. Whether customers lose their cards, forget to bring them, or – worse – get pissed about losing out on hard-earned rewards, punch cards don’t work.

The reason why punch cards fail is that they create an open loop. They leave too many questions unanswered, including crucially important insight, such as:

• How long does it take for a customer to make a return visit?
• What percent of punch cards are active?
• Most important – what do I do as a result of my punch card rewards program’s customer activity?

For analytics, merchants who launch punch card programs can track only three metrics: sales, number of punch cards issued, and punch card redemptions. None can provide definitive answers, only inferences. It’s impossible, for example, to definitely say how many punch cards are in customer’s wallets versus garbage cans.

Essentially, like all open loops, there’s no way for a merchant to know whether the program actually works. Iteration becomes impossible. Merchants can only hope customer behavior changes for the better.

Closing The Loop…?

When you think about the ineffectiveness of punch cards in practice, two shortcomings come to mind:

• Merchants have no way to identify individual punch cards: the metrics “punch card issued” and “punch card used” have no direct connection. 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).

• Merchants have no way to identify individual customers. Even though merchants can find out when customers redeem punch cards (a manual process by the way), they still have no idea which specific customer actually redeemed the punch card (very problematic for personalization).

These two shortcomings ultimately gave birth to coupon codes and member ID numbers. With unique coupon codes, merchants can identify individual rewards transactions, which makes connecting issue and redemption date possible. With member ID numbers (e.g. when customers scan a plastic loyalty card or enter a PIN/phone number every time they make a purchase), merchants can tie transactions and coupons to individual customers. With transactions and customers identified, merchants take a step toward closing the loop that’s left open by punch-card-like rewards programs.

So – (you knew this was coming) is that it? Do coupon codes and customer PIN/plastic cards programs close the loop?

Short answer, no. There’s actually more loop (if you will) to close.

The Power of Closed Loop Promotions And Customer Rewards Programs That Actually Work

There are three data pieces missing from plastic card, PIN-based, and coupon-code rewards programs:

• Customer History
• Customer Feedback
• Customer Retention

With respect to customer history, remember that promotions are not self-contained entities (coupon codes fail in particular here); they are simply periods of time within a much longer customer relationship. If a rewards program cannot tell you how customer behavior changes over time – regardless of the promotion – the loop is left open. Knowing that a customer received a promotion and redeemed it, but not what happened after that interaction makes iteration at the customer level impossible.

With respect to customer feedback, neither coupon codes programs nor PIN-based/plastic card programs deliver information about customer sentiment/satisfaction. Again, the loop gets left open. Unless the rewards program can share insight into how customers feel the business should improve, there’s no way to understand why customer behavior changes. Though a rewards program may appear successful at the brand level, customer feedback uncovers what’s going on at specific locations.

Finally, with respect to customer retention, a rewards program has to keep customers engaged. If customers sign up for the program only to opt-out soon after, the loop remains (wide) open. To solidify a closed loop, merchants need to make their customers’ rewards experiences as effortless as possible. Brands need a way to re-ignite relationships with previously loyal customers. Rewards programs should make customers feel appreciated, not burdened.

With these three data pieces accounted for, the loop finally does get closed. With a closed loop, merchants no longer have to hope for their success – they grab the reigns and take control. A closed loop makes it possible to know exactly what’s going on so that rewards programs can be iterated, innovated, and made successful.