Companies start loyalty programs to encourage additional purchases, but a new book by the brains behind one of the world's most successful loyalty programs believe that that premise is the first step toward failure.

What companies really need to do, say Clive Humby and Terry Hunt, is establish loyalty programs that thank customers for previous purchases rather than encourage them to buy more. That approach is instantly understandable to anyone who has a wallet full of cards just needing a stamp or two to qualify for a “free” sandwich or cup of coffee.

Humby and Hunt, assisted by Tim Phillips, are the co-authors of Scoring Points: How Tesco Is Winning Customer Loyalty. The book details how Tesco used its Clubcard loyalty card to become the largest supermarket chain in the UK, and the largest grocery e-tailer in the world.

The card also laid the foundation for a profitable Tesco-branded bank, fueled substantial overseas expansion and, most important, improved profitability. All that, despite the fact that Tesco returned more than £1 billion to customers in awards since the program started in 1995.

Additionally, the book outlines an overview of loyalty alternatives and explains why competing loyalty programs at Safeway and Sainsbury's failed. Also interesting are the freely acknowledged mistakes along the way, such as the attempt to build loyalty among students or a pub-based scheme to offer “points for pints.”

The scope and capabilities of Clubcard are astounding. Tesco collects data on each head of lettuce, can of peas, bottle of wine or other item purchased by more than 10 million Club card members. It analyzes this tsunami of data to send a magazine with segment-specific content and six highly targeted coupons to each member four times a year.

Four coupons are for products the customer already buys, and two are for products that the customer has never bought before but is likely to buy. As of 1999, Tesco was sending out 145,000 combinations of magazines and coupons; undoubtedly, the number is higher today.

Many promotions just rob future sales, but the analysis enables Tesco to generate more than £100 million in incremental sales each year. Another benefit: “By monitoring short-term coupon redemption rates and then tracking the ongoing transactional activity of the members across all store departments, Tesco could calculate precisely the return on investment.”

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Nick Wreden is the author of ProfitBrand: How to Increase the Profitability, Accountability and Sustainability of Brands (named "Best Business Book of 2005" by strategy+business) and FusionBranding: How to Forge Your Brand for the Future. Reach him at