Loyalty programs or reward points is the practice of providing discounts, prizes, or other incentives to encourage continued patronage of a business as per the definition in the web. Loyalty programs are designed to give you perks for sticking to the same product.
They are the common promotion tactics used by many debit/credit card issuers now a days. They tie up with some sellers and ask cardholders to stick to them while making any purchase. There are also independent reward programs like imint in India. There was a reward program by Times of India group called Times Reward, which failed within no time of its launch despite of huge publicity, due to non-support from the sellers.
The main idea behind the reward points is to trap the customer to be loyal to the product or the seller in the long run. They say he will be rewarded for being loyal to their products. The customer starts accumulating the reward points for the every purchase he makes from the same seller. At certain point when he reaches the specified reward points he can redeem the points to the discount or gifts, and in some situations to monetary benefits.
What is the benefit to the seller? The customer, who looks at the reward point every time when he makes purchase decision, visits the same shop. He does not even bother to pay little more as he is getting the reward point, which he thinks he can redeem later. So usually customer ends in paying more as he stops comparing the price and products with competitors.
As you come near the required loyal or reward points to get a gift or discount coupon, as studied by the psychologists, we tend to spend more to get that as soon as possible. We are willing to spend more money in the name accumulating the reward points. We may end up in buying unnecessary items in the name of loyal points.
Usually, the reward program keeps the reward redeem options little higher, so that the majority of the reward card holders gets an illusion that he reaches it soon by spending more. But most of the time it does not happen. When more and more reward card holders reaches that level the offers will be revised. It makes customer to purchase more, to be more loyal.
I am not against the reward programs or completely oppose holding a reward point options. I have reward point options enabled for all my credit/debit cards. I also have a few loyalty cards of super markets. But I never allowed these to influence my purchase decision. If I come up with a decision to buy a product, which has rewards attached with, ok, I am happy. I strongly believe making purchase decision based on reward points will costs you more in long run.