Timothy A. Koonce: Loyalty Programs Might Cost Your Business More Than You Bargained For

loyalty programs

By Kerry Gorgone

Loyalty programs seem like Marketing 101. A retailer or other local business offers consumers a loyalty card that entitles them to free goods or services if they visit the store X number of times or refers X number of friends, etc.

The popularity of loyalty programs is difficult to dispute: in a recent survey from CodeBroker, 70% of shoppers said they belonged to between one and five non-grocery loyalty programs.

A simple incentive program can work to drive business. Research has shown that consumers are more likely to return to a business (and spend more) if they are part of a loyalty program. Some experts have observed that these kinds of programs don’t engender brand loyalty so much as loyalty to the offer, but nonetheless business are spending unprecedented amounts on establishing new programs.

Deceptively simple, loyalty programs actually spark a number of important legal questions, ones you should consider before starting your own campaign.

First, are loyalty programs legal in your state?

Laws regulating business vary from state to state, and some jurisdictions prohibit loyalty programs, at least for certain kinds of businesses. For example, New Jersey petroleum companies are prohibited from running loyalty discount programs, (except through a credit card company). In other states, the discounted price of that tenth ice cream (i.e. “free”) can trigger state antitrust laws that prohibit selling goods below cost. Check your state’s laws relating to loyalty programs now, so you don’t become acquainted with them the hard way later on.

Second, a loyalty program is a contract.

Some businesses fail to realize that the promises you make on a loyalty card are enforceable. You make what’s called a “unilateral offer” by advertising your loyalty program. Consumers accept your offer by performing according to the terms of your offer (e.g. visiting your store 10 times, purchasing 10 ice cream sundaes, etc.)

If you don’t carefully think through the terms and conditions of participation in your program, you might be held to promises that, in retrospect, seem unreasonable. Most consumers wouldn’t bother to sue you over loyalty program promises, but there’s always that small percentage of the population willing to go the distance over “the principle of the thing.”

One example: the wiseacre who saw a commercial for Pepsi’s “Drink Pepsi, Get Stuff” program stating that participants could get a Harrier jet (at that time worth approximately $33 million) for seven million Pepsi points and decided to go for it. After amassing the requisite number of points, he tried to exchange them for his jet. When Pepsi refused to furnish the Harrier, he sued. Although he ultimately lost the lawsuit, litigation lasted more than four years and likely cost hundreds of thousands of dollars in attorneys’ fees.

Third, consider the tax implications.

Anytime you’re selling goods or services, you need to understand the tax ramifications. You probably have a good handle on sales tax for the state in which you and your clients operate, but do you know how the requirements change when someone redeems a loyalty program incentive? For example, if your customer redeems a loyalty coupon for 50% off a hundred-dollar purchase, does he or she pay sales tax on $100 or $50?

The landscape is complex, to say the least, and there’s no simple blanket rule you can follow to ensure compliance. Collect too little tax, and you’ll get hit with a bill and possibly penalties. Collect too much, and you risk a class action lawsuit brought on behalf of your customers. Talk about taxing! A tax attorney is a business owner’s best friend.

Fourth, think about franchisees.

If you or your client has franchises, regulations govern whether or not franchise locations can (or must) honor your loyalty program. In some jurisdictions (like the District of Columbia), it’s illegal for businesses to require that franchisees participate in their corporate loyalty programs.

From a customer experience standpoint, it’s confusing to have some locations participate in a loyalty program while others don’t. Make every effort to get franchisees on board with your proposed program before launching.

Finally, there’s even some question as to whether unclaimed loyalty rewards should be considered “abandoned property.” (Seriously.)

There’s more to consider (with legal issues, there’s always more to consider), but consulting with a lawyer in your state who specializes in marketing matters will help you to mitigate risk when launching a loyalty program.

I’m not launching a loyalty program, per se, but if you share ten of my {grow} blog articles you’ll get…my undying affection. Thanks for your loyalty!

Kerry O’Shea Gorgone is a writer, lawyer, speaker and educator. She’s also Director of Product Strategy, Training, at MarketingProfs. Kerry hosts the weekly Marketing Smarts podcast. Find Kerry on Twitter.

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