It all started with buy ten get one free. The value was transparent for everyone. People would buy ten bags of sugar and get one free or buy ten roses and get one free. That was the first loyalty program ever and it’s still the dominant model.

In the 1950s Kaiser’s launched the stamp model in Germany. People got stamps with every purchase and glued them into a book. When the book was complete, people went to the store and redeem it for products or got some money back. This was basically the establishment of a virtual currency. It completely broke the users’ ability to keep track of the redemption. It used to be ten to one. With the virtual currency the customer had no idea how much he was gaining in the redemption process. The company knew how much every stamp was worth, but the end user could not keep track.

It was American Airlines who figured out that it’s not about virtual currency but about status. Status is what drives loyalty. Everyone who ever tried to redeem frequent flyer points for a flight to the US knows that. Redemption is not the core value proposition. That fact explains present models in which loyalty programs have merged like Farmville or Foursquare. In those programs you cannot redeem for anything in the real world. You cannot extract one dollar from Farmville. In fact it’s all money in, no money out. When Zynga initiated the very successful campaign with Seven Eleven in the US, the company did not redeem ones Farmville credits for every Slurpee (flavoured frozen drink). People had to buy a Slurpee and then got Farmville credits. Basically people they were putting money in and nothing came out, which is brilliant for the company.

The bottom line is, if companies don’t have a good status system to offer to their customers in exchange for their behaviour, they need to give them cash. And the worse the status system is, the more cash they have to provide. This is the gamification loop.