Loyalty glossary · 9. Program models (20)
Closed Loop
Closed loop is a loyalty programme model in which points are earned and redeemed only within a single operator's network or a small, controlled group of partners. The currency has no external value and cannot be transferred or spent outside the issuer's ecosystem.
Closed loop is the default model for most single brand programmes. The issuer controls the earn rate, the redemption catalogue, and the point value. That control is the point of the model, but it is also the vulnerability. There is no external price check on the currency.
The practical effect is lock in. A member who holds 10,000 points in a closed loop scheme cannot take those points to a competitor or convert them into cash. The balance is only worth something if the member returns to that operator. This raises switching costs and gives the issuer room to change terms.
The most common failure is silent devaluation. Because points have no market outside the issuer, the operator can raise the number of points needed for a reward or reduce the value per point without triggering an immediate exit. Members do not notice until the next redemption attempt, and many never redeem at all.
Work the numbers to see how the model shifts cost. A scheme that awards 2 points per dollar and sets each point worth 1 cent on redemption is offering a 2 per cent rebate. If 30 per cent of those points expire unused, the operator's effective cost drops to 1.4 per cent of sales, while the member still sees the headline 2 per cent.
Closed loop is not wrong by design. It is a discipline test. The scheme survives only if the issuer treats the point liability as a real debt and keeps redemption value stable. When it does not, the programme becomes a discounted gift card with extra steps and no expiry date.