Loyalty Landmines

5 Ways Your Customer Loyalty Program Can Backfire

Loyalty is a hot topic.  Rewards are everywhere.  Once the favored tactic of airlines and hotels, rewards programs, and loyalty programs in general, are now popping up in almost every conceivable business.  From small corner shops to Microsoft®, companies are realizing that customer retention needs plenty of attention.

However, most loyalty programs ultimately fail to meet their objectives.  And that’s a concern, as these programs are often comprehensive, costly to implement, and prominent.  Many of them get discontinued, but not without some pain, as dropping these announced programs requires communicating (aka admitting) to your customers and your bosses that your prize program has failed to perform.

Others change course to make the program feasible for the company’s bottom line.  Remember the high-profile structural changes by Starbucks® and Southwest Airlines® as they moved from visit-based to spend-based programs?

One thing about a comprehensive loyalty program is that there are a lot of moving parts, which means there are many ways the program can backfire and cause the marketing team a lot of headaches.  Here are five favorites to try and avoid when developing or restructuring a loyalty program:

Going “too rich too early”

At its core, every loyalty program has a value exchange.  Customers and the company each give something up and get something in return.  Typically, the customer will give the company the right to track purchase and other behavior and accept promotional marketing in exchange for hard and soft benefits.  And vice versa for the company.

Going “too rich too early” means that the company provides too much value at the start of the program.  This can be either in the form of a “signing bonus” or the ongoing list of benefits of the program.

This is one of the most common mistakes companies make when designing a loyalty program. Why?  Because companies are often fearful that the program will not generate enough interest, so they try to create a value offer that’s very appealing to the customer.

Unfortunately, that can backfire.  First, it is easy to take your eye off the pro forma.  All offerings need to be evaluated based on their potential ROI or cost exposure for the company.  It’s easy to develop a basket of benefits that customers will find valuable, but make sure they are affordable by the business, even in the worst-case scenario.

Second, it is easy to increase the benefits for a program, but difficult to decrease them.  Once a benefit is out there and customers are used to it, taking it away or making it less valuable (even if it only appears so from their perspective) can have consequences.

So, start from a reasonable position and inch up from there if you need to.

Assuming you need a points-based program

When people think of a loyalty program, they typically think of a points-based program.  Accumulate points for purchases and other engagement activities, then redeem them for free product in the future.  It’s a common and proven approach.  The most popular programs are based on this strategy.

However, a points-based program is definitely not for everyone.  For a points-based program to work, The payback must be meaningful.  A typical program will provide 5% of sales back in the form of rewards.  At a 50% redemption rate, the total investment is 2.5% of revenue.

So, if your average sale is $20 and the reward threshold is ten sales ($200 total sales), that translates to a reward worth $10.  Is that meaningful enough to get your customers excited?  Is it enough to get your 5x visitors to provide those five additional visits?  If not, your program could backfire due to creating an unbalanced value exchange.

Further, points can create an accounting complexity.  Accounting rules mandate that outstanding points and rewards be counted as a liability for the business, which could shed some unwanted light on the program if not addressed properly with the CFO at the outset.  That would certainly cause internal problems for the program.

Counting on lower value customers

If you set the spend threshold too high for infrequent users, your program could backfire.  Companies tend to look at the behavior of the high value customers and think, “Let’s get our low-value customers to behave like this with a rewards program.”  You need to have rational expectations of what a loyalty program can achieve.  In fact, most companies find that their programs actually perform best on the best customer segments rather than the lower value segments.  Your objective, if you are relying on improvement in lower value segments, is to try and get them from trial to one or two additional purchases.  There are certainly loyalty marketing tactics to achieve this, but a points-based program may not be the best way to do that.

Using discounts as rewards

The selection of rewards is one of the most important considerations when setting up a loyalty program (that involves rewards).  Strategists continually struggle with the balance between rewards that are meaningful and relevant for customers, but will contribute to a positive ROI to the business.  One thing we have heard loud and clear every time we ask is that customers want a reward with no string attached.  Their attitude is, “don’t reward me for my loyalty by making me spend more money to use it.”

Often, rewards are in the form of an unqualified discount or gift card.  For example, $25 in “cash” you can use on any purchase.  That’s fine, as long as there is no minimum purchase in order to use it.  Otherwise, customers will consider it a scam and your program could backfire.  Also, whatever dollar value you place on the reward should have some product or service that customers can fully purchase for that amount.

We have seen programs that offer a catalog of 3rd party merchandise, allowing customers to use accumulated points to fund a portion of the price of each product.  There are a lot of best-practice problems with this approach:

  1. The rewards are not relevant to the brand, causing a disconnect
  2. Redeeming points requires customers to buy something
  3. The value proposition is low, as the price of this merchandise is the list price, and customers can find it less expensive elsewhere

Discounts as rewards are fine.  We want their redemption to create an incremental visit and purchase.  But make sure the incremental spend is the customer’s choice, not a requirement.

Hoping for Breakage

For loyalty programs, breakage (aka spoilage) is the difference between the value of rewards issued and redeemed.  It is the amount that goes unused by customers.  Breakage is an important element to consider when designing a loyalty program.  In most cases, 30% to 70% of rewards issued will be redeemed.  For accurate financial projections, it is important to understand the projected redemption rate.

If you are going to implement a loyalty program that rewards customers, best practice is to design it so you are rooting for the customer to redeem rewards.  Your pro forma should show that customers who redeem rewards are more profitable than those who do not.  You may even implement reminder communications (email, phone, etc.) to customers to let them know they have rewards available to use.

If you find yourself rooting for breakage, there’s a good chance your program is going to backfire.

 

Loyalty marketing can pay big dividends for companies and it seems everywhere you turn there are new programs popping up.  However, designing and executing a successful program is tricky.  The formula for success involves experience, analytics, and a pinch of psychology.  So always keep your customers in mind and find that balance between their needs and yours.  First think about what is going to be relevant and motivational for them, then determine if that will provide a positive ROI for your company.  The intersection of that Venn Diagram is where your successful loyalty programs lives.

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