Loyalty Programs Gone Wrong – Ten Common Mistakes to Avoid

While it’s not rocket science, designing an effective loyalty program is much harder than it appears. Even the most lauded companies have deficiencies in their programs, deficiencies which can make or break it…

You can download PDF version of this whitepaper here.

A well designed and managed loyalty program can generate significant benefits for the company offering it. Case in point – the Tesco Clubcard program, which has been cited over and over as possibly the single key reason for the grocery chain’s immense success in the UK (and more recently in other markets too).

On the flipside, poorly designed programs can cause significant harm to a company. The globally successful Air Miles program failed when it was launched in the U.S. market, mainly due to how complex it was to redeem benefits – the program lost $25 million dollars its first year and was subsequently shut down.

A loyalty program is made up of many parts, parts which work together in harmony when well designed and managed. These parts are in the communications, the rules, the processes, the gifts, the earning procedure, the spending procedure, the interaction channels, etc., all of which need to be well designed to ensure a best-in-class loyalty program.

Even some of the most recognized programs in the world have deficiencies, weaknesses that don’t necessarily cause the program to fail, but are there nonetheless. We recommend companies who have a program or are planning to launch one make every effort to avoid making the following ten mistakes…

1. Not Treating High Value Customers Differently

As we’ve stated before in regards to learnings from a prior engagement, one customer at the top of the pyramid (top 1% of customers) generates as much profits as 16 of those at the bottom end of the pyramid (bottom 50% of customers). Logic dictates that companies need to do all they can to retain such customers. Yet, some fail to do so, treating every customer the same.

Case in point – MBNA Canada’s PremierRewards program, which gives 1% back on retail purchases, regardless of how much is spent that month or year. The program has no above-the-line differentiation for high value customers, treating everyone exactly the same. One of its competitors has got it right – Capital One’s Cash Back Platinum Card gives 1% back on purchases up to $15,000, 2% back on purchases above that.

Giving more back to high value customers can also be done below-the-line, with gifts given and offers made directly with certain customers – however, an above-the-line differentiation is required – just as all airlines offer tiered benefits, all loyalty programs should have some above-the-line high-value customer differentiation aspect to them.

2. Pretending to Treat High Value Customers Differently

Some programs do have tiers, and treat customers differently once they hit a certain spending threshold. Others also have tiers but fail to provide any real differentiation once the threshold is hit.

Case in point – Emirates Airlines has three tiers to its Skywards program – Blue, Silver, and Gold. When a customer earns 25,000 tier miles in one year they are able to go from Blue to Silver – this requires 15 flights (possibly up to 30, depending on the “category” of the ticket) be made from Istanbul to Dubai in one year, not an easy feat.

The benefits once someone finally makes it? A few extra miles (but not tier miles), some extra luggage space, priority check-in, and lounge access in Dubai. No lounge access abroad, no priority airport entrance, no priority boarding, nothing. If you are travelling to Dubai and pack light & print the boarding pass, there is not a single benefit for being a Silver Skywards member (minus the couple hundred extra miles that is earned). While the program is generally successful, its failure to differentiate how high value customers are treated is apparent, especially when comparing it to programs in the region (Turkish Airlines as a best-in-class example).

Only more disappointing than a program failing to differentiate how high value customers are treated is a program that pretends to do so. It ultimately is a big letdown for those members expecting additional benefits, and as such, careful attention should be paid to how tiers are designed.

3. Offering Too Narrow a Rewards Earning Period

Allowing a member to actually have enough time to accumulate and redeem benefits is the case here. A program can succeed only if its members feel appreciated, that the program truly rewards those who give the company their loyalty. Having too narrow a window in which to earn enough points so as to be able to redeem them before they expire is a common mistake made by companies that are more worried about liabilities rather than being fair to customers.

Case in point – JetBlue’s TrueBlue program, wherein frequent flier miles expired one year following the day they were earned. Without a doubt one of the worst programs in the world around expiry policy, most program members were unable to earn enough miles in one calendar year to redeem them before they expired. The program finally changed this outdated and draconian policy, such that now miles never expire if the member makes at least one flight a year with the airline.

It is a must for companies seeking to have successful loyalty programs to ensure points are redeemed, that benefits are realized – otherwise, the program isn’t realizing its objective of driving loyalty. Best-in-class programs have from 60 – 80% redemption rates; at a minimum, a 50% redemption rate should be the goal.

4. Being Stingy With Payout

Companies in different sectors have significantly different margins, dictating how generous they can be in terms of loyalty program payout. Grocery stores, for example, traditionally only give 1% back, while clothing retailers give 10% or more back. Companies need to be generous with their customers when it comes to their loyalty programs, especially in light of competitors’ practices.

Case in point – Starbucks My Rewards program is notoriously stingy; members need to make 15 purchases to earn 15 stars, which then gets them just one free coffee – that’s a 6.67% earnings ratio. Even worse, it takes 15 transactions, not actual cup purchases, to earn a free cup – so if a customer buys more than 1 coffee in a single transaction, it still only counts as one star. One of its key competitors – Caffe Nero, has a similar program, but theirs requires just 9 cups to be purchased to earn a free coffee. Starbuck’s My Rewards is so notorious for how stingy it is that dozens of blogs and Facebook pages have been created around boycotting it.

5. Having Complex / Confusing Rules in Place

The simpler a loyalty program is to understand and use, the more effective it is. Companies often make programs so hard to understand and benefit from that members simply don’t, lost in the complexity of it all.

Case in point – Walgreens Register Rewards, a program that gives a member a coupon when he or she checks out, if he or she buys certain products in the weekly catalog of the drugstore chain. Not only is there confusion related to earning the coupon (such that a certain amount must be purchased and the exact product / size / type must be purchased), but also around redemption. The rules are rather complex and have driven members to blog heavily regarding them. Some rules, for example, the program has in place:

  • Only one register reward per promotion in a single purchase. 2 of the same item can be purchased, but must be rung up separately to earn 2 rewards.
  • A Register Reward will not be given on the purchase of a product subsidized with a Register Reward.
  • A coupon and a Register Reward cannot be used towards the purchase of one product, only one will count. Two separate purchases are required to benefit from both.
  • Register Rewards cannot be used towards sales tax; regardless of the discount, full sales tax must be paid.

Best-in-class programs strive to ensure rules are easy to understand, points easy to earn, benefits easy to obtain. The more transparent and well-communicated the program, the more successful it will be.

6. Having Too Few Rewards Choices

Just as customers are different from each other in regards to their value, needs, and behaviors, so too are they different when it comes to the rewards they would like to obtain from their loyalty program. A well-designed loyalty program needs to take this into consideration, and offer rewards that members truly want, rather than force limited options onto them.

Case in point – Uninor recently launched its loyalty program, called Sweet Treats, whereby prepaid customers receive benefits based on how much they recharge – sadly, the benefits are limited to local minutes, long-distance minutes, or SMS. No handsets, no data, no other internal rewards, no external rewards through partnerships, essentially, just a discount program, in a day and age when telecom loyalty programs are all about innovative and unique rewards. While internal benefits around minutes and SMS may make some subscribers happy, it takes a lot more to satisfy the masses, especially high value customers.

It is essential that programs reward not just from within, but externally as well, and across a broad range of categories – one size does not fit all. Partnering with airlines, telecoms, grocery stores, bookstores, cinemas, and even charities should be considered, offering a choice that fits the needs of all unique member groups.

7. Changing the Program for the Worse

Every so often, a company needs to change its loyalty program for one reason or another. What doesn’t work, and isn’t accepted by members, is for the program to get worse. Some benefits can be removed but offset by another, but the overall proposition must remain as good as (if not better) it was before the re-launch. Some companies, though, fail miserably at this, causing a wave of backlash from members.

Case in point – Deserving a second citation in this article for their mistakes, Starbucks re-launched its program to the version described above, whereby the key reward is one free drink for 15 purchases, an extremely weak proposition in and of itself. What makes it even worse? The fact that the program’s key benefit was a 10% discount on all purchases – thus a free drink for 10 drinks, a free muffin for ten muffins, etc.  The program has been watered down to the point it is one of the worst large-scale retail loyalty programs in the world.

Changes to programs should and when they need to be made be minor, and be perceived as beneficial by members. As such, of course, the program has to be designed effectively in the first place, a lesson Starbucks clearly didn’t take to heart.

8. Not Rewarding Every Purchase

Many loyalty programs only reward members for some of the purchases they make with the company, not recognizing total spend, failing to encourage consolidation of spend. This is particularly rampant in the telecom and banking sectors, with many loyalty programs only rewarding certain spend types (i.e. only for mobile phone or credit card spend). Any type of spend that ultimately generates profit should be rewarded, even if in a different ratio.

Case in point – Caisse D’Eparagne’s S’Miles loyalty program is a prime example of one which does not reward every behavior; rather, the program only rewards customers for their credit / debit card spend and ATM withdrawals. Current / Saving account balances, loans, etc., are not rewarded, essentially not driving customers to consolidate their assets with the bank. Further, it rewards customers not based on their full or potential value, but rather, only on how much they use their credit card or withdraw cash, transactions which don’t show a customer’s real value.

Companies should pay particular attention to rewarding those purchases which have high margins, but not neglect to reward those with low margins – a customer ultimately is not concerned with such issues; he or she only wants to be rewarded for all of their spend with a given company, not only on those purchases that the company deems appropriate.

9. Not Rewarding the Right Behavior

Customers know the effect they have on companies in terms of operating costs. A customer who doesn’t call the contact center ever, only uses online banking and never visits a branch, who recharges their mobile phone online or sets up automatic payment cost less to serve than those who overload traditional channels. As such, they deserve to be rewarded for this. Some companies have got it right, like Jet Airways, which gives it members 250 frequent flier miles extra if they check-in online, thus reducing the queues at the airport. Or, Boost Mobile, which reduces the postpaid mobile phone bill of customers who make payments in a timely manner six months in a row. Some don’t:

Case in point – Ikea Family, the global furnishing company’s loyalty program, that rewards customers only with discounts on select products and throw-ins like free coffee. There is no points system, thus no accumulation based on spend. Essentially one can get discounts on a couple products, but will not be rewarded for spending tens of thousands of dollars. Thus, the right behavior of spending more and more over several years is not rewarded at all – a truly disappointing program from a wonderful company.

10. Making Redemption Very Difficult

Some loyalty programs make it very difficult for members to redeem the benefits they earn, primarily due to a deficiency in systems that can automatically deliver rewards. This is not an excuse, however, for a poor rewards fulfillment process – members don’t care about a company’s system-related limitations.

Case in point – A final citation for Starbucks; not only is it stingy, not only did its program get worse, but it also has an awful fulfillment process. For some reason, the reward for getting 15 stars (a free drink) is distributed via mail (that’s right, mail), in the form of a coupon for a free drink. So when a member gets to 15 stars, he or she can’t get the free drink right away, but must wait for a coupon to come in the mail. Money can be loaded onto the card, it is also used to earn stars, but for some reason it can’t be used to redeem benefits? Starbucks has a great deal to learn about loyalty programs.

Programs should make the redemption process easy and instantaneous for their members. In a day and age when instant gratification is a must, real-time rewarding through SMS’, cards, or some POS system should be designed into a program’s core offering.

Not all programs pass the test on all of the above – they can’t be expected to. The perfect loyalty program doesn’t exist, and never will. Companies need to do the best they can with the resources available to ensure their programs avoid as many of the above listed pitfalls as possible, be it in designing a new program or re-designing an existing one.

To learn more about building effective loyalty programs, please contact info@forteconsultancy.com.

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