2. 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…
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-
3. 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.
4. 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.
5. 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
6. 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:
7. 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.
8. About Forte Consultancy Group
Forte Consultancy Group delivers fact-based solutions, balancing short and long term
impact as well as benefits for stakeholders. Forte Consultancy Group provides a variety
of service offerings for numerous sectors, approached in three general phases –
intelligence, design and implementation.
For more information, please contact
info@forteconsultancy.com
Forte Consultancy Group | Istanbul Office
www.forteconsultancy.com
