Loyalty Programs Gone Wrong – Ten Common Mistakes to AvoidDocument Transcript
Loyalty Programs Gone Wrong –Ten Common Mistakes to Avoid February |2011
Loyalty Programs Gone Wrong – Ten Common Mistakes toAvoidWhile it’s not rocket science, designing an effective loyalty program is muchharder than it appears. Even the most lauded companies have deficiencies in theirprograms, deficiencies which can make or break it…A well designed and managed loyalty program can generate significant benefitsfor the company offering it. Case in point – the Tesco Clubcard program, whichhas been cited over and over as possibly the single key reason for the grocerychain’s immense success in the UK (and more recently in other markets too).On the flipside, poorly designed programs can cause significant harm to acompany. The globally successful Air Miles program failed when it was launched inthe U.S. market, mainly due to how complex it was to redeem benefits – theprogram 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 inharmony when well designed and managed. These parts are in thecommunications, the rules, the processes, the gifts, the earning procedure, thespending procedure, the interaction channels, etc., all of which need to be welldesigned 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 therenonetheless. We recommend companies who have a program or are planning tolaunch one make every effort to avoid making the following ten mistakes…1. Not Treating High Value Customers DifferentlyAs we’ve stated before in regards to learnings from a prior engagement, onecustomer at the top of the pyramid (top 1% of customers) generates as muchprofits as 16 of those at the bottom end of the pyramid (bottom 50% ofcustomers). Logic dictates that companies need to do all they can to retain suchcustomers. Yet, some fail to do so, treating every customer the same.Case in point – MBNA Canada’s PremierRewards program, which gives 1% back onretail purchases, regardless of how much is spent that month or year. Theprogram has no above-the-line differentiation for high value customers, treatingeveryone exactly the same. One of its competitors has got it right – Capital One’sCash Back Platinum Card gives 1% back on purchases up to $15,000, 2% back onpurchases above that.Giving more back to high value customers can also be done below-the-line, withgifts given and offers made directly with certain customers – however, an above-
the-line differentiation is required – just as all airlines offer tiered benefits, allloyalty programs should have some above-the-line high-value customerdifferentiation aspect to them.2. Pretending to Treat High Value Customers DifferentlySome programs do have tiers, and treat customers differently once they hit acertain spending threshold. Others also have tiers but fail to provide any realdifferentiation 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 areable 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 oneyear, 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. Nolounge 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 nota single benefit for being a Silver Skywards member (minus the couple hundredextra miles that is earned). While the program is generally successful, its failure todifferentiate how high value customers are treated is apparent, especially whencomparing it to programs in the region (Turkish Airlines as a best-in-classexample).Only more disappointing than a program failing to differentiate how high valuecustomers are treated is a program that pretends to do so. It ultimately is a bigletdown for those members expecting additional benefits, and as such, carefulattention should be paid to how tiers are designed.3. Offering Too Narrow a Rewards Earning PeriodAllowing a member to actually have enough time to accumulate and redeembenefits is the case here. A program can succeed only if its members feelappreciated, that the program truly rewards those who give the company theirloyalty. Having too narrow a window in which to earn enough points so as to beable to redeem them before they expire is a common mistake made by companiesthat are more worried about liabilities rather than being fair to customers.Case in point – JetBlue’s TrueBlue program, wherein frequent flier miles expiredone year following the day they were earned. Without a doubt one of the worstprograms in the world around expiry policy, most program members were unableto earn enough miles in one calendar year to redeem them before they expired.
The program finally changed this outdated and draconian policy, such that nowmiles 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 ensurepoints are redeemed, that benefits are realized – otherwise, the program isn’trealizing 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 PayoutCompanies in different sectors have significantly different margins, dictating howgenerous they can be in terms of loyalty program payout. Grocery stores, forexample, traditionally only give 1% back, while clothing retailers give 10% or moreback. Companies need to be generous with their customers when it comes totheir loyalty programs, especially in light of competitors’ practices.Case in point – Starbucks My Rewards program is notoriously stingy; membersneed to make 15 purchases to earn 15 stars, which then gets them just one freecoffee – that’s a 6.67% earnings ratio. Even worse, it takes 15 transactions, notactual cup purchases, to earn a free cup – so if a customer buys more than 1coffee in a single transaction, it still only counts as one star. One of its keycompetitors – Caffe Nero, has a similar program, but theirs requires just 9 cups tobe purchased to earn a free coffee. Starbuck’s My Rewards is so notorious for howstingy it is that dozens of blogs and Facebook pages have been created aroundboycotting it.5. Having Complex / Confusing Rules in PlaceThe 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 thatmembers simply don’t, lost in the complexity of it all.Case in point – Walgreens Register Rewards, a program that gives a member acoupon when he or she checks out, if he or she buys certain products in theweekly catalog of the drugstore chain. Not only is there confusion related toearning the coupon (such that a certain amount must be purchased and the exactproduct / size / type must be purchased), but also around redemption. The rulesare 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 easyto earn, benefits easy to obtain. The more transparent and well-communicatedthe program, the more successful it will be.6. Having Too Few Rewards ChoicesJust 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 wouldlike to obtain from their loyalty program. A well-designed loyalty program needsto take this into consideration, and offer rewards that members truly want, ratherthan 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. Nohandsets, no data, no other internal rewards, no external rewards throughpartnerships, essentially, just a discount program, in a day and age when telecomloyalty programs are all about innovative and unique rewards. While internalbenefits around minutes and SMS may make some subscribers happy, it takes alot 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 withairlines, telecoms, grocery stores, bookstores, cinemas, and even charities shouldbe considered, offering a choice that fits the needs of all unique member groups.7. Changing the Program for the WorseEvery so often, a company needs to change its loyalty program for one reason oranother. What doesn’t work, and isn’t accepted by members, is for the programto get worse. Some benefits can be removed but offset by another, but the overallproposition 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 frommembers.Case in point – Deserving a second citation in this article for their mistakes,Starbucks re-launched its program to the version described above, whereby thekey reward is one free drink for 15 purchases, an extremely weak proposition inand 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 muffinfor ten muffins, etc. The program has been watered down to the point it is one ofthe worst large-scale retail loyalty programs in the world.Changes to programs should and when they need to be made be minor, and beperceived as beneficial by members. As such, of course, the program has to bedesigned effectively in the first place, a lesson Starbucks clearly didn’t take toheart.8. Not Rewarding Every PurchaseMany loyalty programs only reward members for some of the purchases theymake with the company, not recognizing total spend, failing to encourageconsolidation of spend. This is particularly rampant in the telecom and bankingsectors, with many loyalty programs only rewarding certain spend types (i.e. onlyfor mobile phone or credit card spend). Any type of spend that ultimatelygenerates 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 ofone which does not reward every behavior; rather, the program only rewardscustomers for their credit / debit card spend and ATM withdrawals. Current /Saving account balances, loans, etc., are not rewarded, essentially not drivingcustomers to consolidate their assets with the bank. Further, it rewards customersnot based on their full or potential value, but rather, only on how much they usetheir credit card or withdraw cash, transactions which don’t show a customer’sreal value.Companies should pay particular attention to rewarding those purchases whichhave high margins, but not neglect to reward those with low margins – acustomer ultimately is not concerned with such issues; he or she only wants to berewarded for all of their spend with a given company, not only on those purchasesthat the company deems appropriate.9. Not Rewarding the Right BehaviorCustomers know the effect they have on companies in terms of operating costs. Acustomer who doesn’t call the contact center ever, only uses online banking andnever visits a branch, who recharges their mobile phone online or sets upautomatic payment cost less to serve than those who overload traditionalchannels. As such, they deserve to be rewarded for this. Some companies havegot it right, like Jet Airways, which gives it members 250 frequent flier miles extraif 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 paymentsin a timely manner six months in a row. Some don’t:
Case in point – Ikea Family, the global furnishing company’s loyalty program, thatrewards customers only with discounts on select products and throw-ins like freecoffee. There is no points system, thus no accumulation based on spend.Essentially one can get discounts on a couple products, but will not be rewardedfor spending tens of thousands of dollars. Thus, the right behavior of spendingmore and more over several years is not rewarded at all – a truly disappointingprogram from a wonderful company.10. Making Redemption Very DifficultSome loyalty programs make it very difficult for members to redeem the benefitsthey earn, primarily due to a deficiency in systems that can automatically deliverrewards. 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 itsprogram 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 comein the mail. Money can be loaded onto the card, it is also used to earn stars, butfor some reason it can’t be used to redeem benefits? Starbucks has a great deal tolearn about loyalty programs.Programs should make the redemption process easy and instantaneous for theirmembers. In a day and age when instant gratification is a must, real-timerewarding through SMS’, cards, or some POS system should be designed into aprogram’s core offering.Not all programs pass the test on all of the above – they can’t be expected to. Theperfect loyalty program doesn’t exist, and never will. Companies need to do thebest they can with the resources available to ensure their programs avoid as manyof the above listed pitfalls as possible, be it in designing a new program or re-designing an existing one.
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