Why your Loyalty Program is failing and how to fix it?

If you're reading this article, I'm going to assume that you've probably seen it or heard it before. A loyalty program is supposed to be the cure for the ailment that plagues many businesses: customer churn. By giving out incentives and rewards to your customers, you increase purchase frequency and average order value per customer. According to a study by Markinblog, the probability of selling to an existing customer is 60-70%, while the probability of selling to a new prospect is only 5% to 20%.

The loyalty programs statistics sounds great, right? yes, but the truth extends further than that. Your loyalty program is underperforming and becoming a financial burden.

Before you lay the blame on marketing over-hype campaigns of loyalty systems or how the loyalty gods are dooming you for eternity, there's a good chance it's your fault.

If you're looking for ways to improve the return of investment of your loyalty program, then you're in the right place. We will take a deep dive into what may be preventing you from reaping the benefits of your loyalty program, and how to fix it before it's too late.

Why is the purpose of loyalty programs?

The word “loyalty” is thrown around like candy nowadays. But the majority of loyalty programs out there are not really “loyalty” programs at all. Many loyalty programs are created simply as an ‘add-on’, a ‘me too’ concept that most companies feel they have to do. We see a lot of businesses thinking about loyalty programs as, "Hey, it’s important to have loyalty programs with customers. Can you do that?"

You most certainly can. Many businesses such as Sephora & Costa coffee have done just that. What was it that drove these companies to be so successful? To design a successful online loyalty program that doesn't betray you, we must go back & understand the basics. 

What are the goals of a customer loyalty program?

Customer Loyalty programs center around 5 objectives :

1. Acquire customer data: allowing businesses to create targeted offers for loyal customers, and their transactions can be analyzed for a more in-depth understanding of their behaviors.
2. Convert new-to-brand or cross-sell consumers: rewarding users for trying out new products and services.
3. Increase visits & purchase frequency rate: rewarding users for their frequency of visit or purchase.
4. Increase transactions and generate incremental profit: encouraging customers to buy more so they earn rewards faster and other soft benefits (perks, events, etc.).
5. Fend off competitors: rewarding users for staying with you or not switching to a competitor.

How can loyalty programs help reduce the churn rate   

Customer retention is a high priority for many businesses, and it can be extremely expensive to acquire new customers if an existing customer base is allowed to erode. There are several ways that loyalty programs can help with this issue, but there are also pitfalls that can frustrate and alienate customers.

One way a loyalty program can help is by increasing switching costs so that consumers who have already earned points are less likely to switch to a competitor. Take food & beverage businesses, for example, the bargaining power of buyers is strong due to lower switching costs. In such markets where brands offer similar products at similar price points, it often results in increased price wars and eroding margins. As customers accumulate a certain amount of points, the incoming rewards are likely to keep them engaged with your brand, and competitors would require much more captivating offers to sway them away.

The more your customers shop with you, the more points they will accumulate which can be used for discounts and other exclusive benefits. For example, a customer could earn points at different rates depending on the type of product they buy from your company. This incentivizes customers to buy higher-margin products, which costs you less.

Loyalty programs also help identify dormant members who may be tempted back into buying from your company. If a member has not made any purchases within the past year, for example, they may get an email offering them a coupon or discount code to tempt them back in.

Another way Loyalty programs help prevent churn is when they are paired with other retention tactics like tiered pricing. A customer who has spent a certain amount of money with your company over an entire year, for instance, will get a better price than someone who has been with your company for only six months.

This incentivizes customers to continue buying from your company because they know that if they spend a certain amount of money over a year, their price will be lower than the customer who has been with your company for a shorter period.

Finally, you could increase brand advocacy and word of mouth through rewarding referrals, customer reviews, and sharing.

Why is your loyalty program betraying you?

There's no "magic bullet" to turn around your loyalty program overnight. But to provide meaningful suggestions, we'll go over step by step process to help you identify the reasons behind the failure, and what you can do to improve its performance :

1 — Identify what caused the failure of your loyalty program

2 — Look beyond your loyalty program

5 — Check your loyalty programs' financial vitals

4 — Make changes to your loyalty program

Step 1: Identify What Caused the Failure of Your Loyalty Program  

The first step to solving a problem is identifying and defining what that problem is. By identifying the root cause of your loyalty program's failure, you can determine the best course of action for reviving your program.

Reasons why your loyalty program might be failing you:

— There isn't enough perceived value to justify the cost of effort: The reward/effort ratio doesn't justify increased engagement. Customers must spend a significant amount of money to get only a small return. As a result, customers don't see the benefits of earning points or engaging with your program.

— Your rewards may be unattractive: If customers are not receiving attractive rewards for their increased engagement, they will lose interest. Since customers may view this additional effort as taking time out of their day and not really "earning" anything in return, it may seem to be a waste of time.

— You're not selling your program well: The customer cannot reasonably connect the reward to the effort unless they know about it. You must promote your loyalty program for customers to be able to link their actions with rewards, otherwise, they won't see any reason to get involved.

— One-size fits all approach: customers aren't created equal. Treating all your customers the same way is a common mistake many brands make. While one reward or engagement method might work for a certain cohort of your customer base, it won't necessarily work for everyone. Customers should be engaged in a way that is meaningful for their specific needs.

— No customer support and bad customer experience: The brand experience affects the loyalty program's success. If customers have bad customer support or negative interactions with your company, they will be less likely to engage with your loyalty program.

— Your business isn't improving transactional and emotional drivers: If your loyalty program doesn't address either transactional or emotional needs, customers may lose interest. Brands need to work on strengthening both their customer relationships and the customer experience overall.

— You're not measuring your loyalty programs' performance: You don't know how well your loyalty programs are working if you aren't tracking their performance. This means that whatever marketing initiatives you're implementing, you're likely wasting your time and money.   

— You don't know what metrics to track: It's difficult for brands to improve their loyalty programs if they don't know what to measure. The metrics you track should be directly related to your loyalty program's objectives, and help provide insight into what efforts are paying off and which ones aren't. If you're not tracking the right metrics, then you'll be running your loyalty program blind.

— Poor customer experience during redemption: when you realize that each household has on average twelve loyalty cards, you begin to realize why it's important that the redemption process is painless.   If the process of redeeming rewards is difficult and time-consuming, your customers will not be excited to redeem their rewards. 

— Frequent program changes or inconsistency across channels/products/markets/etc. that confuse customers and decrease value for both ends (customer & business)

— You're rewarding more than you're getting: loyalty programs should provide value to your business as well as to your customers. If you're not getting more value out of the loyalty program than what it is costing you to operate, then your rewards structure isn't working for you.

— You don't have enough customer data: You can't measure your loyalty program's performance without customer data. If you don't have a frequent and accurate way of collecting this essential information, then the insights you need to make changes and improve your loyalty programs will be lacking.

— Your rewards program is too complicated: Customers don't want a complicated rewards program. Customers want to be able to see the immediate benefits of engaging with your loyalty program, and if they can't easily do that, they will be turned off and won't want to participate.

Step 2: Identify how your business can drive better customer loyalty   

Perhaps the most neglected part of loyalty marketing is asking this fundamental question: If I didn't have a loyalty program, what would drive customer loyalty? Brands tend to forget that loyalty doesn't exist in a vacuum. Even a well-planned and implemented loyalty program will flop if the company can't provide enough transactional, or emotional stimuli.

There are three types of customer loyalty :

1 — Transactional loyalty: customers that only purchase from the brand because of price, promotions, ease of use, proximity, etc.

2 — Rational loyalty: customers who come back because they have a good understanding of the value your products/services bring to them  

3 — Emotional loyalty: customers that feel connected to your brand, and are willing to come back because of that connection.

When you know which type(s) of loyalty best describe your customers, then you can start thinking about how to improve your overall brand experience.

Step 3: Check your loyalty programs' financial vitals

Not every low-performing loyalty program is worth the effort. Building a loyalty program financial structure and knowing your costs and profits is a critical step to determine whether the loyalty program is worth revamping. A loyalty program can be considered a financial success when it does the following things:

• Has a healthy balance sheet

• Produces a good return on investment (ROI)

• Provides strong net income

These vitals should also be calculated realistically through segmentation. Loyalty programs are not meant to change the behavior of every single customer that comes to your store in the same manner.

Make a bottom-up financial projection model for this purpose. The model should estimate the number of incremental visits, referrals, reactivated customers, and AOV that can be delivered by each segment for every visit.

Step 4: Make changes to your loyalty program

Once you've identified what drives customer loyalty, and taken stock of where your current loyalty program stands, it's time to make some changes.

Remember that, to improve your loyalty programs' performance, you should also focus on improving your operational excellence and increasing customer interaction/experience excellence overall. If you focus only on loyalty and neglect the other two areas, your results will be limited.

With that being said, here are some recommendations to improve your loyalty programs' performance :

• Offer value, and make it easy to use: Make sure the value proposition of your loyalty program is easy to understand and offers relevant benefits. Redeeming rewards shouldn't be rocket science. Therefore, you can go for a simple redemption model that delivers an experience your target customers value.
  
• Don't forget about mobile: A lot of companies have been slow on the uptake when it comes to offering a strong app experience, but more and more consumers are using mobile apps to interact with brands.
  
• Prioritize emotional resonance: Loyalty programs are an integral part of the customer experience. That means they should be designed to build up relationships with customers, not just incentivize them for purchases.
  
• Listen to customers: Customer feedback will help you identify what type(s) of loyalty each customer segment values most so that you can customize their experience accordingly. Ask questions about why they are opting out from a particular perk or offer so that you can act accordingly.
  
• Offer personalized rewards & benefits: Adding personalization to the mix will set you apart from the competition and provide customers with a reason to come back. For your transactional loyalists, make sure the program is simple enough for them to understand. And for your rational loyalists, make sure the program offers something valuable to them. Remember to also provide personalized perks based on purchase history or location/demographic information if possible. 
  For example, a 20-something male and a 60+-year-old female may be looking for different things when they visit your store/website. This is an opportunity to make each customer experience unique by customizing the product offering based on gender, age group, etc.
  
• Don't be afraid of change: As your company evolves, consider whether the value proposition of your loyalty program also needs to evolve. If yes, make sure you are ready to implement changes quickly and effectively in order not to disappoint current members or lose momentum.
  
• Promote your loyalty program at every touchpoint: Make sure to educate employees and incorporate the loyalty program into all touch-points – from webinars and support chats to payment. A great way to let your customers know about your loyalty program right away is to place an on-brand widget that pops up on your home page or when customers make critical interactions with your site.
  
• Place a strong emphasis on customer experience excellence: The loyalty program should be embedded in your customer experience excellence strategy. And it's not just about improving the online/offline journey, but also the overall service you are providing to each of your customers.
  For example, if one of your top loyalist segments is transactional and you know that they value convenience most, make sure their experience with your company is as easy and quick as possible.
  
• Use your loyalty program to drive operational excellence: Your loyalty program should be an integral part of your business's day-to-day operations, not just a marketing tactic or something that only the customer experience department focuses on. Make sure you use it for insights into what drives customer behavior within the company as a whole.
  
• Make it easy for customers to sign up and join your program: Don't make your customers jump through hoops just to sign up and join the loyalty program. If they don't see a compelling reason for joining, chances are they won't bother.
  
• Don't underestimate the value of cash rewards: Cash isn't for everyone, but it's still a decent incentive for a certain segment of your customer base.
  
• Keep it simple: Don't overwhelm customers with too many rewards, benefits, and offers. Offer a simple loyalty program that is focused on one or two key benefits.
  
• Don't forget your high-value/high-frequency customers: Reward your loyal customers, but don't forget about the high-value and high-frequency segments. Make sure that you offer them something extra special to incentivize them to keep coming back. You could leverage membership tiers to offer different levels of benefits for customers with higher frequency and spending.
  
• Set up clear goals and track your KPIs: Set clear goals and define the metrics that will help you measure your program's success. Also, make sure to track those numbers regularly so you can adjust as needed throughout the campaign.
  Some metrics you want to track include :
  - Customer spend (and amount of transactions)
  - Average order value
  - Number of members and referrals per member
  - Retention rate by month/quarter etc.  
  
• Don't stop there: Once you have started implementing all of these changes in your loyalty program try not to rest on your laurels. Constantly measure and track your results, set new goals, and work towards hitting them.

Conclusion

Loyalty programs can be an extremely powerful tool for building customer relationships and driving business growth – if you know what motivates your customers and how to best communicate the value of your program in relation to their preferences. If done right, it will help bring results that not only justify its existence but also set new standards to your customer retention metrics.

I hope this article helped you better understand the purpose of a loyalty program, as well as the benefits it has for both customers and businesses.

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