Should you invest in a loyalty program?

Plenty of brand marketers launch loyalty programs without the right understanding of how to make them work or why they should (or shouldn’t) launch one in the first place.

We’ve all been in the meeting. A competitor launches their loyalty program, and a few weeks later there are slides and a name for yours. Except nobody asks what the program will make customers do that they wouldn’t have done anyway. That’s the question.

A loyalty program only pays off once a customer has bought enough with a brand for the program to mean something. Spend the money before that, and you’re funding a discount for people who were already buying.

What a loyalty program is, and more importantly what it isn’t

A loyalty program promises to give a customer something extra for buying again and again. Most of them run on points you save up and spend later, sometimes with a status level or a members-only perk layered on top.

The mistake is discounting prices today and calling it a loyalty program. Your loyalty program should promise a future reward the customer has to earn. If every member gets the same price cut with no threshold, this isn’t a loyalty program. Sometimes that’s the right call, but it’s a simple price cut, not a loyalty program. 

Points don’t fix cancellations, and signing someone up doesn’t mean they’ll use the program.

A client who asked first

A recent client had a points program they used for years. Most leaders find themselves with a decision to fund the next round of loyalty tiers and perks, then move on. It’s harder to ask up front: what is the program actually doing for us? Do we know what it costs and what business value it’ll create? 

This is the wall every loyalty program runs into when most customers only buy once. In my client’s case, about seven in 10 points ever issued were too small to spend. Nearly nine in 10 customers had only one purchase, whereas the program rewarded you after your fourth purchase. The rewards were out of reach for almost everyone the program was supposed to incentivize. 

Every point sits on the books as a promise, so you need enough cash on hand in case some customers suddenly take the desired action. I asked what would happen if the same loyalty budget went to customers trying to make a second purchase. On paper, this came back as roughly seven times what the loyalty program was earning at the time, so the focus shifted to incentivizing the second purchase.

4 questions to ask before you build

These are my top four questions to ask before investing in a loyalty program. 

1. Does your product build anything?

Ask yourself what a two-year customer has that a customer who signed up yesterday doesn’t. It must be something they’d lose by leaving, and “they know how it works” doesn’t count.

When each purchase stands on its own or involves a disposable good, the experience ends when your customer walks out the door or gets their delivery. A great first step is to reduce friction (e.g., a saved purchase profile), so buying the second, third, and fourth time is easier and quicker. That’s still a pretty thin reason to purchase again, and when it’s that thin, you have to give the customer something. 

Compare that to a product that builds something on its own. I just moved my files from one cloud storage platform to another. The files came with me, but the sharing settings and every link I had sent someone still pointed at the old account, and I had to rebuild all of it. They never had to give me points to keep me there. The setup itself was the reason to stay. Add a loyalty program on top of that and the company’s paying you to keep doing what you were going to do anyway. If nothing carries over between purchases, a loyalty program has a real job to do. 

2. Who is going to sign up?

Your best customers will, and that’s the problem. Fast-forward six months and the members look better than the non-members. Nobody asks if they were going to look better anyway.

Daniel McCarthy, an associate professor of marketing at the University of Maryland, walked through Blue Apron’s public numbers in a Knowledge at Wharton interview: six months after signing up, 70% of customers were gone, and the ones left to count were always the most likely to stay. I asked McCarthy how that applies to loyalty programs.

“Loyalty programs often get credit for loyalty that was already there,” he said. “Members may look better because the customers most inclined to stay are also the most inclined to enroll, and looking only at surviving members compounds that bias.”

In my client’s case, program members came from the one in 10 customers who were already frequent buyers. The program rewarded behavior that already existed. This is an opportunity to build on the relationship and show members how their relationship has improved.

3. Has your typical customer bought enough for this to work?

Nine in 10 customers had bought once, and a points balance means nothing to someone who never comes back to spend it. Buy something once every year or two and you don’t even remember who you bought it from (I’ve done that myself). Until that changes, it’s a discount wearing loyalty program clothes.

A bigger reward won’t get you to a yes quicker. The reward has to show up when the customer decides. Move something the customer can use onto that second purchase and stay in front of them in between purchases. A $5 Starbucks coffee “reward” once a quarter is a low-cost, high-reward way to stay ahead of this. Customers will associate it with the positive relationship between your product and their next purchase. 

4. What does failure look like?

Decide before you launch your loyalty program what result would make you turn the program off. McCarthy’s advice is to hold some customers out so you have a group to compare against. I agree with this approach. You must be able to measure whether the program adds incremental value to customers and the business. If you can’t measure your program, there’s never a reason to turn it off or press pause.

Make your loyalty budget work harder

Focus on the KPIs that matter and target rewards at customers whose behavior has room to change. For my client, that meant incentivizing a second purchase with a reward customers could use on that purchase. The budget stayed the same, but the focus shifted to a different segment.

Address any gaps the four questions reveal before investing. The next time you’re in a scoping meeting, lead with: “We can build this, and here’s the group it pays off with.” If that’s not the group on the slide (and it likely won’t be), be prepared to explain why.

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