5 expensive mistakes in retail loyalty programs - and how to avoid them

Launching successful loyalty programs is a huge challenge for retailers. Research shows that over 77% of loyalty programs that rely solely on a transactional model fail within the first 2 years. For this reason, most retailers wonder how they can ensure a greater loyalty program performance and get the best results.
5 expensive mistakes in retail loyalty programs

Whether you’re planning to launch a new loyalty program or to improve the one you have, it’s important to identify your specific program goals. Is your objective to increase year-over-year sales volume by a certain percentage? Do you want to increase brand engagement and encourage repeat purchasing?  And when you are designing your loyalty strategy or the nitty gritty mechanics, how do you make sure to avoid costly mistakes?

While there are plenty of statistics proving customer loyalty programs work, there is far less statistical data that shows why or how.

In this article we will shed some light on how to stay on track toward achieving your loyalty program objectives.

In this article, you will learn:

  • 5 examples of failed loyalty programs:
    • Why Target discontinued its initiative involving “smart” credit cards.
    • When Old Navy (one of Gap’s brands) overcomplicated their program
    • How United Air Lines tried to increase market share and got price shopping instead.
    • Why Subway, the restaurant chain, got rid of its Sub Club cards.
    • How eBay quietly pulled the plug on its Bucks loyalty rewards program.
  • Mistake #1: Unintentionally encouraging disloyalty
  • Mistake #2: Making your loyalty program too complicated for customers
  • Mistake #3: Offering irrelevant or insignificant rewards to customers
  • Mistake #4: Offering only transaction based rewards
  • Mistake #5: Not promoting your loyalty program effectively
  • BONUS: Loyalty program tips that will bump your success and bottom-line

5 examples of failed loyalty programs:

Big and small retailers have proven that a well executed loyalty program can work wonders towards contributing to more sales, more retention and increased CLTV.

However, because of the mistakes listed below in this article, a number of well know brands had their customer experience go from good to bad as a result of their loyalty initiatives.

Even as loyalty programs are launched left and right, many have been shut down – and not with a sense of mission accomplished.

Let’s dive right into some real life examples.

– Why Target discontinued its initiative involving “smart” credit cards.

In December 2013, discount retailer Target made the headlines on every news outlet because of a ****major hack that stole credit and debit card data from 40 million accounts.

Customer names, credit or debit card numbers, expiration dates and CVVs were involved in the information theft. Hackers used this data to make card replicas.

The data theft was caused by the installation of malware on the company’s POS machines, thought to be accessed via third-party vendors with security flaws in their systems, which provided the bridge for hackers to break in.

Customers clearly are not thrilled about this rewards experience!

– When Old Navy (one of Gap’s brands) overcomplicated their program

Old Navy went for the more is more approach and the result was a complicated mess of confusing rewards. This loyalty program was known to have too many membership options and to present confusing earn and burn mechanics, where members were not clear on how to gain and redeem their points.

In addition to that, some of the program’s perks appear to be available not only to members but to any customer, and therefore lack exclusivity.

– How United Air Lines tried to increase market share and got price shopping instead.

Thankfully this initiative did not kill a well established loyalty program, but it was definitely not a success either:

We are talking about the attempt by United Air Lines to poach customers worried about a mechanics’ strike at Northwest Airlines in 2005.

This is what happened:

  • In an e-mail promotion, United Airlines targeted fliers with an offer of double miles.
  • Northwest responded by matching the offer for flights taken before early October.
  • In mid-October, United announced it would award double miles for travel until mid-December.

See where this is going? All of it had the opposite effect of what either side wanted—it encouraged price shopping and NOT loyalty.

It’s worth noting that the same thing killed the Green Stamp.

Stores began trying to outdo one another by offering double stamps, then triple stamps, and ultimately quadruple stamps, inflating the value of the average stamp to about eight cents on the dollar.

Shoppers were happy to go wherever they could collect the most stamps.

What had begun as a mechanism for rewarding loyal customers devolved into clumsily concealed price promotions administered by third-party stamp providers.

Eventually, stores had had enough and began touting the benefit of lower prices with no stamps attached.

– Why Subway, the restaurant chain, got rid of its Sub Club cards.

Sub Club was a reward system that allowed loyal customers to earn a free meal every time a card filled up with 8 stamps. It was a beloved program for it’s members so, why was it discontinued?

Well, in a world of home laser printers and multimedia PCs, counterfeiting become just too easy, and people went to great lengths in order to abuse the stamp program.

But as technology ruined the viability of some loyalty programs, companies today can also take advantage of modern advances to create new programs less prone to crime.

– How eBay quietly pulled the plug on its Bucks loyalty rewards program.

In March 2021, eBay sent the following message to buyers enrolled in the program:

Hello (redacted),

Thank you for being a Bucks member, and a valuable part of our eBay community. We’re reaching out to tell you about upcoming changes to the eBay Bucks program.

After careful consideration, we’ve decided to retire the 1% earnings reward on everyday purchases starting April 1st, 2021. The good news is, you will continue to receive bonus Bucks offers, so you can keep earning.

And, beginning April 1st, the Bucks you earn will have a 12-month redemption window, so there’s even more time to score those big savings.

You can also earn extra rewards through the eBay Mastercard(R), earning up to 5x points on eBay purchases. Now through March 11th, 2021, open a new eBay Mastercard, spend $250 in the first 30 days and receive a $50 statement credit.* Click* here to learn more.

We hope you will continue to enjoy savings and deals on the brands you love. Plus, all the exciting finds you’ve come to expect on eBay: from the rare to the retro to the right now.

Sincerely, The eBay Bucks Team.

Ebay buyers where less than thrilled by the news, as you can see in these replies:

Whether loyalty programs are discontinued because of security issues, lack of engagement or underwhelming results, the list of failed initiatives goes on and on.

Now that we’ve reviewed some very specific examples, it’s time to highlight what are the main issues to watch out for.

The value of learning from mistakes is obvious, right? As the popular quote says:

“Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.”

Let’s get right to it.

Mistake #1: Unintentionally encouraging disloyalty

Like we mentioned in the example of United Airlines and supermarket stamps, if your program becomes equivalent to discounting, then you are only paying your customers to buy and, paradoxically, encouraging disloyalty.

You will inevitably be drawn into a price war, with tit-for-tat competitive moves basically yielding a lower profitability all around.

Managers must use their loyalty programs for more than a direct payment mechanism for purchases, which is simply not sustainable in the long term.

What to do instead: Reward profitability.

Keeping track of the profitability of the customers is key. There’s no reason to cut into profit margins as long as customers are made happy with attractive rewards.

Retail CMOs must ensure that their loyalty programs is designed so it is in customers’ best interests to be loyal to their brand and consolidate their purchases. A program should discriminate between more and less loyal customers, and reward the use of the card over time and not on a specific occasion tied to a time-sensitive promotion.

Harrah’s Entertainment has a loyalty program that focuses on its most profitable customers.

As an example, it recognizes that some types of gambling are more profitable to the company than others. Therefore, when a customer books a night at one of its hotels, Harrah’s is able to generate a price for the room based on customer profitability as well as availability. Profitable customers might stay for free while others might be charged for the same room or even be told that no rooms are available.

Mistake #2: Making your loyalty program too complicated for customers

One sign of an ineffective loyalty program is that a big number of customers are not redeeming the point they collect. The more features and functions you add to your loyalty program, the easier it is for the whole system to spiral out of control. Customers will be left confused as to how the rewards program even works.

What to do instead: Offer easy ways to earn and redeem points

Make sure your loyalty mechanics are easy to communicate and to understand. Try to make both earning and burning points as frictionless as possible. Give points frequently enough, communicate with customers their points balance in real-time over multiple channels (email, push notifications or SMS) and update them regularly on any new and exciting opportunity. Signing up to the loyalty program should be a quick and easy process. The action required to achieve the rewards should be clear as day. Do X, and you’ll get Y. Do more X, you’ll get more Y.

Mistake #3: Offering irrelevant or insignificant rewards to customers

Today, more than ever, customers expect and appreciate rewards especially tailored for them, and do not respond to irrelevant offers. Rewards that aren’t exciting or worth your customer’s time will actually hurt your loyalty program’s success.

What to do instead: Personalized rewards.

Retailers need to turn to offer personalized rewards that take the individual customer’s shopping behaviour and interests into account. Instead of spending a big share of their marketing budgets on sending out discount coupons to people who don’t care to use them, using personalization will encourage engagement on all stages of the customer journey.

If you’re a retailer and you’d like to talk about how technology can cut costs and increase ROI on your loyalty program, then get in touch with one of our team – we’ll be happy to show you relevant use cases or talk through your brand’s unique challenges.

Mistake #4: Offering only transaction based rewards

Customers today do not appreciate been treated as walking wallets.

If a brand fails to engage its customers in a more meaningful way, it misses the point: making its customers feel valued and understanding how they are willing to engage with your business beyond a purchase.

What to do instead: Incentivize behavioural loyalty

Reward your customers in meaningful ways beyond the transaction, such as writing reviews, referring a friend or taking a survey.

Mistake #5: Not promoting your loyalty program effectively

Some companies make the mistake of thinking that their job is done once their loyalty program goes live.

But that is similar to launching a 3 Michelin star restaurant on the moon. The meal is great, but no one can get it.

In reality, companies must constantly promote their loyalty program with good communication, over a variety of channels, to meet customers where they are.

What to do instead: Continuous promotion

Don’t stop promoting to your customers the advantages of becoming a program member. Offer seasonal promotions and tie in rewards for larger incentives.

And finally, here are some loyalty program tips that will bump your success and bottom-line:

  • Attract customers to join your loyalty program by giving to give them something right from the beginning.
  • Offer unique rewards, not just free stuff.
  • Providing an excellent customer service is still critical, also for your loyalty program.
  • Use gamification strategies to encourage engagement with a fun and social spin to your loyalty program.
  • Always plan your strategy with care and foresight, as cancelling a popular loyalty program can lead to backlash from your customer base, and your sales will drop, too.
  • Create coupons with a minimum spend limit to ensure that loyalty discounts don’t hurt your margins.
  • Contests and raffles are alluring and capable of mobilizing every participant within the program, though you only need to give the prize for a handful of lucky winners.
  • Points, credits, or whatever currency you use in your loyalty program are an optimal reward for a contest, because customers can spend them on anything they want, while keeping your costs down.
  • Make sure your loyalty provider offers your partnership management, so you can involve 3rd party brands and offer more attractive rewards to your members.

If you’re a retailer and you’d like to talk about any of the loyalty strategies outlined in this article in more detail, then get in touch with one of our team – we’ll be happy to show you examples or talk through your brand’s unique challenges.