Three steps that guarantee your loyalty programme will fail

Failure
Mateusz Skowronek
Senior Consultant
Comarch
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It may come as a surprise to hear that many loyalty programs actually fail.

More often than not, they fail to meet their objectives, not delivering the promised added value to their members.

But sometimes they also fail completely, disengaging customers and generating dissatisfaction, instead of doing the opposite. As such, they can threaten the performance of a whole company.

While working with clients from various sectors, I’ve seen some interesting examples of failed and failing loyalty initiatives. More often than not, they have been caused because the process of creating and operating a loyalty programme is so complex, with myriad activities that can go wrong and collectively hinder prosperity.

However, what I’ve learned over time is that, to absolutely guarantee your programme fails in the most spectacular and miserable fashion possible, you only have to follow these 3 simple steps.

1. Strategy - make your programme work against your business objectives

That is a first step, but one that is straightforward. Inexperienced businesses and not-so-strategically oriented loyalty teams will find it especially easy to deliver. And success rate is high.

You can take two approaches – either state no clear strategic business objectives for your loyalty programme (sort of “it’s only for data collection purpose” story). Then you can be sure the programme will be like a cruise ship sailing the strait of customer relationship, but without a working navigation system, roaming around and making more harm than good.

Or, you can set the business objectives for the programme that are completely mismatched with the company’s overall strategic goals. A case in point is of one of the retailers I worked with some time ago.

As a premium grocery retail chain with limited locations, serving rather lower frequency shopping visits, the company has been challenged by unjustifiably high price perception, and customers were too often avoiding it for their everyday grocery.

One of the key strategic objectives of the company became to bring this price perception down while keeping their high-quality, wide-choice image untouched. Against this backdrop, the company operated a loyalty scheme that was expected be a good tool to help deal with this challenge.

Instead, the company’s programme, called something close to “the elite club”, covered a catalogue with high quality and very expensive rewards, for which you had to wait very long to collect points.

To add to this, to become the member of the programme you had to spend at once a sizeable sum – six times the average basket value, making it out of reach for many customers. The programme became perceived as overtly exclusive, reinforcing the damaging public opinion that prices were too high on the shelf. Unsurprisingly, the scheme’s uptick among customers remained relatively low, and member activity limited. Eventually, the company’s growing financial strain forced the programme to fold.

A 2014 McKinsey study highlighted that companies with higher reliance on loyalty appear to have consistently lower profitability. Getting a financial payback is harder than many people give credit for. 

2. Customers - design a meaningless customer value proposition

Setting loyalty objectives against your company’s objectives is often ineffectual and will make a programme stumble. It becomes the creation of a customer value proposition that is completely worthless for its members.

For sure you know a number of loyalty schemes which you subscribed to, but never brought you any tangible value. Or even you never understood how they worked, and you felt like their only purpose was to get your e-mail address so they can spam your mailbox?

These are the schemes with meaningless value proposition. And it’s an important piece of the whole puzzle. It will ensure your customers feel exploited and tricked, increasingly unwilling to be more loyal to your brand.

Consider for instance one of our clients, a mid-sized European supermarket chain with 400+ outlets around Europe, which had been operating a programme composed of relatively unsophisticated ‘earn and burn’ rules.

The programme’s cornerstone benefit was a regular one-day-a-week promotion that covered one selected product sold at a discounted price to members. The programme held a currency in the form of loyalty points, however customers were not informed properly about the possibility of points collection.

Moreover, there was nothing tangible they could have done with these points, once they had accumulated a larger amount. Not surprisingly, the programme’s penetration (after a couple of years of operations) stood at the alarming rate of below 20% - very low comparing to industry benchmarks, and had been decreasing fast.

Ultimately the company had to call in loyalty consultants in order to help redesign the whole customer value proposition from scratch.

3. Profitability - create a white elephant scheme

If you suspect that taking the above-mentioned steps will still keep your loyalty programme afloat, there is one last move you can make to ensure its entire collapse. It’s a nail in the coffin for many schemes and a nightmare for financial departments.

You need to design a rewarding model that will cost you more than it generates. Plus, make sure that a financial black hole will grow as the programme develops. This profitability time bomb needs to be supported by an ambiguous business case lacking any reality checks. Convincing everyone should be rather easy, because companies on the hunt to acquire sophisticated behavioural data and contact information from customers are ready to accept buoyant financial estimates, forgetting that the loyalty programme is an investment like any other and hence, should undergo close scrutiny.

You’ve probably heard of loyalty programme X going through a major revamp with a hanging profitability issue in the background. Take for example the major reconstruction of the Sears Shop Your Way scheme, or the closing of the Rogers First Rewards programme. Or even the much-maligned but current Starbucks loyalty scheme.  

In reality, many loyalty programme business models are so poorly designed that they return low or close to zero profit. According to The BCG, for most programmes it’s below 10%, but often negative, although there are companies that get it as high as 25%.

As a 2014 McKinsey study displays, companies with higher reliance on loyalty appear to have consistently lower profitability (see graphics below). Which suggests that getting a financial payback is harder than many people give credit for.

Loyalty profits

Source: http://www.mckinsey.com/business-functions/marketing-and-sales/our-insig...

There is a growing group of failed loyalty schemes out there. Your programme too can join this ailing bunch. Just remember that small, operational mistakes alone may be not sufficient. But if you follow this 3-step method presented in here, the chances are, your programme will fail are very high.

Setting your loyalty objectives against company’s business goals, making sure your customers don’t see any value in being a member, and creating financial black holes are much more powerful, yet simple steps to ensure a disaster. Or alternatively, if you want your programme to be a success, you may need to start thinking about what taking the exact opposite approach might look like.  

Mateusz Skowronek is senior Loyalty and Customer Experience Consultant at COMARCH, with  over 6 years of experience helping retailers and FMCG companies build and execute winning customer strategies and loyalty programmes 

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