Do Rewards Programs Foster Loyalty?

Only If You Address Customer Scenarios

July 9, 2009

Loyalty programs have to do more than just offer discounts, or else customers will simply play “find the bargain.” This report looks at the differences between Rewards Programs and Preferred Customer Programs and how each impacts customer loyalty.


Customer loyalty is always important, but no more so than during an economic downswing. This report looks at the differences between Rewards Programs and Preferred Customer Programs and what customers want from each. It also explores ideas about what fosters true loyalty.


What Customers Want

Working with one of our clients, I recently turned my attention to loyalty programs, trying to identify programs that worked and ones that were less successful. This, of course, led me to think about two very different customer scenarios that so-called loyalty programs address:

  • I want to get discounts/free stuff: “rewards”
  • I want to feel special and valued: “preferred customer”

Although there are many similarities among the two scenarios, ultimately, what customers want to achieve, how they want to achieve it, and what matters most in each case are different.

Also different are the loyalty results that each type of scenario fosters.


Follow the Rules and Get Discounts

So let’s look at this customer scenario: what are the customers’ moments of truth? 1

In a rewards program scenario, customers’ moments of truth/showstoppers (which we state negatively) include the following:

IT IS TOO DIFFICULT TO SIGN UP. Most customers want it to be extremely easy, if not completely transparent, to sign up for rewards. They want to sign up in one step via one touchpoint (and want to be able to do it via ANY valid touchpoint). For example, they don’t want to be on the phone with customer service and be told to go to the Web site to sign up. Or if they are at the store (or restaurant, or hotel, or airplane), they want to fill out the card and drop it off right there—not have to snail mail it in, make a call, or log onto the site. No matter whether they call, go online, or visit the physical store, the sign up process is available and it’s the same. The latter should be true even if the rewards program isn’t for the venue where you picked up the form. For example, if I get a discount program offer for a visit to a Six Flags theme park at my local Burger King restaurant, I don’t want to have to mail it in. I want Burger King to have a collection box where I leave the form, and they forward it to Six Flags.

Don’t make the customer sign up more than once! Many frequent flyer and hotel loyalty programs require that customers who want to take advantage of limited time offers and discounts must register specifically for those offers. For someone who is already a member of the loyalty program, signing up again to take advantage of a special promotion is an annoyance. For example, the typical promotional program for a hotel or airline is something like: “book your vacation before the end of July to receive extra points, or a free night stay.” That’s a reasonable offer that might propel someone to firm up their vacation plans sooner than later. But asking the customer to “register” for this special promotion is a showstopper. It annoys members and probably results in lower conversions. From the customer’s point of view, they are thinking, “Great, I’ll get an extra bonus, how nice!” But when you then say, “click here and register” to sign up for this offer, customers feel that the extra step is an imposition. “Why can’t they track the fact that I’m already a member of the program, and I’m booking within the deadline, or with the appropriate credit card (if it’s a credit card specific offer), and just give me the bonus?”

So make sure that any rewards program you offer is very easy to take advantage of, no matter how the customer gets to it.

IT TAKES TOO MUCH EFFORT TO UNDERSTAND AND KEEP TRACK OF MY POINTS AND DISCOUNTS. Some rewards programs are so complicated that customers can’t figure out the rules. Typically, these are programs based on earning points, where the number of points needed for desired rewards is vague, the different ways to earn rewards seem baroque, and you are never exactly sure how to redeem the points.

Although some people really enjoy, and actually become obsessive, about checking their reward points, keeping tabs on every transaction and how much closer they are to an award level, most of us don’t have the time or energy to keep track of such things. We want the vendors to automatically keep track of our activities with them and award points (or miles or discounts or cash back) based on our transactions.

For example, it drives most of us crazy when we book a flight, but forget to specify our frequent flyer number. We then have to “prove” that we actually took the flight, sending in documentation to the airline to get the miles we are owed. This doesn’t make sense to me. It seems to me that the airlines know when you’ve booked a flight, based on your name, address, and other information that uniquely applies to you. When you get your boarding pass, whether online in advance, at a kiosk, or from an agent, your frequent flyer number should automatically be included (and if there is a question, say there are two Ronni Marshaks with similar demographic info, you should be asked for a quick identifying piece of info). Take the onus off the customer. If you want them to reap rewards to stay loyal, make it so easy, they don’t even think about it; they just enjoy the benefits of it.

IT IS TOO HARD (AND TAKES TOO LONG) TO EARN AND REDEEM REWARDS. I actually signed up to take consumer surveys—as you can tell, I love to give my opinions—for which I would get “HiPoints” that can be redeemed for valuable prizes. Except I could never figure out exactly how to redeem these points. I would go to the site, and leave after a few minutes, frustrated. In addition, the reward thresholds seemed impossible to reach when you were earning something like 25 points for a survey, and you needed thousands of points for any reasonable reward.

Some of the most successful rewards programs are the ones where the rules are clear, and the rewards are automatic. For example, one of my favorites is the Chase Credit Card. This requires 2,500 points to achieve the one reward, a $25 gift certificate to Amazon. You earn 2 points for any purchase, and more for an purchase. When you reach the reward threshold, you are sent a rewards certificate automatically. (Although there still are flaws with the program; you are snail mailed an actual certificate rather than simply sent an email with the redemption coupon. My hunch is that this is a way to try to avoid having everyone redeem their reward; some of us might misplace the certificate or simply throw it away, not realizing that it is, in reality, virtual money. Come on Amazon/Chase. The reward is only redeemable online. Send it to me online!)

I CAN’T SPECIFY THE REWARD I WANT. Money is always nice, but sometimes you are offered a reward—or even choice of rewards—that simply don’t interest you. For example, Omaha Steaks is constantly offering you different deals with different rewards: “50% off filet Plus steak knives!” “Up to 45% off gift packages and a Free chocolate cake!” “A dozen free hamburgers with each purchase!”

A friend of mine complained about the seemingly arbitrary “free bonus” that comes with each offer. “I don’t need steak knives, so I won’t go for this offer. If they had offered me free hamburgers, I would have taken them up on the offer.” Make sure that the rewards being offered are ones that your customers want and will compel them to buy.

Even with cash rewards, let me choose whether you send me a check, I can apply it to future merchandise, or I can use it to pay my outstanding bill. The key here is to let me CHOOSE.

IT COSTS TOO MUCH TO BELONG TO THE PROGRAM. There are rewards programs that cost you money. For example, the women’s specialty clothing chain, Catherine’s, charges you $25 a year for a Perks Card, which gets you 10 percent off all purchases. This was a valid approach in a good economy, but now, I imagine, not as many people are spending over $250 at Catherine’s per year (where the prices are very low, so it takes a lot to spend that much). If the policy was changed, and the Perks Cards were free, I imagine that more people would shop there these days—I know that I would.

On the other hand, discount warehouse stores, such as Costco, are worth the investment to become a “member” because of the range of merchandise and the typical customer need for what Costco offers. So make sure you consider how much people will logically spend to reap the rewards based on what you offer, outside influences (such as the economy), and your target customer segments.

A final thought on costs of rewards programs. A reward that charges you $6.95 for shipping and handling of an item that is worth about $10 is not necessarily worth it. This is a common offer from credit cards—redeem the desktop barometer (that you never really wanted or needed) or light up calculator and pay “only” shipping and handling.

THE REWARDS PROGRAM COMPLICATES OR INTERFERES WITH MY ULTIMATE GOAL OF PURCHASING THINGS I WANT AND NEED. Remember, people shop with you not to earn reward points, but because they need to buy what you are selling. The rewards are merely an incentive to get them to buy from you rather than a competitor. You can’t get in the way of the select and buy process. One site (which one, I actually don’t remember because I’ve never returned) took me from my shopping cart and got me so lost in the maze of choosing how to apply the points I would get for my purchase, and to put a hold on my desired reward, that I actually forgot to go back and make the purchase. I ultimately bought the same item from a week later when I realized that I never completed my purchase.

Rewards should be secondary to making it easy to find what you want and to buy it at a good price.

Why Rewards Programs Don’t Really Foster Loyalty

SHOP ONLINE AND YOU’RE AUTOMATICALLY “REGISTERED.” In the past, loyalty programs required explicit sign up in order to get these discounts and rewards. However, in today’s economy, and with the price transparency that customers now have via the Internet, consumers are offered discounts and freebies just for opening an email. When you make a purchase online, the etailer site has access to a lot of vital information—most conveniently, your email address. Discount offers and other rewards can easily be sent to anyone who ever purchased anything on the site. I get a real kick out of sites that I shopped at once, several years ago, that send me emails that start, “As a loyal customer…” Loyalty is not a single or even occasional purchases; loyalty is demonstrated by repeat business and a relationship with the brand.

LOW PRICES ARE COMMODITY ITEMS. When your rewards program is based on offering discounts on merchandise, you are basically entering into pricing wars. I know that I have received a discount offer for a particular item, and then I have Googled the Web to see if I can find a better price. If the site with the coupon offers the best price (and you have to include the shipping price), I buy it there. If I can find it cheaper, I go elsewhere. This isn’t loyalty; this is bargain shopping...


1) A Moment of Truth in a Customer Scenario is the point at which the customer will give up, walk away, or be very disappointed and frustrated.

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