Customer Experience News & Trends

How customer loyalty programs can backfire

The best loyalty programs successfully keep customers coming back. But new research finds that many programs do the exact opposite: They turn customers away.

Customers are often eager to sign on for loyalty plans. They want rewards — such as free products, upgrades and better deals — for doing business where they’d do it anyway.

In fact, many customers will buy more just to get those rewards. They’re enthusiastic about the company and tell others their great service stories. They spend more money and shop more frequently.

The problem side

The problems lie with the customers who can’t or don’t reach the reward level. They don’t buy enough so they fall short of qualifying for the rewards.

Those customers who fall short aren’t just indifferent about the failure to qualify; they’re less likely to continue to do business with the company that had the loyalty plan, according to the study published in Marketing Science.

The scariest part: Only about 30% of customers in the study reached levels to qualify for loyalty program rewards. So when 70% of customers shoot for a bonus and miss the mark, there’s a chance the loyalty program will upset more customers than it will please.

A plan that does more good than harm

So you still want to offer a loyalty program. And why not? Researchers did find that loyalty programs have a positive impact on overall customer purchasing.

The trick is to design and maintain it so it does more good than harm.

These three expert tips can help. They’re pulled from another study that proved customers are more likely to participate and reach goals in a loyalty program that gives them a “jump start” on being rewarded.

In short, only 18% of the participants in the study who were given a card that gave them a free car wash after eight visits reached the goal. Meanwhile, more than a third of customers who were given a card that gave them a free wash after 10 visits — and included two “free” stamps to start the program — reached the goal.

People starting from ground zero sometimes don’t feel like they could reach the goal, researchers found. But customers with “artificial progress” feel like they’re already on their way there and can more easily get to the rewards.

Three keys:

  1. Set a goal for customers to reach. It has to be something attainable. Set the level a bit above what a large group of your customers currently buy. That way some customers will reach it easily (they’re already loyal anyway), and many will feel they can reach the level.
  2. Pick the action they need to take to reach the level and make it clear. Designate a number of purchases or level of spending within a certain time period.
  3. Give them an early advancement toward the goal as a bonus. Try a signing bonus similar to the car wash’s two-stamp bonus.

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