Are Loyalty Programs Still Doing Their Job?

It’s a pretty disloyal world out there, but can you really blame the consumer? Online shopping has never been easier, and stores have been stepping over each other to see who can offer the deepest discount. While discounting your way to a one-time purchase might work in the short term, at the end of the day, you need to aim for a higher prize: customer loyalty.

Many retailers attempt to accomplish this with an official loyalty program. There’s just one problem – they rarely work.

What’s Your Loyalty Program Really Worth?

Have you ever eaten at a terrible restaurant but continued to go back because of their loyalty program? Of course not! Seinfeld did an entire episode on this, so you know it’s worth questioning. These days, most loyalty programs have simply outgrown their usefulness – and they no longer create loyalty.

A while back, I was speaking with someone at Macy’s about the retail landscape. When I asked about their biggest competitor, he said it was Amazon. Is anyone shocked? Then we got onto the topic of loyalty programs. As he explained theirs, I was a bit puzzled. Here’s why.

First, you need a Macy’s credit card to be eligible, which eliminates many people right from the start – those who either don’t want another store credit card or aren’t yet loyal enough to Macy’s to want theirs. At a high level, If someone spends $500 in a year, they qualify for free shipping for the rest of the year. Is free shipping really a perk anymore, especially when the free shipping threshold on the site is only $25? These members are likely getting this “perk” anyway.

At $1,200, you earn 5% cash back on purchases, which equates to $60. Will that $60 be what prevents someone from shopping elsewhere? Remember: This person likely won’t even qualify for these perks from day one of the year, unless they buy some high-ticket items. That means they may only receive these benefits for part of the year. Come January 1, they’re back to square one.

I can’t help but think that a Macy’s credit card holder who spends $1,200 each year is already fairly loyal. And with Amazon as their biggest competitor, why should shoppers spend $500 to get free shipping when they can get the same perk for just $99?

Let’s look at another well-known brand: Starbucks. Everyone I know who drinks Starbucks coffee is pretty loyal to that brand, and it’s not because of their rewards program. It’s the customer experience. Of course, they have drive-through locations, which is convenient, but they also offer a great in-store experience. Their app allows you to order ahead, and they offer mobile payment options. Their baristas are friendly, and the store is inviting. Simplicity and convenience. Will people be more loyal to Starbucks because of the rewards program? I highly doubt it.

Bruegger’s Bagels offers a bottomless mug program, which is more or less a membership program. The price of the mug can vary by location. By my house, it’s $185 for 365 days of free refills on coffee, tea, or soda. The program is simple. One price, one benefit, for one year. At around $2 for a small coffee, frequent visitors can really rack up some savings.

But would a first-time or infrequent customer buy the bottomless cup? Not likely.

That’s a big investment for a casual visitor. While I do think it has the potential to bring an already frequent customer into the store slightly more often, I think they missed the mark of what I see as their true goal – selling food. I assume Bruegger’s is banking on customers ordering some food while waiting in line for their bottomless mug refill. But what would compel a person to make that extra purchase? I bet an incentive of 5-10% off food purchases (with cup in hand) would do the trick.

Amazon doesn’t even have a loyalty program. They have a membership program, yet people are still very loyal to them – including some Macy’s shoppers. The perks of membership, such as the convenience of quick, free delivery and access to streaming video, work to keep people shopping with them. Prime members spend roughly $1,300 a year on Amazon, almost double that of non-members. They also get cash back with an Amazon credit card (like Macy’s), but the card is not a requirement for membership. Their customer experience is why over 80 million U.S. households choose to pay for Prime membership.

What Does it all Mean?

Most loyalty programs don’t seem to generate loyalty anymore. Strong brands that provide consistently good experiences are the ones earning their customers’ loyalty. If Amazon had horrendous service and delivered a poor experience, shoppers wouldn’t keep going back to them time and time again.

Maybe we should just remove the term “loyalty program” from our lexicon altogether and refer to them as what they are: rewards programs. If done right, rewards programs can be used to create and foster customer engagement, which helps create that all-important emotional connection. Think beyond the traditional model of “buying products to accumulate points” and reward customers for interacting with your brand. Invite them to play a game or write a review to earn rewards.

If you’re banking on a loyalty program to keep customers from straying, you’ve already lost them. Take a hard look at your program. Could the time and effort of maintaining it be better spent engaging your audience with more personalized email, social media and other marketing strategies? At the end of the day, the success of your program is only as good as the success of your brand.

Stop Slashing Prices, Start Connecting With Your Customers

The retail sector is going through drastic changes. Established names like The Limited are closing or filing for bankruptcy. Amazon and Walmart squeeze everyone’s margins. Special discount shopping days like Black Friday have morphed into Gray November, a month-long deep discounting period. As brands fight to keep up with competitor discounts, profits and customer loyalty are harder to earn.

It is unrealistic for retailers to continue to increasingly discount and remain viable. After all, if a retailer offers 50% off, they’ll need double the sales to reach the same margins. And, oftentimes, the unit sales immediately after the promotion ends suffer as a result. But with global competition increasing, what are retailers to do? Keep up with the Joneses and hope to remain viable, or take a risk and go against the grain to try to increase profits? While some retailers need to rely on discounting, I’d argue that most don’t.

I recently spoke with a fashion retailer who recognized the endless discount cycle dilemma. They had been stuck in this discounting rut, but did not want to be known as a discount brand. They prided themselves on making quality products at a reasonable price, and this constant discounting was bad for their brand and devalued their product. This past holiday season, they made a straightforward business decision: No guts, no glory. At their busiest time of the year, they chose not to discount.

Hello Guts, Meet Glory

While their competitors were running 30%, 40% and even 50% off specials during the busiest shopping period of the year, this retailer resisted the urge. As the season played out, they saw a 10% growth in total revenue until the last week of December (more on that below). On top of the 10% growth, their margins were protected. They generated 30% to 40% greater profits for those units sold.

This retailer also runs an annual day-after-Christmas and clearance sale. This year was no exception. But how would the previous non-discounting impact this sale? As it turns out, one side effect of the non-discounting strategy was that it created and satisfied the demand for a discount. This year’s clearance sale set records in volume of units sold, selling 10 times more year over year. It satisfied the demand of those looking for a deal while not taking away from their traditional after-Christmas strategy.

Having this conversation can be scary. Before you pull the ditch-the-discounts ripcord, first look at ways to strengthen your current brand positioning.

Focus on Your Brand

What does the brand stand for? How consumers perceive your brand can ultimately determine whether they will purchase from you without a discount, much less become a loyal customer. Consider brands that have a cause, like TOMS Shoes. Consumers connect with their cause and, because of that, they are generally willing to spend more on a product.

Does your brand focus on quality, value, customer service, personalized services, etc.? Do you have social causes? Do you convey this within your messaging on your website, email, and social profiles? If you remove or lessen discounts, consider whether you offer customers enough value-adds to purchase from you and not a competitor.

Planning for The Long Haul

Since you will no longer be relying on sending a generic 30% off promotion to drive sales, your general batch and blast email strategy will likely need to become a little more refined. You’ll need to maintain a more relevant customer experience. Focus on segmenting where you can. Include intuitive product recommendations inside your emails and on your website. Analyze your lifecycle messaging and determine how you can redesign them to provide the most value to the end user. Engage, I mean really engage, with your audience on social media. Ask questions, proactively comment, and deploy user-generated content to make the site and email experience better.

Evaluate Your Automated Marketing Strategy

When making the decision to pull back on promotions, the next step is to evaluate this strategy with your automated messages. If you have discounts in your welcome, post-purchase, shopping cart, or other automated message series, determine whether you want to maintain this strategy. In some cases, you may, as these messages are triggered from user actions. Since these messages are sent to single contacts, you may decide it is worth “rewarding” subscribers for engaging.

The Aftermath

Just because you no longer set the expectations of continuous discounting doesn’t mean you have to end discounting altogether. Occasional sales may ultimately carry more weight with consumers as they know deals are few and far between with your brand. This will also appeal to those consumers who specifically look for deals.

By avoiding blanket price discounts, you can experiment in configuring promotions. Consider free or expedited shipping promotions, for instance. These carry weight with consumers while protecting margins. Retailers can run promotions on grouped items instead of single SKUs, therefore increasing average order value while still protecting margins.

There is no one strategy for fighting back against deep discounting. Retailers will need to determine how far they are willing to commit to the strategy, and to what extent their customers are willing to tolerate the pullback. While the retailer I mentioned earlier plans on enhancing their overall strategy by refining their segmentation and timing of messages, I did ask him if there was anything he would do over again based on his experience. His answer, “Not really.” That answer is quite telling. Whether the success of this strategy is sustainable, only time will tell. But right now, this retailer is enjoying the glory.