6 Reasons Why Customer Loyalty Programs Fail

As a blogger and author, I continuously find myself reading smart/pithy lines from other bloggers and authors that I wish I had written. Marty Neumeier’s book, ZAG, is chockfull of so many smart/pithy lines that this blogger and author is envious.

I’m especially envious of how Marty breaks down the fallacy of loyalty programs like “frequent shopper” programs from retailers. In TRIBAL KNOWLEDGE, I write about the fallacy of loyalty schemes but Marty’s musings on why loyalty programs don’t work is BRILLIANT. His brilliant take makes my take rinky-dink in comparison.

On page 100 of ZAG, Marty outlines six reasons why customer loyalty programs like “frequent shopper” cards don’t work.

"... and here are six reasons why [loyalty programs don't work]: 1) Loyalty programs are based on discounts, which ‘train’ existing customers to expect low prices and wait out normal prices, 2) They attract loyal customers who would happily pay a premium, 3) they discourage new customers by making them feel punished or excluded, 4) they encourage competitors to retaliate with me-too programs, 5) they reduce profit margins, which 6) reduces the company’s ability to serve customers at formerly high levels.

The truth is, loyalty can’t be programmed. As soon as customers begin to feel ‘stalked,’ they choose ‘fight’ or ‘flight.’ They either figure out how to game the system, or else they run to another brand.”

Dang. I wish I had written that!

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All week I am sharing snippets from ZAG. Here’s what I wrote on Tuesday.

Comments

[Kent Zimmerman]

I totally agree with this....and wish that I had said that as well! I briefly touched on this subject in a recent post on my blog Background Noise. Unfortunately, so many retailers feel that this their only avenue to a "loyal customer", and more importantly the only way to track their behavior. The number of truly loyal customers that they are alienating is probably staggering.

[Jasper Amsterdam]

Hmm I want to feel this is right but, when did starbuck quit their cardsystem? Was is right after they decided not to focus on being the biggest by aplying cannibalizing strategy amongst other tactics that led to the 13000 stores they have now?

[johnmoore (from Brand Autopsy)]

Japser ... SBUX stopped doing "Buy 9, Get 1 Free" cards in the late 90s. The beverage frequency card was primarily used by SBUX as a "limited-time only" marketing tactic to support new stores. Once the store was opened a few months the program would typically stop. However, you might still be able to find a local SBUX doing this but that would be a market-specific program and not a corporate-driven program.

The more well-known "frequency card" program SBUX used in throughout the 90s was the Coffee Passport program. If customers purchased a certain number of 1/2 lb. or 1 lb. bags of coffee, then they were given free coffee. This Coffee Passport program is one that's beloved by old school SBUX partners as its part of the company lore. Customers also enjoyed the program.

The SBUX thinking behind stopping these frequency programs is 'Why give something away for free when customers will gladly pay for it.'

Also, customers would "game" the system by saving receipts and simply turn in receipts to receive their free stuff and not use the beverage or bean frequency card. That made for some dodgy customer interactions that SBUX decided it didn't want to deal with.

SO yeah ... profitability as well as customer service concerns played a role in SBUX stopping their frequency card programs.

[Jasper Amsterdam]

Sorry for my emotional reaction, i was under the impression the "starbucks card" was offering some kind of discount.. but appearantly i doesnt. I live in a country where there is no starbucks (yet) and work for a small chain (10 stores), about to grow substantialy(50). Since day one we have a prepaid customer cards wich offer a discount price for each drinks. I think it will we be hard on our loyal customers to stop offering this service.
Thank you for your reaction btw. i'm loving your blog and book and feel its helping me alot managing the brand.

[smoovebcoffee]

How does this advice account for the rise of foursquare and similar sites? I find foursquare oddly compelling and end up checking-in (being loyal) to locations that don't directly pay me a dividend to do so. The new starbucks reward program has a couple of these winning elements that could make their loyalty program more game-like and interesting, but they could use more (example- "try all the new sandwiches on the menu, check in, and we'll give you a coupon for a sandwich of your choice").