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Why Are Companies Constantly Devaluing Loyalty Programs?

A woman pays for her purchase and earns reward with a loyalty program.

For years, companies large and small have offered loyalty programs to reward their customers, providing discounts, birthday gifts, and other special perks to keep their most devoted buyers coming back for more.

The idea was to show some love for existing customers as opposed to only grabbing new ones, encouraging repeat business. The strategy was smart, and it’s worked: a recent survey showed that 80 percent of American consumers belong to at least one loyalty program.

Yet many brands are now pulling back on these successful brand-building endeavors, citing their supposed drain on the bottom line.

Examples of Loyalty Programs Cutting Back

Dunkin’, for example, triggered an online backlash when it revised its rewards system to require customers to accrue more than twice as many points for free coffee drinks (and eliminated free birthday drinks), prompting one aggrieved consumer to write: “What idiot do you think I am, Dunkin’? I did that math.”

Meanwhile, the new CEO of Chili’s Grill & Bar last year clamped down on the chain’s beloved program that had included personalized rewards such as free appetizers and kids’ meals, “to the dismay of loyal customers.”

Related: Loyalty Programs Can Gain – Or Lose – A Customer’s Loyalty

The penny pinching has reached the point where the Associated Press this month christened it a trend, putting out an article headlined: “Companies rein in customer rewards programs.”

That’s not very rewarding.

In fact, it’s just plain bad customer experience. One expert acknowledged to the AP that businesses are worried the programs cost too much. But that’s backwards thinking.

While rewards programs need to be profitable, they are an unwise place to cut the budget. With companies already pouring money into sales and marketing as opposed to retention, the programs are a rare – and vital – way to keep existing customers happy. That’s why they exist.

And the biggest users of rewards tend to be the very best customers. If they bolt to a competitor, businesses will lose money in the end, along with people who could have been strong brand advocates.

Reinforcing this short-sighted thinking even more, some companies continue to devalue loyalty programs by letting rewards expire in often arbitrary time periods. Witness the stars added to accounts under Starbucks’s rewards program: they expire in six months.

I learned that the hard way recently when a bunch of my stars expired. And I’m at Starbucks multiple times a week. How does it make sense to deny the most valued customers what they’ve already earned?

A McKinsey study laid out the upside of smarter thinking. It found that more than 60 percent of members of a paid loyalty program – one that charges a participation fee – are more likely to spend money on that brand.

That’s some pretty stark business math.

Loyalty Programs Date Back Nearly to America’s Founding

Modern loyalty programs, experts say, originated in 1793 when American retailers began giving out copper coins that could be collected and redeemed for future purchases. Other pre-1900 innovations included stamps given to loyal customers that could be exchanged for various rewards.

The practice grew in the 20th Century, with Betty Crocker in 1929 becoming the first to introduce “box-top” loyalty cut out coupons, and it charged ahead even more after American Airlines introduced its frequent flyer program in 1981.

In recent years, loyalty programs have increasingly gone digital. Their purpose: to retain customers and build loyalty through everything from free goods and cash rewards to early access to sales and members-only discounts.

Experts strongly recommend the practice, yet even with the large numbers of loyalty programs, studies show that businesses focus far more on efforts to acquire new customers than retain them.

“Acquiring new customers costs 5 to 10 times more than selling to a current customer — and current customers spend 67% more on average than those who are new to your business,” says, citing Inc.

Why would companies exacerbate that disconnect by pulling back on the programs that reward their best customers? This is what happens when companies make business decisions based on the Finance department’s input, but not the Customer Experience department’s.

Rewards That Don’t Expire

Some companies look at every business decision through the lens of the customer.

During my tenure at Discover Card, the company eliminated expiration of its Cashback Bonus, instead moving to an automatic disbursement if a customer stopped using the card.

“We will credit your Account or send you a check with your rewards balance if your Account is closed or if you have not used it within 18 months,” reads the Discover website.

Discover knew that the expiration rule was originally put into place because the accountants worried about rewards dollars remaining as a liability on the company’s balance sheet. Standard accounting principles require that a company essentially set aside the value of the rewards until customers actually redeem them. For large companies, this can equate to millions of dollars.

But let’s get real: customers don’t care about a company’s accounting practices. And your best customers only stand to end up disappointed if their rewards are suddenly taken away.

More Companies Are Cutting Back on Loyalty Programs

Yet more and more, the trend is that companies are employing various strategies to reduce the value of customer rewards.

Red Robin, for example, recently added a dine-in-only and minimum purchase requirement to redeem a free birthday burger, while Best Buy changed its loyalty program so members can no longer earn reward points unless they pay with the company’s credit card.

Even a brand as widely recognized for good customer experience as Starbucks has cut back. The chain gradually limited the timeframe to redeem its free birthday drink or food item to just the date of your birthday. And this year, Starbucks changed its entire rewards program, forcing customers to pile up considerably more stars to earn free items.

In some instances, brands downgrade points and rewards in ways that are “tricky to detect,” such as when Hilton Honors increased the number of membership points required to book at many of its properties, devaluing accrued points. Airlines are also famous for this tactic.

And when Sephora announced that it was instituting a $25 minimum purchase to redeem a Beauty Insider birthday gift, one Twitter user wasn’t subtle about her displeasure.

“Burn Sephora down!” she wrote. Yikes.

Focus On The Customer

While violence of course is never a solution, her angst is understandable. While cutting rewards might temporarily enhance a balance sheet, companies should take the words of their experience professionals over their accounting teams on this one.

As one expert said, pulling back perks actually discourages “retailers’ devotees from being loyal.”

Related: Why Do Customers Love Certain Brands?

That’s the exact opposite of what any brand should want. As they consider whether to go along with this disturbing trend, companies should be mindful of the broader impact – financial and otherwise – of these types of decisions.

As always, they should put their customers first, especially their best customers – giving them even more flexibility and benefits, so they can be rewarded for their loyalty.

Photo by Blake Wisz on Unsplash.

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