The Fatal Flaw in Loyalty Programs (And How to Minimize Damage)

demoted by starbucksLoyalty and rewards programs can be great motivators. When a business rewards the behavior they want from their customers – say, giving them a free coffee after they consume nine – they encourage that behavior. The most potent loyalty programs go beyond mere periodic freebies and confer status.

The masters of status-based loyalty are airline rewards programs. They not only offer benefits of great value, like free flights and free upgrades, they provide a major status incentive. Members are “gold,” “platinum” and so on depending on how many miles they rack up. These elite members conspicuously board airplanes ahead of the rabble, the passengers who merely paid for their tickets. These loyalty programs work, too – I encounter a lot of frequent flyers in my own travels, and they strive to move up the status ladder with their preferred airline, often at the price of less convenient flights.

When habits change
But, there’s a dark side to these programs. They reward those customers who are the heaviest users of the product, be it coffee or travel. But, sometimes, people change their habits. They change jobs and now find that a Panera is a more convenient coffee stop than Starbucks. Or they get promoted and spend less time as a road warrior consuming flights, hotel rooms, and rental cars.

While this is a natural turn of events, each company needs to deal with the issue of reducing status and benefits for members who no longer make the grade. Particularly when the benefits are limited in availability and of significant value (like unsold first class airplane seats that can be awarded to frequent flyers), loyalty program operators have to be sure they are allocating those benefits to their best customers.

Your Brain Doesn’t Like Demotion
Several elements of human psychology make status reduction tricky. First, we know that fear of loss is a bigger motivator than anticipation of gain. Even if one rarely used the benefits of being a higher status member, losing them will have an emotional impact. Second, people place a higher value on things they have. This ownership effect will magnify the value of what is being taken away. Third, to the extent that the original increase in status made customers feel better about themselves, removing that status will predictably have the opposite effect.

I’ve written both here (Starbucks Loyalty Fail) and more recently at Forbes.com (Starbucks: Loyalty Program Misfire) about Starbucks’s unceremonious demotion of Gold Card holders. In their attempt to mimic the status appeal of airline programs, the coffee chain issues its best customers with a special card (gold, of course) that serves both as payment card and rewards tracker. It’s imprinted with the customer’s name, and confers benefits like free refills on brewed coffee as well as periodic free items.

To the surprise of some Starbucks Gold Card members, if they fail to accrue 30 coffee purchases in a year, they lose their gold status and any accumulated points. They must start from scratch to accrue a new set of 30 purchases to requalify. This approach rubs some customers the wrong way, as comments on my Forbes post indicate:

starbucks logoAngela: “My 17 yr old nephew just informed me all of his stars got wiped off of his rewards card. Starbucks needs to rethink what they’re doing.”

Jill Moon: “I moved from a large city with a Starbucks on every corner and went nearly everyday to a city with one. I was one star away from a freebie and boom gone, gold status and all my stars. I sent an email to customer service and received a very generic form letter in return, very disappointing.”

Amber King: “Great way to lose customers. Just because you stopped buying from them does not mean you must get their stars back?? If this is their process, they should have informed or sent a warning to their consumers first.”

And, from Twitter, also cited in the Forbes piece:

More important, perhaps, is that customers expressed similar sentiments about other loyalty programs:

united-logoAllison Wroe: “…my 80-year-old mother was demoted by United and lost her miles due to account inactivity (she stopped traveling for a while after her husband passed away). They never warned her they were about to expire – she learned when she tried to book a flight… she has never looked back. Unfortunate for United because she tends to “gift” her family with travel – but never again on United.”

cathay-pacific檳 香: Cathay Pacific’s Marco Polo Club does the same… every time you are promoted or demoted to another level, or simply that the member year expires, the mileage count resets to 0. Once demoted to GREEN, you basically lose all benefits except for a Hotline number to call and check in at designated counters. I still fly frequently and would meet the standards, Since demoted from elite my loyalty to the airline is just gone, fare prices ranks higher than anything now.

best buy logoJonathan Kelly: This article reminded me of my experience with Best Buy’s “Silver reward membership.” After spending over $2500 in a calendar year, i made it to silver. I spent 12K the next year and close to 10K the year after that. This past year I only spent 2300 dollar by the time December 31st had gone by. Now I am no longer a Silver member. Really Best Buy? A guy spends 30 large in just over three years and then you take away the Silver card?

When a rewards program angers customers rather than making them feel good about the company or brand, it needs a second look. While I have no quibble with the need to reduce benefits to customers who are no longer as active as they were, any change in status should be accomplished in a way that minimizes any feeling of unfairness.

Here are my own rules for minimizing loyalty program dissatisfaction:

  1. Make the rules clear up front. People hate negative surprises, and one way to do that is to let them know what to expect when they sign up. Most programs do that, but most consumers probably pay little attention.
  2. Show progress frequently. If customers have no idea where they are in the process of earning rewards or holding onto their status, they won’t work to do either. Progress can be shown at the point of sale, by email, on receipts, etc. Counter staff could be prompted to offer verbal encouragement.
  3. Warn of impending status loss. Don’t turn a change in status into a “gotcha!” Let customers know in advance so they can take action if it’s important to them.
  4. Offer options if possible. Airlines will sell you “miles” to let you retain or advance your status. While it’s unlikely that coffee consumers would pay a fee to buy “stars” and hang onto their status, I wouldn’t rule it out. Consumers might not like the fee concept, but what if they were prompted, say, to add $50 to their card balance to retain their gold status? Or place a delivery order for coffee or accessories?
  5. Look at the customer’s history. Automated rules could grant customers with a strong history a last-minute extension to meet the criteria, or simply renew them once. The cost of this would be negligible for a program like Starbucks, even if it wouldn’t be practical for an airline.
  6. Watch out for “penalties.” Beyond the surprise factor when Starbucks customers are informed they have been demoted, the loss of collected points seems particularly galling. This may be typical for airline frequent flyer programs that reset each year, but seems like a penalty when it comes to coffee “stars.” It’s the perception of the customer that counts here.
  7. Give customers a head-start to requalify. Hand in hand with the last point, it’s important to recognize that this customer was a frequent consumer in the past, so give them an easier path to status than a brand new customer. Recognize their past achievements. This will ease the sting. In addition, if you give them a bonus of miles, points, stars, etc. to encourage them, the “goal gradient hypothesis” will kick in and further motivate them.

No loyalty program is the perfect motivator, but a few simple steps will prevent it from turning into a de-motivator for customers whose habits have changed, perhaps only temporarily.

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This post was written by:

— who has written 959 posts on Neuromarketing.

Roger Dooley writes and speaks about marketing, and in particular the use of neuroscience and behavioral research to make advertising, marketing, and products better. He is the primary author at Neuromarketing, and founder of Dooley Direct LLC, a marketing consultancy. Follow him on Twitter.

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14 responses to "The Fatal Flaw in Loyalty Programs (And How to Minimize Damage)" — Your Turn

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AspenSpin 31. July 2013 at 10:11 am

Thank you for putting this in writing. I’ve started calling them “dis-loyalty” programs. Have you ever tried to use frequent flier miles? Not so easy. I’ll never forget how United sent my recently deceased Mom a warning about her soon to expire frequent flier miles…a substantial amount of miles. When I contacted them about her death and the possibility of transferring her miles to her heirs…they insisted on a death certificate. That’s just what I wanted to do…run down to the Kinko’s and copy my Mom’s death cert. Thanks United. I never forgot that….and have not flown United since.

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Roger Dooley
Twitter: rogerdooley
31. July 2013 at 10:35 am

Sorry to hear about your Mom, AspenSpin. Nothing like a sensitive “expiration notice.” In defense of United, this is no doubt a difficult area to handle, both in terms of automated communications with millions of members and in transferring miles without being socially engineered.

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Medical Services Provider 1. August 2013 at 8:09 am

Great post! I totally agree with you – “No loyalty program is the perfect motivator, but a few simple steps will prevent it from turning into a de-motivator”.

I own a company that provides medical services, so the loyalty of my clients is crucial for my business. I tried to apply some loyalty programs during the last 3 years, but is not an easy task to do. However, the results are good and tey will be better, thanks to this post! Thank you!

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Doug Wack 2. August 2013 at 12:03 am

Great article, I tend to stay away from loyalty cards because I don’t want to rely on it and loose the status for some idiotic reason. Thanks for the great analysis!

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Tom Thirsk 5. August 2013 at 4:28 am

Great post on managing loyalty schemes. My favourite point is user progress in scheme and acknowledgement of retuning customer’s previous loyalty status. The death certificate request from the airline is heartless.

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Roger Dooley
Twitter: rogerdooley
5. August 2013 at 11:45 am

Thanks, Tom. I can’t totally fault United on the proof-of-death part. I’ve been through the process of executing an estate, and just about every entity will ask for a death certificate as well as proof you represent the estate before transferring anything of value, closing accounts, etc. If they failed to do so, they’d be liable if they allowed the wrong person to claim the money, air miles, etc. (On the other hand, creditors are less picky about the details as long as they are paid!)

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Randy 5. August 2013 at 9:49 am

This spring, I was one star away from earning my gold card and ZAP, everything was lost. All my stars were gone and the cashier suggested I get buying again to beat the deadline next time! Fortunately the barista jumped in and suggested I send a note to head office. I did, and promptly received a reply that my gold card was on its way.

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Roger Dooley
Twitter: rogerdooley
5. August 2013 at 11:36 am

Glad to hear they resolved your problem, Randy. But, your surprise loss of everything is exactly the kind of customer experience brands should avoid entirely.

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Spook SEO 6. August 2013 at 1:45 am

Interesting topic. While dealing with “demoting” (for the lack of a better word) a customer’s status can be very delicate, there are tons of ways to handle it.

I wouldn’t agree with Starbucks removing all the stars though. Perhaps they can demote the customers and not really change the name of their membership (and not remove all the stars in a snap). The thing with names is that it has a strong connection with the customers feelings.

They can try limiting the membership and still call it the same level. Perhaps removing a star (in Starbuck’s case). That way, the customers have a warning of some sort.

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Roger Dooley
Twitter: rogerdooley
6. August 2013 at 7:57 am

The problem, Spook, is that the more companies bake “status” and “prestige” into loyalty programs, the harder the fall is when you lose it. As you point out, we’re into the customer’s emotions at that point. And, they won’t be feeling good about the company if they think their treatment has been unfair in any way.

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Neel 8. August 2013 at 1:00 am

Really hats of to you Mr. Roger Dooley for amazing analysis. I like your rules about minimizing loyalty program dissatisfaction. I hope it will work for my future planning and thank you very much for sharing your thoughts.

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Laura
Twitter: lauragrace42
8. August 2013 at 9:54 am

HA! Yes. During college I was so proud of my Starbucks gold card. Their rewards program made my local Bucks my official study hangout. After graduating, my coffee volume dropped a bit, my card stopped working because apparently I was demoted and now that I am an avid coffee drinker again I have no brand loyalty. There is even a starbucks inside my office and I could really care less about the program.

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Roger Dooley
Twitter: rogerdooley
8. August 2013 at 10:24 am

Good example, Laura. Starbucks earned plenty of goodwill during your college years, and instead of building on that relationship they put it in peril with the demotion.

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Jordan J. Caron 18. August 2013 at 2:14 pm

Hey Roger,

Interesting post and topic. I do think there is a great way to offer a rewards program. Obviously there shouldn’t be an expire date. And I also like the concept of what Derek Halpern over at Social Triggers calls “artificial advancement”.

http://socialtriggers.com/get-repeat-customers/

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