Loyalty Program Pitfalls: Mistakes Retailers Make & How to Avoid Them

In this ever-evolving retail landscape, many marketers are rolling out loyalty programs that seek to appeal to the growing generation of shoppers. Do you know that out of 14.8 memberships, an astonishing 6.7 remains active? Despite the rising popularity of such programs, we see how they bear the costs of incentivising customers in the wrong ways and failing to turn them into brand advocates.

In this co-authored blogpost Kelferd Hor, Chartered IT Professional, Digital Banking Innovation, BCS and Dhawal Shah, Regional Managing Director, 2Stallions Digital Marketing Agency share why loyalty programs often fail and how to avoid pitfalls.

Loyalty Strategies: What Keeps Customers Versus What Drives Them Away

With the rise of digital media, mobile apps and social adverts have emerged to grab the attention of online consumers. Loyalty programs are no exception.

Those high-performing programs enabled retailers to unlock revenue potential and keep customers engaged. On the other hand, the unsuccessful ones include built-in features that pay little to no attention to what they value. They tend to suffer from high operating costs, undesirable customer behaviours, and may increasingly become a source of distraction.

The following are some of the common problems retailers run into:

• Treating them “as an afterthought” and running these programs for the sake of driving up customer engagement because they are “good-to-have"

With every new customer costing the retailer between 5 to 25 times higher than keeping an existing one, it is paramount for retailers to create loyalty programs that enhance the member experience for increased engagement, rising ROIs, and improved retention rates.

Kelferd mentions “one of the most prominent strategies is member to member referral mechanism.” For instance, a tiered incentive mechanism could be applied for both referrer and referred customer upon sign-up, verification and after first purchase etc.

• Inefficient data collection strategy

Finding the right balance in data collection is crucial. Too much data collection can create a cumbersome registration process and deter potential members joining, while data scarcity limits a retailer’s ability to target consumers and offer customised product recommendations. With 91% of consumers seeking to exchange personal information for exclusive membership rewards, building a robust customer database and redesigning its infrastructure are increasingly an imperative.

A retailer that showcases its strategies in collecting customer data is Uniqlo. “The app captures customer information such as address, full name, phone number and birthday when their motivations are high.”

• Lack of Personalisation and Segmentation

Dhawal notes that, “many retailers launch loyalty programs with a "one-size-fits-all" approach, assuming all customers have the same needs and motivations.”

He shares that most brands do not use data-driven insights to segment customers based on purchase history, engagement levels, and demographics.

Personalised rewards, recommendations, and communication help move customers down the funnel more efficiently.

For example, a growth strategy that retailers could use is rolling out personalised discounts for high-value customers who are at risk of churning based on their inactivity over a specific period. 

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• Insufficient Integration Across Channels

A blind spot that retailers fail to catch on is the fact that they do not integrate loyalty programs across their digital and physical channels, leading to fragmented user experiences.

Oftentimes, brands might have a loyalty program on their website, but it doesn’t translate in-store, or vice versa.”

He then shares an omnichannel strategy retailers can hop on, “using push notifications or retargeted ads to remind users of unredeemed points or exclusive member-only sales helps re-engage them effectively to revisit the brand store or website and make a purchase.”

• Neglecting to Create Clear Value Propositions and Rewards 

Dhawal states that “some loyalty programs lack tangible or aspirational value, offering rewards that are too hard to redeem or do not align with customers' preferences.”

Brands need to focus on customer journey analytics to identify points where there is an increase in customer churn due to low perceived brand value or a lack of engagement.

Sometimes, “what the brands thinks the customer values may not be the case.” For example, retailers can offer instant gratification options, like free shipping after joining, and carry out A/B testing to see which rewards lead to faster retention or increased cart size.

Measuring Their Success

Here are a few Key Performance Indicators (KPIs) retailers should track to measure the effectiveness of the loyalty programs they’ve launched.

• Enrolment Rate

In the early stages of implementing a loyalty program, we can measure its effectiveness by looking at the enrolment rate, which should ideally be higher than the churn rate. Kelferd believes so as “this indicates that the loyalty program is growing its membership base and successfully attracting new customers while retaining existing ones.”

• Engagement Rate

This refers to the percentage of enrolled members who actively engage with the loyalty program by collecting and redeeming points they have earned. Key metrics for measurement could be # of transactions, points earned and # of points redeemed.

Dhawal notices that many loyalty programs fail because customers sign up but do not actively engage. Hence, there is a need to “measure how many new members engage with the program through actions such as point redemption, reward claims, and personalised offers.”

He offers a tactical insight, “funnel analysis can identify where drop-offs occur, such as if customers sign up but never redeem rewards.”

• Customer Retention Rates

For a stable or mature loyalty program (e.g. 3 years in operations), maintaining a stable membership base is crucial as this group of customers are stickier and would continue to support your business. Kelferd says retailers should track KPIs like Daily Active Users or Monthly Active Users.

On the other hand, Dhawal also believes that one of the key metrics is higher retention rates as they indicate that the loyalty program is successfully engaging customers and moving them through the loyalty funnel. To track this, he says a retailer should measure the percentage of customers who return to make repeat purchases over specific time frames after joining the program.

• Customer Lifetime Value (CLV)

CLV shows how much value a customer brings over their entire relationship with the brand, indicating how impactful the program is.

Dhawal believes we should compare CLV of loyalty program members versus non-members. “A successful program should increase both the average order value (AOV) and frequency of purchases.”

• Incremental Revenue Contribution

This metric assesses whether the loyalty program drives additional revenue that would not have occurred without its launch.

Dhawal says to “conduct A/B testing by comparing revenue from customers who are in the loyalty program with similar customer segments that aren’t. Look at campaign-driven conversions and reward-driven upsells.”

Advice for Retailers: Remastering or Kickstarting Your Program

The foundation of a successful loyalty program bridges the growing chasm between brands and customers.

• Empathy Is Key

A word of advice from Kelferd is to conduct customer surveys and focus groups to gather actionable insights for improvement.

“Survey with Likert scale from very dissatisfied to very satisfied can be used to measure the satisfaction level of the existing program. Area with lower satisfaction score will require more attention for improvement. Focus group can be used to understanding competitive landscape to discuss what members like and dislike about other loyalty programs they are currently using, this could provide valuable competitive intelligence and generate new ideas. By using both surveys and focus groups, retailers can gain a comprehensive understanding of their members' needs and preferences, leading to a more effective and engaging loyalty program.”

For app-based loyalty reward program, retailers could consider developing a Minimum Viable Product (MVP) to obtain early feedback and validate the assumptions about their users’ need and preferences. They should also incorporate early users’ feedback to make improvements and develop future iterations of the loyalty reward app.

Kelferd emphasises, “remember, you must love your product first in order to market it well.”

• Build a Data-Driven Feedback Loop

On the other hand, Dhawal urges retailers to leverage on “real-time analytics and attribution tools to continually optimise the program. Create dashboards that track member behaviour and key touchpoints along the funnel to make agile adjustments.”

• Focus on Community and Exclusivity

Lastly, Kelferd shares an example of a retailer, Shopee, who leads the charge with their user engagement strategy. Through daily check-ins on the app, Shopee members will receive Shopee Coin, which can offset the purchase value on selected products available on its platform. Customers can also earn Coins after playing games through the mobile app.

“Loyalty is more than just points; customers want to feel valued. Implement exclusive perks like early access to sales or member-only experiences” makes them feel like they belong to a community of like-minded individuals.

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