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

Loyalty 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:

Angela: “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:

Wtf Starbucks DEMOTED me from gold to green & erased all my stars! Stopped using cuz the app wldnt reload with cc. Way to lose me for good!

— Shannon Manning (@shannonmanning) February 14, 2013

@sh I know I haven't been spending $8 a day there for awhile but WTF. I am so mad, stupid @StarbucksCard @Starbucks !! OVER THEM.

— Emily (@emilyrm) February 28, 2013

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

Allison 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’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.

Jonathan 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.