Why your loyalty program needs to change

by Kate on September 29, 2012

Starbucks tall vanilla latté

What are loyalty programs really about?

Starbucks encountered a bit of bother recently when they announced a change to their loyalty program. Customers were vocal about their upset when the Seattle coffee icon said “No more free soy or syrup”. What they did was take away a discount for a chunk of people who felt they were entitled.

Naturally, there has plenty of suggestion it could have been handled better.  Perhaps it could. Still, I’d expect someone at Starbucks to have anticipated there would be a frenzy of comment on Facebook, Twitter and the Starbucks blog. Probably unavoidable, and in a few weeks it will all pass.

But there are some interesting things to look at apart from the social media storm. And they might cause you to consider whether your loyalty program is due for a change.

A loyalty program is part of marketing intended to drive profitable business through the door. It should produce a return for the money invested in the program (eg the soy milk, syrup and food given away). This happens when the program leads to increased sales or reduced costs. For example, when it leads to:

  • More customers or higher customer retention
  • Increased value of sales to each customer
  • Increased frequency of purchase
  • Reduced cost of marketing or business operations

The customer gets a reward, but the program is there to create business. So at some stage, it will be necessary to look at the program and evaluate it. For a financial person it’s straightforward – look at the costs and returns. If the numbers don’t stack up, there are questions to be asked about the program.

It looks like the rewards program was set up so Starbucks was giving free soy and syrup with any sale to a person who had purchased more than 5 drinks. They weren’t just rewarding loyalty, or trial of a new product, they were routinely giving away something that costs money. Sounds a lot like a discount, though no discount if you don’t want soy or syrup.

As the program becomes more popular it costs more to execute as soy and syrup fans pile in for their freebies. Meanwhile, someone would be asking whether sales revenue is heading in the right direction, and is this attributable to the program. Perhaps it worked at first, but things change over time and it’s simply good practice to review. Without this, costs keep increasing, profits and squeezed and cuts must be made elsewhere.

Many businesses are operating in an environment where sales growth is harder to achieve than in the past and costs are under pressure. Adjustments must take place to the way things are done so they can manage costs and maintain profits that allow reinvestment and dividends to shareholders. Sometimes, that means decisions which some people won’t like, but that’s business.

 

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