Why Large Rewards Programs Failed and What You Can Learn From Them

April 2018

Most of marketing pros state a rewards program is a must-have for a customer-oriented company. Perhaps, you’ve already had one developed. Is your loyalty program one of the most valuable assets of your business? What if it is designed not well enough, and can hamper prosperity and slow down the margin growth of your company?

A surprising study carried out by McKinsey&Company A recent McKinsey study suggests that on average, they do not — and may in fact destroy value for program owners. The study, involving 55 publically traded North American and European companies, showed that those that spend more on loyalty, or have more visible loyalty programs, grow at about the same rate — or slightly slower — than those that do not (4.4 vs 5.5 percent per year since 2002). Notably, this trend appears to vary by sector, with loyalty focus having a positive impact on hotel growth, but negative impact on airlines, car rentals, and food retail, for example. However, as a whole, companies surveyed that had higher loyalty spend also had EBITDA margins that were about 10 percent lower than companies in the same sectors that spent less on loyalty. discovered companies that used greater budgets for developing loyalty programs grew approximately at the same rate or up to 4% slower that companies who didn’t. The agency researched more than 50 publicly traded companies.

Does it mean there is no need is wasting money on building customer loyalty?

By 2015 more than 3.3 billion US consumers became participants of various rewards programs – here you can check figures per industry. And the number is growing. However, enrollment doesn’t always imply engagement. The McKinsey study shows how many loyalty programs are poorly executed. Genuine rewards programs for retail businesses add 5% to customer retention level and, as a result, boost profits up to 95%

A rewards program is a powerful instrument for customer involvement and retention: when it is executed right.

Here are a few case studies showing weaknesses and fails of world-known retail companies when creating their rewards programs:

1) Starbucks

Starbucks Rewards enrolled 12 million customers and was considered to be a gold standard for loyalty programs. It helped to increase the revenue to $2.65 billion. The key was its smooth design, easy communication, outstanding mobile experience within smart omnichannel solution and customized rewards.

A few words about Starbuck’s mobile app: it is developed using the hottest M-Commerce tips including maximum interaction, gamified experience with collecting Stars, easy mobile order and payment systems. The app generates about 6 million sales monthly and covers almost a quarter of all US Starbuck’s sales. It proves that a good mobile app can make any rewards program special.

However, in 2016 the company decided to introduce changes. Previously customers collected 12 Stars – 1 with each purchase and could get a free beverage of snack of their choice. Then the company decided to reward only “premium” clients, willing to spend more. Every dollar spent provides 2 Stars, and a freebie is given to those who hit the mark 125, i.e. spend around $63. Such a revolution seriously discouraged a major part of customers including black-coffee-lovers and led to a 50%-decrease in the company’s buzz score just in 8 days.

Lesson 1: A loyalty program makeover can be successful, when it remains simple and offers value to the most customers possible. If you want to target more payable audience, make the transition smoother for the rest of your customers by providing something special for them too.

2) Tarte

This cosmetics brand provides a great example of rapid company reaction to customer feedback and learning from their mistakes. Tarte ‘Pretty Perks’ rewards program was outstanding: it gave a token for every dollar spent or for every product reviewed and rewarded most active brand advocated with 10 tokens for an attracted referral. Tokens could be redeemed to valuable goods or additional services.

The only problem aspect was thousands of customers outside the USA who had no opportunity to redeem their rewards and felt disappointed. After receiving some of the customer complaints, the brand reacted immediately: in a few weeks ‘Pretty Perks’ was replaced with beautifully designed ‘tarte Rewards’. The latter implied more opportunities to get and redeem bonus points, well thought-out tiers with special appreciation of VIP customers and, of course, international customer involvement.

Lesson 2: If a rewards program makes some of your customers disappointed, do your best to act rapidly and openly to resolve problem issues to turn unhappy customers to your most passionate brand advocates. In addition, tarte proves that program VIP tiers with exclusive offers, deluxe samples and surprise gifts is a great way to make your luxury-segment customers feel especially valued.

3) Microsoft Xbox Live

There is hardly any online video game fan, who has never heard of this subscription service. Members can join Xbox Live Community for $50 annually. To win more loyal customers, the company started its Xbox Live Rewards program with multiple ways to get bonus points. Users can redeem points to purchase new games, get improved avatar images, better outfits for their game characters and a lot of other benefits. However, users have found a significant drawback of the rewards program: its birthday gifts for subscribed customers.

In 2012 Microsoft Xbox started sending so-called birthday presents: 20 points, which are equivalent to $0.25 and are perceived as nothing but mocking. Twitter exploded with angry and sarcastic posts about Xbox being that generous.

Lesson 3: Take your time to research customer profile and customer motivation to avoid a mistake like that. An inspiring reward doesn’t have to be expensive, the value is perceived subjectively. You can give away additional services – in case of Xbox this could be free trials of new products, exclusive customization offers or 1 extra month of subscription.

Here are TOP-5 loyalty program fails a lot of businesses don’t even notice:

1) Excess reliance on discounts

Routine delivery of discounts can minimize margins and endanger company’s financial stability. Thoroughly develop the rewards program economy and diversify the rewards not to get trapped in a vicious cycle of discount-based competition with other brands and keep healthy economic performance of the company. How much a company can spend on a loyalty program? How much of it can be allocated for providing discounts?

2) One-size-fits-all approach

One-size solution is great for clothing manufacturers, but not for a successful rewards program. An average American household is a member of 29 loyalty programs, but is active in 12 – according to the statistics provided by The 2015 COLLOQUY Loyalty Census. One of the reasons for such a low program engagement is lack of differentiation: active customers don’t feel they are appreciated and are not likely to become brand advocates. Differentiation and creating tiers is a powerful tool of gamification.

3) Making a reward program a one-way match

Irrelevant rewards associated with an opportunity to upsell or cross-sell are very discouraging for customers. On the contrary, well-developed rewards programs are trying to provide customers with what they actually want or need. Bond Brand Loyalty Report proves this approach: authentically fulfilling customer needs is vital for increasing customer involvement.

4) Inability to evaluate the program efficacy

The abovementioned study carried out by McKinsey&Company discovered the success of many rewards programs is estimated wrongly. There are two reliable indicators:

  • Participation rate – successful loyalty programs have an average participation rate around 40%.
  • Redemption rate – the goal is to beat 13% points or 75% rewards redemption rate.

5) Underestimating the reflection on the brand

Bond Brand Loyalty Report found out that more than 75% of the surveyed US residents consider rewards program a major factor influencing brand reputation. A fact worth consideration: 1/3 of respondents confirmed their brand loyalty was built up by a loyalty program.

More and more brands tend to develop rewards program within a mobile app to keep in touch with the customer and provide seamless communication with the brand. Below we gather up the most valuable YES/NO tips for loyalty programs within the brand’s mobile app:

Signing up

Yes: Mobile users are picky and impatient. Deliver value to your customers quickly and easily. If you can remove a few fields from the sign-up form – do it now. Your customers can fill out additional fields later, when they will be going to get their freebie or other perks. Confusing sign up process is a mauvais ton for the entire mobile development area.

No: Statistics show that up to 70% of customers discontinue or postpone signing up, when the forms are too extensive or the navigation is too complicated. Ask yourself: what can be learned about the rewards program and its principles prior to registration? Users should be interested to sign up to start receiving points in a few clicks. A good idea is to provide welcoming points and then give an outline of how to get more and how to redeem.


Yes: Invest in a responsive app interface and attractive design to make customers feel the whole world of the brand is at their fingertips. Check it twice before you go, as app technological troubles, when it comes to redeeming points, for example, can seriously damage brand reputation.

No: Saving on app development can lead to increased customer retention expenses in the future. Mobile development should be profound and performed by experienced specialists; this is not a thing to cut costs at.

VALFOR Company is confident that the technological solutions it provides correspond to customer expectations. We include active customer development in digital product design and work within SCRUM framework. At the end of every sprint, ready software elements are thoroughly tested by our development team and then approved by the customer. In addition, we create a focus group that represents final product users to test the software UX.

Program explanation

Yes: Collecting points is still the most popular loyalty program basis due to its simplicity and familiarity for customers – it has been used by businesses for over a century. You can add more interesting rules, terms and tricks, but make sure you provide a comprehensive visual explanation of how it works within your app.

No: Both too primitive and too sophisticated rewards programs are most likely to be a failure. We’ve already mentioned that former types don’t include customer differentiation the way people expect (the Law of Diminishing Marginal Utility). At the same time too sophisticated programs are just extremely difficult to be communicated to the customer in a simple way.

Delivering your loyalty program to customer mobile phones should include implementation of hot trends and valuable experience in mobile development area. VALFOR Company is a great partner for businesses of any size and in any industry. We assist in functionality improvement for mobile and omnichannel communication with customers moving the brand recognition to the new level. Our company scrupulously works on every indicator to evaluate the performance of your company.

Our customers are retail businesses including stores, warehouse and logistics organizations.

We have enough talent and technological solutions to support our ambitions and remaining one of the top companies in the industry. Contact us for details.

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