Most Loyalty Programs Don’t Build Loyalty – Here’s Why

More than 90% of companies have some form of a customer loyalty program – but most of them don’t deliver the ROI brands are looking for.

While having a loyalty program is better than nothing at all, you won’t automatically see optimal results. Great loyalty programs follow a targeted strategy to drive LTV.

So why aren’t brands doing those things? Well, let’s talk about that..

Most brands chase lower CAC instead of increasing customer value

Loyalty programs work — if you can actually build loyalty. But many brands set up their loyalty programs and then place them on the back burner to simmer. Then they focus all their time and energy on pulling in new customers and lowering CAC.

Historically low CAC meant DTC didn’t need loyalty programs

DTC used to operate on the idea that as long as you acquire customers for less than it costs to keep them, you’re golden. In the past, this strategy worked incredibly well.

In 2013, CAC was as low as $9 per customer. That’s why the market saw mile-high valuations for DTC brands like:

• Allbirds 2021 valuation: ~$4.1 billion 

• Glossier 2021 valuation: ~$1.8 billion

• Casper 2019 valuation: ~$1.1 billion

Brands don’t see numbers like that anymore.

CAC has more than tripled in the last decade

CAC is at an all-time high: $29 per customer, a 222% increase over 9 years. With little chance that those costs will return to previous levels, brands can no longer rely on acquisition to drive growth.

DTC’s sweethearts have seen their valuations plummet accordingly. Allbirds’ valuation dropped 96%. Meanwhile, Casper nowhere near lived up to its hype and just sold its Canadian division for $20.6 million.

4 reasons why most loyalty programs don’t deliver

Today, the big question on merchants’ minds is, why chase lower CAC when you can increase customer value?

So, savvy brands started looking for any possible path to retaining customers (and increasing their LTV in the process).

According to the research, loyalty programs are a reliable strategy for increasing LTV:

• 84% of consumers are more likely to stay with a brand that offers a loyalty program.

• 66% of consumers say rewards program incentives change their spending behavior.

The problem is that what consumers say they do and what they actually do aren’t always the same. In fact, 23% of credit card holders in the US didn’t redeem any of their rewards in the past year– and the number one indicator of customer LTV in loyalty programs is reward redemption rate. This points to an issue with loyalty programs themselves.

1. The one-size-fits-all approach creates an awful user experience

Today’s internet is hyper-personalized. Platforms like TikTok and Instagram have algorithms that are excellent at figuring out exactly what you like and what sort of content keeps you engaged.

In contrast, most loyalty programs remain one-size-fits-all. Take Starbucks’ loyalty program: about 10 million people drink their coffee every day. Such a large pool of customers includes the widest array of buying habits. And yet, each customer receives the same points (in the form of stars) and discount rewards for their purchases.

Jacob Jaber, Co-Founder and former CEO of Philz Coffee, sees loyalty differently. In his words, it’s not about discounts or points — it’s about the barista knowing your name, order, and birthday. That acknowledgment and personalization forms relationships that keep people coming back to a coffee shop — in ways that a discount code never will.

So nix the one-size-fits-all program– it’s not working. Instead, show your customers what they mean to you.

2. Many rewards systems quickly lose momentum

Most loyalty programs aren’t gamified correctly– so customers quickly lose interest.

Simply put, points are too disconnected from rewards. Racking up the amount of points necessary to see a benefit takes so long or is so expensive that people lose interest. Not to mention that if they persevere and reach the points threshold where they’ve earned something, they return to zero once they redeem the reward.

Failing to gain customer interest means losing customer interest. People can take their business elsewhere at any time.

The tiered Sephora Beauty Insider program has a variety of benefits. For instance, Insiders can redeem 500 points for $10. It’s one of their most popular perks.

However, to reach “Rouge” status, the top tier of their Insider program, a customer must spend $1,000 in one year. Once Rouge members rack up 2,500 points, they get a $100 reward. But that perk is out of reach for most Sephora customers. The rest will lose interest before they ever get there.

3. Rewards can only be redeemed on a single channel

Most brands today are omnichannel, yet their rewards systems remain single-channel.

Today’s market is competitive, so any brand without an omnichannel loyalty program risks losing customers to brands with more evolved loyalty strategies. Brands should focus on customer engagement across channels rather than just encouraging them to build up purchase-based points.

Take the DSW rewards program – customers can achieve different tiers based on how much money they spend. Those tiers offer rewards like free shipping or extra points. This traditional program focuses on incentivizing more purchases, but they have no clear path to scaling it into a more advantageous customer loyalty program.

However, there is a way forward.

Hang integrates with all customer touchpoints. Take, for example, a coffee shop on Toast with multiple locations. They also sell beans through Shopify, maintain several social media platforms, and allow people to order their food on various delivery platforms.

These are all disparate customer touchpoints, but we connect them on the backend through their unique loyalty account so customers can earn points or redeem rewards, no matter how they’re interacting with the company.

4. The brand’s investment doesn’t justify the returns.

The average customer loyalty program costs $150,000 or more to build. That’s impossible to justify if its returns are low. This is especially true now that VC funding has dried up for DTC.

Not to mention, the people most likely to use your loyalty program are your best customers. They’d purchase from you anyway, so there’s no point in spending to drive sales that you’ve already won.

So what’s the solution? You need to offer rewards with high perceived value to customers but zero marginal costs to your company. For example, airlines offer their loyalty members seat upgrades — and doing so costs them nothing because the airline only upgrades the seat if no one has bought it, so rather than having their member sit in the economy seat they paid for, that person sits in business class and walks away feeling like a valued customer.

Other examples of great rewards are raffle tickets and exclusive access – more items with zero marginal cost.

Create a loyalty program that drives real value – for you and your customers

Great loyalty programs don't happen by accident. The best ones will have these three ingredients in common:

1. Personalization: Rewards are tailored to each customer based on their unique preferences. These brands leverage customer data obtained through the loyalty program to understand each person’s shopping habits and needs.

2. Gamification: Loyalty becomes a game that customers actually want to play. The best loyalty programs are genuinely fun and exciting. A structure that defines goals, creates a point system, and offers achievable rewards keeps customers interested and motivated.

3. Omni-channel experience: Offering customers more than one way to participate in your program drives outsized sales across all channels and gives them the option to engage in a way that works best for them. It also benefits your brand because you can obtain better data on your customers to gain understanding and offer more personalized rewards and experiences.

The best way to integrate all three of these areas into your loyalty program? Hang.

Here’s how our platform makes it happen:

1. Real-time machine learning to create smart rewards personalization for each customer.

2. Brandable minigames keep customers engaged and feeling rewarded.

3. Omni-channel loyalty connects your customers’ journeys across all touchpoints.

Reimagine your loyalty program with Hang

We’re proud to report that Hang drives serious value for our customers.

Take Boba Guys as an example. One of their customers had been dormant for nearly 2 years until they joined the loyalty program. That changed everything: the customer visited the store on 12 out of the next 15 days.

Overall, Boba Guys’ loyalty members visit 60% more frequently and spend 46% more than they did prior to joining the program. Boba Guys loyalty currently has an 8x ROI.

Your brand can see results like these, too. Book a demo with Hang today!