The Loyalty Illusion: Why Points Don’t Create Love

0:00Was interested in there was an article I saw that was talking about the loyalty illusion and loyalty penalty and things like that and talking about loyalty programs and things like that was talking about loyalty. Insider reports that U.S. consumers lose billions in value each year from loyalty programs that quietly devalue the rewards, hike costs, or trap customers in a loyalty penalty. So today we're going to unpack why most loyalty programs don't work, how to audit yours if you already have one, and how to build one that actually drives customer love and profit.

0:49Hey everybody, welcome to the Business Lunch podcast with your hosts, my wonderful partner Ryan Dice and myself, Roland Frazier. Ryan, how are you doing today? So dang good because I got to hang out with you all last week. That was actually really fun. Good meeting with our founders board members at the meeting and then also wonderful dinners courtesy of Chef Adam and some pretty good wines courtesy of the folks in France and California. Yeah. One of my favorite things in life is just getting to walk into your wine cellar and just, just pick. That was fun. I was surprised. I had told Ryan, I said, I said, pick whatever you want.

1:33And, and I liked the selection. It was, it was a deep cut selection. Yeah. Which I thought was pretty fun. Yeah. I mean, you know, you have everything pretty much. I mean, if, if you know anything about wine, Roland's wine cellar has everything. I mean, it's got all the best stuff, period, bar none, you name it, it's in there. But there are a lot of great wines that you can get, right? Like there's some amazing wines that you can find. And then there's some amazing wines that you just can't get anywhere. And so, but that may not be considered like some of the crazy cult, you know, type stuff. And so, yeah, I opted for some of the ones that - Actually, you chose a crazy cult wine.

2:15It's just a lot of people that know the big famous names don't know the, that that is a cult one, which is, that's the best, you know? Maybe one of these days for our super secret insiders, we'll tell them exactly what the wine was. Yes. I like it. I like it. Cool. I was interested in, there was an article I saw that was talking about the loyalty illusion and loyalty penalty and things like that and talking about loyalty programs. And so I thought that was really interesting. So here's our hook today, basically. Have you ever noticed how your internet bill quietly creeps up after the first year or how your airline miles seem to buy you less and less?

2:57Yes, I have. So, Business Insider reports that U.S. consumers lose billions in value each year from loyalty programs that quietly devalue the rewards, hike costs, or trap customers in a loyalty penalty. So, today we're going to unpack why most loyalty programs don't work, how to audit yours if you already have one, and how to build one that actually drives customer love and profit as opposed to holding them hostage. So, that's what we're talking about today. And I just wanted to see first, do you have any thoughts on this? Have you experienced this loyalty issue that's going on? Yeah, as a consumer, I have.

3:33And I'll tell you, it's so frustrating. And they do such a good job of pencil whipping you that I've kind of given up. Right? You know, I have too. Like airline models especially. Yeah. Yeah, because this used to be your thing. Like you would, you were the loyalty guy. Like you would, the points guy. Like you would be the person who would be optimizing all the points. and I've got tons of points. I've got tons of Amex points, tons of American Airlines points, like all the points. And they've done such a good job of making it such a gigantic pain in the ass to use that I've just given, they won.

4:07They won. But I'll tell you, as a result of it, I'm no longer loyal to anyone. So I guess mission accomplished. Definitely not mission accomplished. Right, exactly. Yeah, I mean, I guess mission accomplished. And you know who did this? the people who did this were the financial folks. I will guarantee you somebody with a finance degree sitting at the office was like, you know, we could just make these couple little changes here and there. I bet nobody would notice and look at all the money that we could save. And they're they're spreadsheeting these things to death. And they won. They got their way.

4:47And as a result of this, they've effectively killed the loads program. So no, I don't do it. I don't do them anymore. For you, and I didn't take the time to research this because I didn't think of it now that we're talking about it. But for me, I'm in the same place that you are. And so I wonder how many people are there. I do know that we are blessed and fortunate enough to be able to afford to buy what we want to buy generally and fly the class that we want to fly and all that. I don't anymore want to take the risk of not getting first class. For example, I don't want to take the risk of being on a flight that has 14 connections.

5:24I don't want to take the risk. I don't get the hotel I want or the room that I want at the hotel. And I'm perfectly, I can tell you basically what I used to do and the benefits I used to get, which was probably six figures a year of benefit. I just don't care about anymore in terms of choosing a particular provider. I do enjoy that all my business stuff, I run through my credit card and therefore I have lots of miles. And now I just take the stupid paltry, like a penny a mile, basically thing. If you've got a million miles, you can get$10 ,000 worth of stuff. And I'm happy that I can click on the use your points for that, you know, use your points as dollars.

6:08and so that's nice but it doesn't keep me with American Express or anybody else definitely Marriott lost me years ago we had because of our event before remember that super high Marriott thing and actually because of the Centurion card we have the highest loyalty thing on a lot of other things but it's like you said it was just such a hassle even signing in because they ended up going with like pass keys and all these things I just I don't care it literally has zero impact on any loyalty for me. And like, honestly, if it didn't pop up as something I could click and use, I wouldn't do it. So the next thing for the brilliant finance MBA graduate to do is just go, Hey, people don't care.

6:48Let's just save all that money too. And just obliterate all loyalty programs. So is there a place for them still? Do you think? I think what there, I think there's an opportunity now for somebody to come back and actually do it right and be loyal again. And I'm thinking about, I think that we have reached peak disloyalty. And I'll tell you why I think we've reached peak disloyalty. Because if I were to ask probably 20 people on the street, hey, define a brand that really is known for customer loyalty, customer love, just that their customers really do like them and they seem to really like their customers.

7:30The name that I bet would come up more than any other is Southwest Airlines. That's the name that would come up more than any other. And yet Southwest Airlines has now done away with all of the things that everybody loved about them. Bags used to fly free. Now they don't, right? They're like every little thing that they used to do that made them what they were, they now have gone away with. So I think that this is going to create an opportunity because there's going to be so much contrast for somebody to once again compete on just simply being nice and friendly, where before it might've gotten a little commoditized.

8:11Yeah. I think there's a disconnect between the goal and how they're getting the goal that they want. And so I want to talk first, like about the loyalty penalty. So if you haven't noticed what Ryan and I have noticed. Basically, the concept is that the loyal customer actually ends up paying more than new customers because loyalty programs aren't as good as incentives that are put out to get new customers. And this is constantly annoying to anybody that's got like internet or streaming rates on cable packages. Quit and then go back. You'll get a way better deal than if you stay. My phone company.

8:49How many times have you talked to your cell phone company where you're like, hey, are there any better plans now? Oh yeah, there's this one would save you this much money. I'm like, why don't you just tell me that? And I know that it's a financial reason, but it's so disrespectful to your customers that are there that it's really annoying. Car insurance premiums are raising year after year, no matter how good a driver you are, you get these discounts when you start and then they dissipate. Airline miles we talked about. I like this. This is Wharton's, Peter Fader said, true loyalty is when people stay even though they could switch, not because they're trapped, not because the switching hassles that much.

9:27And this is the disconnect to me, as Accenture found that 57 % of consumers spend more with brands to which they feel emotionally connected, but 71 % of loyalty programs fail to engender that connection. And that to me is the disconnect is, is we want people to be emotionally connected and the loyalty program should make that happen. But what is it? 71 % of them fail to achieve that objective. So I like, that's to me, something very wrong with the way people are doing loyalty. Yeah. And that's really what I was, what I was trying to say when talking about Southwest Coast Airlines is that is the opportunity.

10:09That's the opportunity right now that every single brand seems to have let go. And certainly all these brands, they basically said, let's replace these very hyper transactional loyalty programs for actual customer loyalty, for actual brand liking. They don't have to like us anymore if we just put them in a program where they get stuck. And I think what these brands are now finding out is that that's not good enough anymore. And it's not good enough when everybody's got one of these loyalty programs. And it's not good enough now that they've started pencil whipping all their people. And consumers are waking up to the reality that these deals just aren't good.

10:52But I think it's creating opportunities for brands who are just willing to do a little bit of customer bonding. It is. There are other drivers, though. And I think it's going to be, it's kind of the sequence that built it. it will fall apart this same way because I didn't really understand this until, you know, we started looking into it, but the airlines actually receive more from selling miles to credit card companies than they do from flying passengers. $25 billion a year. Good God. That's insane. Right. And now that's called all their margin, right? It is. That's because the people that are looking at credit cards, including me previously, are looking at it and saying, yeah, I want one mile or five miles for every dollar I spend on my credit card company.

11:42And so, I mean, on my card. And so I'm going to choose that card, although I'm not really inclined to switch at this point. And so that's what they're using to drive new people in, but that's only because the miles are perceived as valuable. And as the miles are devalued because they're not treating them right, this will ultimately disappear as a way to get revenue because nobody's going to care. And then the credit card companies are going to stop buying the miles from the airline companies because the promos aren't going to work. And so like it is ultimately destroying$25 billion a year of value by devaluing what they've got, especially since the breakage is, is so high.

12:21And the other kind of things that are going on right now is these frequent flyer programs are shifting from distance flown, like you used to get a mile for every mile that you flew, to dollars spent. So that you basically just get credit for the dollar you spent, which is way less than miles. So that's kind of an interesting thing too. It was less expensive for them to give two or three or five miles per dollar spent that sounds better than give you 700 miles credit for the flight that you flew that was 750 miles. Like that's, that's an interesting thing to think of too. And so, um, British Airways, uh, they raised the thresholds and I'm a British Airways.

13:04I forget what the name of the thing is member. I don't even use them anymore. Uh, they scrapped the distance based tiers. Um, there was a huge customer backlash from it. So basically there was press, the loyalty scheme is dead and all this. So like, it is something that's becoming more and more aware And Southwest, as you mentioned, they were praised for transparency, like you actually know what you're getting, and no blackout dates and simple accrual points per dollar. So I thought that was kind of interesting from a case study standpoint. It just still seems to me like this is the wrong way to actually create customer loyalty.

13:44This entire thing has, it's a case study, I think, in transactional loyalty, which is an oxymoron. Right. I think you can call it something. I just don't know that you can call it loyalty programs. You can call it. It's not a reward. It's incentive. That's the thing that's happened. They've conflated those two things and they're not, they're not at all the same. Yeah. So if you want to do it, because does anybody think that if you've got somebody who once or twice a week, they go to Chick-fil-A and they love Chick-fil-A and they love Chick-fil-A because Chick-fil-A is closed on Sundays and that aligns with their values.

14:21And when they, you know, go to Chick-fil-A, the person at Chick-fil-A is so nice. Does anybody think that if Kentucky Fried Chicken starts offering a punch card program that somebody is going to be like, well, screw Chick-fil-A, I'm going to Kentucky Fried Chicken? Of course not. Of course not. Right? Maybe a few, but that's not what got them the brand loyalty in the first place. So let's talk about a loyalty audit framework. So how do you know if your company's loyalty program is helping or hurting? What are your thoughts on that based on kind of the things we looked at? Yeah, you got one. Do you have it all figured out or are we doing it on the spot?

14:54No, no, I got several. So the first is, so basically five audit questions to see if it's working. The value to cost ratio. So are the rewards actually worth it? What's the redemption rate? And like, so how many people are actually using it? Are they like you and me and we don't care? And the only reason that I redeem American Express points at this point is because it literally shows up as a button I can click and I can spend free money that I didn't know that I had. That's like, that's the only reason I'm never going to their site. I'm never going to look up how many miles can I trade anymore for airline miles?

15:29Cause I just feel like none of it's worth it. and my time is definitely worth more. So the red flag is if your redemption rate is less than 30%, that's a bad thing. Isn't it kind of perverse incentives though? Because on one hand, you want people to use it because it shows they value it. But on the other hand, your margins increase dramatically if they don't use their points. This is why. That's the short-sighted thing though, right? Your margins increase, but what's the cost of the loyalty program to like, like, is it getting you what you want? Because if people aren't using it, then it's, it's probably not driving the sales or, or continued patronage that you want, because if they're not using it, that's not why they're like, like they aren't loyal.

16:19You know, they aren't, they aren't. I get that. I guess that's what I'm saying. Like, but it does create these kinds of perverse misaligned incentives where you want them to use it. Absolutely. But you don't want them to use it that much. It's just gross. All right, keep going. Yeah. So the second, so the first is value to cost ratio. Red flag if it's under 30, if redemption's under 30%. Second is transparency and simplicity. Can a customer explain it in 60 seconds? I love that as a, you know, like it's like that five second was at mom test that was out for a while. Can you explain anybody's airline loyalty program in, I don't know, even 60 minutes?

16:59it's probably not. So can you explain it in 60 seconds? JetBlue, another airline that gets really good marks for this, their TrueBlue program, one point per dollar, no blackout dates, lots of praise for simplicity. So have you found that they're generally pretty freaking complicated to understand? Yeah, JetBlue is great. And I'll tell you, Southwest Airlines used to be really, really simple. You got enough points and somebody just got to fly with you for free. You got like a free companion pass. And I thought that was really smart in any loyalty program that effectively allows you to include somebody else in it.

17:34That to me makes a lot of sense because now it's built in referral as well. I think that, that can be really, really smart. Yeah. And, and maybe getting new customers because like you can't always take your family or your, you know, or somebody like that. And so you ask a friend, Hey, do you want to go with me? And then they're like, Oh, it's Southwest. It's pretty cool. You know, and then they acquire our customer could be pretty good. Third is a frequency of wins. Our customers rewarded often enough. And I think this is really good to build a habit. So, uh, Starbucks rewards users visit two times more frequently than non-members because they can, they get stuff much more often.

18:12The threshold to get a benefit is very, very low. So I thought that was interesting. Two times more frequently than non-members. So that's clearly driving what they want, right? They want you in their shops more because you're going to spend money. If you spend the same dollar amount each time, you're spending twice as much as you would if you didn't have the loyalty program. Wasn't though, I feel like we did an episode on this, and maybe it was a year ago, and maybe I'm kind of conflating two things, but Starbucks was basically in the toilet recently. I don't know how they're doing right now, but one of the problems that Starbucks had was margin compression.

18:44And one of the reasons they had margin compression was because of all of these different loyalty programs and the discounting culture that it was creating. And they were no longer considered this luxury brand that was selling expensive coffee. They now were effectively turning themselves into this discount brand still trying to sell expensive coffee. Yeah. And they opened a hundred stores that were grab and go that they are currently closing because they realized that the experience of the European coffee bistro was what was lost when they went that. And so, so they don't make it as a discount brand.

19:21They make it as a brand that gets you to come and visit. So I'm guessing that the person who's grabbing and going is really just shopping deals much more like, like they don't care where they're going to go as much as the one that's going to go and sit and stay is going to spend enough to make the margin make sense. Whereas the grab and goer literally cannot order another cup, right? I guess, I guess the question I've got is, is the existence, the presence of this type of, you know, this type of benefit, this loyalty program, this points program, does it feel high end to you? And not, not every brand is a luxury brand.

20:01Like, so not every brand does this matter, but it seems like if you want to position yourself as premium or luxury, I can't imagine Hermes necessarily doing a loyalty type program they have one do they really okay well you would know they they have one and what it is is the ultimate cool high-end thing is kind of like patek philippe you can't buy or uh uh ap admaris brigade right you can't buy the better stuff unless you have and they keep a score so you have a score and so if you want to buy a birkin bag or something like that it ain't going to happen unless you are rated a certain level. And all of those guys, protect the reap, all of them have that.

20:48See, this is different though. And I think that this is important. Does your loyalty program grant your most loyal people higher degrees of access and experience? Or does it merely allow them to buy more of what you're already offering at a discounted rate? I think that's a really Discount is a mistake. Yeah, exactly. If all your loyalty program is, if it's just another form of discounting, I'd be really, really, really careful. If the loyalty program offers higher degrees of status and access, all about it. Because probably at that point, what you're doing is creating more loyalty. Because what you're doing is expanding the relationship, getting closer to your people.

21:33Status, access, convenience. Like I, um, just yesterday or this morning, uh, just yesterday, yesterday, um, I'm, I've got to go to Las Vegas and for meetings. And I saw that at the win, which is kind of our combined preferred hotel there, uh, there the, uh, four sixes ranch, which is the ranch that actually, I think a lot of Yellowstone gets filmed on, um, has a pop-up restaurant for a limited period of time. and it's completely sold out. You can't get into it. So I called when private access, which is a loyalty program that I'm a member of and said, Hey, it's all sold out and everything. Can you get me in?

22:18When do you want to come? Gave them the date. Absolutely. No problem. Done. Now I couldn't have gotten in. So that's access. But then at the same time in something as basic as the Terrace Point Cafe there where we have casual, you know, dining, uh, or a couple of the other restaurants with Zuzu and Red Eight, you can't, you can't make reservations, but if you're in private access, you can make reservations. And also there's a line cut line for private access members that just get to skip everything and go around, even though I've been to breakfast there in the morning to get their world famous best in the world pancakes.

22:57Um, and, uh, the line stretched around like the, you know, like 40, 50 people in line waiting. And we walk right in because we've got that. So that's convenience, right? I don't have to wait. I think that's like, you can buy the stuff that you can't buy. You can get special editions or drops. You get first access to that stuff. Those are all smart. Um, a hundred acre that you and I are both, uh, on the allocation list of wine wise, right? If you want special, uh, bottles like deep time or precious or dark arc and, you know, or crypt, those are all only available to people that are their VIPs. And they tell you when you log into their site, you're a VIP, you know, and you, you know, that if you don't buy, you know, for a while, you're not going to get to keep to be a VIP, you know, or you get booted off the list.

23:45So those are all to me wins, um, that makes sense. And, and, um, which goes to like, that's, I was talking about frequency wins that goes to, we're really talking now about number four, which is emotional connection versus switching cost, right? Are they staying because they want to or because it's painful to leave? And I think we've really covered it well. A negative case study is that T-Mobile faced heavy churn in their subscriptions when their Perks app was cut back. And the customers realized that loyalty was really basically just like pre-Netflix, right? Just not, wasn't really worth anything.

24:25So you would face this with a vendor that we had where, you know, we basically were like, Hey, we're done. We, you know, we want to cancel. And they're like, Oh, sorry. You know, you're like three days late from when you were supposed to tell us you want to cancel. You're in it for another year. And we're like, really? So your entire business model is basically locking people into 12 month contracts, screw you. And knowing that they don't want it and how much bad press, because I would actually mention their name, but I'm not going to, if you're not going to, to me, I'm going to tell everybody that story and they're going to be like, oh, I'm never going to use those people.

25:01And I know a few people and you know, a few people, and that's just such a dumb, dumb thing to do. The, the last one, the fifth one is, goes to your Starbucks thing, financial sustainability. So does it drive incremental profit or just discount existing spend? Cause that would be bad. Right. And there's a Deloitte study that showed poorly structured programs can cut margins by 10 to 15 % if they incentivize behavior that would have happened anyway. So like, if you're going to go to Starbucks and you would have hung out and bought five coffees while you typed your great American novel, you know, wearing your scarf, um, then, you've just screwed yourself because you're giving people, especially like those quick wins, if it's too frequent, like if I can earn the benefit while I'm there and then not have to spend the money that I would have otherwise spent, that's obviously not going to work.

25:54So I think that was what you were talking about there, right? Yeah. Yeah. I mean, I think when it comes to a lot of this, brands forget that nice is free And so much loyalty can be created simply by being nice, simply by being kind, simply by being just over the top helpful. This is what builds so many brands today. And, you know, when you think about a lot of the great brands, this is what Southwest Airlines did well. This is what Chick-fil-A still does well. This is what Four Seasons and a lot of the great, you know, a lot of great hospitality brands have been able to do at scale, except when they don't.

26:34is they're able to deliver great service and they're able to do it over and over and over again. And I think so much of it is just recognizing that actual loyalty is created when actual relationships are created. And that happens the same way that all relationships are created, right? When there's a genuine exchange there of values. And like, so start there. Like, I really think that's important because none of this stuff is going to make up for your people just being a jerk to your customers. And that really comes from the top. So, I mean, as leaders, we've got to mirror that and model that for our people.