Why Customer Loyalty Programs Can Backfire

Customer loyalty programs are ubiquitous, accounting for more than 3.3 billion memberships in the United States alone. And they can confer tremendous advantage: Members are more likely than others to buy from a retailer whose program they belong to, they visit the website or store more frequently, and they are more likely to download the retailer’s app, follow or otherwise engage with the retailer on social media, and recommend it to family and friends.

But new research, conducted by professors at the Wharton School along with the customer experience consultancy the Verde Group, reveals an important downside of loyalty programs. When loyal members encounter service failures—shipping issues, problems with returns, stockouts, and the like—they get more upset than customers who are not members of the program. Because they shop the brand more frequently than nonmembers do, they experience such problems more often; and the pandemic-fueled increase in online shopping, where service failures are more prevalent, has compounded the problem to the point where loyalty programs are causing significant damage. The researchers call this the boomerang effect, because the very loyalty a brand engenders comes back to hurt it.

“This is a real problem for retailers,” says Thomas Robertson, the academic director of the Baker Retailing Center at Wharton and one of the study’s authors. “Businesses are inadvertently killing their golden geese.”

The researchers surveyed more than 5,000 U.S. retail consumers in February 2020 and an additional 2,500 in May, after the pandemic took hold. The results showed that members of loyalty programs not only experienced more service friction than other shoppers but were more likely to struggle to have their issues resolved. For instance, loyalty members surveyed in May required an average of four contacts with the company before reaching a solution, and the process took 5.1 days. Nonmembers needed just 2.8 contacts and 3.3 days.

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“These highly valuable customers are getting bounced around between different departments and are struggling to get resolution,” says Paula Courtney, CEO of the Verde Group and a coauthor of the study. Part of the problem is that members who have a complaint often begin by calling a dedicated number, only to learn that the loyalty department is not empowered to help them. That’s especially damaging given that members have high expectations for how they should be served. Another issue is that members frequently need to ensure that the points or rewards they have earned are properly accounted for, which often means they are bounced back to the loyalty or marketing department. “These customers aren’t getting anything close to white-glove treatment, and that is frustrating them,” Courtney says.

The researchers suggest three steps to mitigate the boomerang effect.

Understand which problems are the most damaging.

As they audit the customer journey, retailers should avoid the temptation to blindly focus on the most frequent service failures. “Don’t get distracted by the squeaky wheel,” Robertson says. “Your most common sources of friction aren’t necessarily the ones that need immediate attention.” Indeed, the surveys revealed no overlap between the 10 most frequent service failures and the 10 that caused the biggest erosion in loyalty, as measured by Net Promoter Scores. The three problems most often cited by respondents in both February and May related to items’ availability. The three most destructive in the pre-pandemic survey had to do with finding and purchasing items efficiently. During the pandemic, the most destructive issues were having to pay for return shipping, needing an original receipt to make a return, and experiencing problems navigating the website.

Implicit in a loyalty program’s contract, Robertson explains, is an understanding that just as the brand is special to members, members are special to the brand. While failures such as stockouts are annoying, they aren’t particularly destructive because they don’t violate that contract. But asking members to pay for return shipping and provide an original receipt signals that the company doesn’t know who they are, doesn’t trust them, and doesn’t care about making it easy for them to do business.

Deliver on the benefits that can protect against defections.

Several loyalty program perks tempered dissatisfaction in the face of service failures both before and during the pandemic: insider access to information such as limited-time offers or invitations to exclusive events, free shipping and returns, cash back for purchases, alerts when desired items went on sale, access to one’s shopping history, and Alexa or Google Assistant notifications about order and shipping status. Those benefits tend to make loyalty members feel valued, the researchers say, and they can temper shopping frustrations much as frequent-flier perks can assuage travel-related glitches. “You’re less likely to mind having your baggage delayed if you’re sipping champagne in the arrivals lounge,” Courtney says. Benefits such as special member pricing and gifts, by contrast, did little to shore up loyalty when problems arose.

Integrate loyalty programs with overall strategy and processes.

Rather than silo loyalty programs within marketing departments, retailers should integrate them into operations, technology, and finance to facilitate swift, streamlined service recoveries. Seamless returns, for example, aren’t possible if a loyalty program doesn’t utilize point-of-sale technology that recognizes repeat customers. Other damaging service failures, such as rudeness from reps answering the phones, can’t be remedied if the loyalty department is powerless to drive operational changes—in the case of rude reps, by pushing for a reappraisal of staffing and training priorities, for example.

The boom in online shopping is likely to continue after the pandemic abates, and while some of the associated service problems should smooth out as once-deluged companies adjust, firms will still need to monitor and manage any backlash from their loyalty programs. “No retailer can afford to lose its most valuable customers,” Robertson says. “The boomerang effect shows the urgency of tackling problems that specifically aggravate loyalty members and investing in benefits that can mitigate the damage.”

Source: Why Customer Loyalty Programs Can Backfire (hbr.org)