More companies are noting the growing costs of loyalty programs

Reward program perks—the cozy airport lounges, the free coffees—might become a distant memory. Or…not. Increasingly, companies are trying to cut back on reward program perks—but customer pushback is making it close to impossible.

Exhibit A: Delta Air Lines, which saw such swift backlash to announced changes to its frequent-flyer program that the company recently had to reverse course. Delta’s kerfuffle demonstrates the inherent challenge of maintaining a reward program in 2023: Slashing perks may turn you into a corporate pariah, but you also can’t keep following the status quo.

“If you still have the same [reward] program today that you had 10 years ago, what are you doing?” Gerard du Toit, the founder of Bain & Company’s multi-year customer loyalty in banking report, told CFO Brew. “The world has changed so much.”

It’s high time for a reward reset: Inflation is changing the way reward programs fundamentally function, according to Yuping Liu-Thompkins, a marketing professor at Old Dominion University who researches loyalty programs.

“As inflation goes up, people are racking up their points faster, and as a result of that, they’re also getting to their rewards faster,” Liu-Thompkins told CFO Brew. “It’s costing the company much more to just fund the reward cost.”

That’s because we’re stuck in the same reward program model that first originated with airline miles in the 1980s, she explained, which can be summed simply as: “You earn points, you get rewards, you repeat.”

These programs can’t be discounted entirely, even when they run into snags. For starters, they’re a reservoir of data, giving companies a more accurate picture of how their customers behave, Liu-Thompkins points out. And some research suggests that, when designed correctly, they can increase purchase behavior by keeping people tied to a single retailer, she added.

But reward programs have always been plagued by a follow-the-herd mentality. Somewhere along the way, everyone—from big-box retailers to casual restaurants—decided they needed to get on board, using the same exact formula, and not all loyalty programs are created equally, according to du Toit and Liu-Thompkins.

“A lot of companies seem to treat [loyalty programs] as an automatic thing they need to do, and they’re forgetting there’s a lot of factors that can come into play on making it successful or not,” Wayne Taylor, a marketing professor at a Southern Methodist University who’s studied loyalty programs, told CFO Brew. “There are a lot of little details that need to line up to make it work.”

Free coffee isn’t free. The biggest dilemma: Loyalty programs (spoiler alert) aren’t free for companies to build and maintain.

The most upfront cost is the rewards themselves, whether that’s free coffees, discounted goods, or perks on your next flight, Liu-Thompkins and Taylor explain. Then, there’s a tech cost for all the data being collected, they add. You’ll need servers to store data. You’ll need data scientists and software engineers to turn that data into something useful for the company.

“There’s a lot of bodies that need to be hired to make it happen,” Taylor said.

Finally, there are administrative costs involved with actually managing the program: Who’s going to pick up the phone when people have questions? How’s the program being marketed, and managed overall?

“Someone’s got to pay for that—all the little plastic cards, all the direct mail costs, [the] marketing costs,” Taylor said.

“The problem is [that] a lot of the reward programs aren’t that well designed [so] they just end up costing so much to pay for existing behavior,” du Toit said. “Once you do the full math, it doesn’t actually add up.”

Scaling back? Given the short-term costs, it’s easy for CFOs, who need to stay focused on the bottom line, to ignore the long term benefits of rewards programs, but Liu-Thompkins thinks finance chiefs who do that are missing the point.

“It is common perception, and I believe it’s a wrong perception, to think of loyalty programs as a cost center,” she said. “Businesses cannot afford to be short term oriented with these type of programs [which are] meant to be a long-term impact tool…When they’re looking at these things, [CFOs] should be looking at it three to five years out, rather than [thinking about] what this program is going to do for me in the very first year.”

Seeing those long term benefits depends on designing an effective program, Liu-Thompkins, du Toit, and Taylor maintain.

“Once you start a loyalty program, you will be able to see pretty quickly if people are coming back faster than they used to, or spending more than they used to per trip,” Taylor said. “And that’s the goal: It’s creating incremental spend that wasn’t there beforehand.”

“It feels like every firm has the right design that could work; they just have to figure out what that looks like,” he continued. For example, some companies push things too far too fast, offering perks only if you spend every week. “You have to find that sweet spot where the goal is attainable, but it’s not so far away that people are just going to be disheartened by it and not even try,” Taylor added.

Liu-Thompkins notes that in a recent research project, she found that one of the top reasons people didn’t use loyalty programs was that it took too long to earn rewards. She also noted that rewards were often “not valuable enough or relevant enough for them to want to continue purchasing from the company, or using the reward program.”

With that in mind, she thinks more companies should consider how they can turn existing reward programs into something that’s no longer just a carrot on a string, but “can also engage people in the sense of emotional loyalty, [and] getting people really tied into the brand.”

In the club. Taylor sees things similarly. “The way you can really add value in this space is creating that sense of exclusivity,” he explained. “That’s how it started with the airlines [in the 1980s]. You did feel like you were part of a special club.” du Toit points out that markers of exclusivity in reward programs, like pre-releases or early access to sales, have “high perceived value” but come at a “relatively low cost for the formal organization,” making it a valuable strategy for building a more resonant loyalty program.

Without some kind of retooling, however, Taylor adds that many reward programs out there right now are so generic that “it’d be totally fine for a lot of people to cut back.”

“It’s not even loyalty anymore; it’s just automatic discounts or whatnot,” he continued. “I do think everyone got a little carried away, and could use a hard refresh on a lot of this.”