The ‘basics’ of loyalty marketing are not obvious to non-practitioners, and there is a lot of misconception around key principles.
If a new CEO replaced you tomorrow, and had no previous connection to the current loyalty program, what changes do you think she would make?
This person would not be suffering from cognitive entrenchment and would revisit every opportunity to create more value.
by Chuck Ehredt
We hear loyalty leaders state all the time that they have embraced ‘best practices’. In my opinion, if someone believes they have reached ‘best practice’, then they typically stop thinking about how to create more value for all stakeholders, and simply allow inertia to drive their customer engagement efforts.
Since most loyalty programs still embrace ‘best practices’ from the last century, a huge amount of value is being left on the table. If no one else will rock the boat, then that is the CEO’s job.
You might have noticed that several airlines mortgaged their loyalty programs in 2020 for many billions of dollars. Nobody granted those loans on a whim. The loans are underwritten by the enterprise value – which is a multiple of EBITDA.
That’s right, loyalty programs should be a profit center.
The scale of your business may (or may not) allow you to create billions in additional enterprise value from loyalty marketing, but this discipline should be contributing between 10% and 30% of your recurring EBITDA, and probably have lower cost in accelerating earnings than almost any other part of the business.
I don’t sell loyalty systems or provide consulting services. What I am trying to do is share with you that customer engagement in loyalty programs will double or triple in the next few years, thanks to changing business models and new technology. And, there are specific things you can do as CEO to bring your loyalty program into that league.
I have, though, been a 4-time CEO, across various industries which went through fairly dramatic changes during the past three decades, so hopefully my voice can be viewed as unbiased. I also care a lot about companies executing their digital transformations well, so they can deliver more value to customers, build more sustainable businesses, and survive in the age of Amazon, Alibaba, and WeChat.
There are two main sections to this article:
- Part 1 covers the ‘basics’ of loyalty marketing at a level that a CEO needs to understand: specialized enough that you can lead the loyalty team, but high-level enough that you don’t have to get bogged down in details
- Part 2 sets out the three important factors you can influence to reduce cost, deliver more value to customers, and importantly, build richer customer profiles that will pay dividends for years.
But before we dive into what you need to know (and support) in order to create more value for your company and your customers…
Acknowledging certain realities helps build a solid foundation for loyalty
Let’s first acknowledge that loyalty programs work.
I’m not going to quote a bunch of statistics, but if loyalty programs did not generate positive ROI, thousands of top brands would have given up on them decades ago.
Let’s also acknowledge that if your loyalty program appears to be performing fine, then you have probably not paid much attention to it (possibly for many years). This will have also been true for your C-level direct reports. However, you know that ‘good enough’ is the enemy of great. And you also know that if a small investment of your time can produce greater ROI from any department, and raise your NPS score significantly, then that’s time well spent.
Let’s also be honest about how much time you can dedicate to improving your loyalty program’s performance. It is probably close to zero, but you can certainly find 30 minutes per month to ask the right questions to get your team executing brilliantly.
And let’s acknowledge that in the Age of Amazon, Google, Alibaba, Tencent and Apple, if you don’t have loyal customers, then your business is doomed. In fact, the most loved brands usually don’t have a points-based loyalty program at all. But, they absolutely have a loyalty strategy that is executed well across their entire business. Points can be an effective tool to build loyalty, but by themselves, all they do is attempt to lock in customers that are already frequent.
If you want to dig deeper into loyalty mechanics, you can read more about where loyalty is headed in our blog on the characteristics of a winning loyalty program in 2025.
So, against this backdrop: why is the loyalty program of strategic value? As we’ll see, it can be used to optimize the emotional and transactional engagement of customers with your brand, while creating more enterprise value from things your company is already doing.
Part 1: Loyalty program basics
The ‘basics’ of loyalty marketing are not obvious to non-practitioners, and there is a lot of misconception around key principles. If you scrub up on these four key principles of loyalty programs, it will improve dialog and mutual understanding with your loyalty team, and save you a lot of time.
As stated, giving points (or miles) does not build loyalty.
A customer’s loyalty is based on their perceived value in doing business with you, and their cumulative experience interacting with your company. If you get either of these dimensions wrong, no amount of points will make customers loyal. The points can help cover up some inconsistencies, add gamification dynamics to the relationship, and help in keeping score. But the prerequisite for loyalty is that customers enjoy the value and experience that you set out to provide, based on your business strategy (i.e., low cost, premium, or whatever your market positioning).
At the end of the day, a loyalty program is a value exchange. The customer opts in to your program, giving you permission to analyze their data, send them marketing messages, and tailor engagement in exchange for more value, better experiences, and perhaps some recognition.
Most loyalty programs are fairly transactional. Transactions are rational, so they appeal very effectively to one half of the customer’s brain.
The other dimension is emotional loyalty, which appeals to the less rational side of our brain and gets customers to talk openly about their experiences. Emotional attachment to a brand also means customers are more forgiving when things go wrong.
When most brands talk about improving personalization, they really mean better targeting to improve conversion. They are missing the boat about improving emotional loyalty where a transaction may not be involved at all (at least not today).
Very few loyalty programs are designed, or have deployed the mechanics, to encourage emotional loyalty. Non-purchase touchpoints might include your customers:
- mentioning your brand in a positive way on social media
- posting product reviews online
- referring friends
- participating in surveys
…or your company:
- reaching out to say thank you
- or just wishing them a pleasant birthday
Rewarding non-transactional touchpoints increases the customer’s lifetime value.
Your enterprise value is the Net Present Value of the future margins generated by all customers, so your ‘value exchange’ model should not be constrained to only transactional loyalty.
Frequency is the most important factor in building a successful loyalty program. Grocery chains tend to have high frequency and high monthly spend, so they can reach 60-75% customer participation. Travel programs work well for frequent business travelers, but deliver little value to the 95% of people who don’t travel often. Most retail programs may have only 15-25% of total customers active in their loyalty program.
Without frequency, customers just can’t earn enough points in a single program to make it worth their while. It is unfortunate (or maybe an opportunity for you), that few programs are designed to reward less frequent customers.
The way to get around this problem is to collaborate with complementary brands that your customers also shop with. This can be by offering your customers the points they really want, across many programs, or allowing them to exchange your points with other programs to shift value.
In fact, most of your customers belong to 15-20 loyalty programs – so they simply don’t have time to focus on yours.
Most business leaders like the idea of their brand participating in wider coalitions; the sticking point for many is the idea that theirs might be the brand where customers earn points, so that they can burn them elsewhere.
Granted: if you’re naturally an ‘earn’ brand, such as supermarket or bank, you are probably funding an ecosystem where the ‘burn’ partners, such as airlines, are the net beneficiaries. But even if there is a net outflow of value, you still want to participate.
This is firstly because you’ll enjoy greater customer frequency, as customers shop with you more to earn points. But more importantly, you’ll get customers to agree to divulge their data and agree to receive marketing messages – which are of incredibly high value, against the relatively low cost of issuing somebody else’s loyalty currency.
While multi-brand collaboration is starting to increase rapidly, the greatest constraint in giving customers more freedom and choice with loyalty currencies is often your brand’s ego.
Loyalty programs, and the ‘loyalty mechanics’ designed into them, can drive very specific customer behavior. But, these mechanics need to be relevant in the lives and daily context of your time-starved customers.
Unenlightened CFOs like it when your points expire because a potential liability converts into additional earnings. You should like this too, but you must weigh the fact that expired points represent frustrated customers, who signed up to your program to earn incremental value. If your program does not make that possible, then your program has no influence on their behavior.
CMOs hate expiring points (except for poor-value customers), so you need to work with all stakeholders to find the right balance.
Note that poor-value customers and infrequent customers are NOT the same. Most loyalty programs treat infrequent customers as though they are not good customers – but most infrequent customers are probably spending money with your competitors – suggesting that they could be good customers with the right incentives. Poor value customers are those costing you so much money via customer service issues that you should introduce them to your competition.
As a general rule, 5-10% of points should expire every year because people die, move, change interests, or simply aren’t that desirable in the first place. But your entire company needs to work together to deliver sufficient value to customers that they are earning points frequently (directly with you or through partners), and that they reach at least $25 worth of value per year. This $25+ worth of perceived value may cost you only $10-20 if you acquire redemption options wisely, but you need to give less frequent customers the opportunity to reach this level of earning so they realize utility. Otherwise, they won’t engage, and your marketing efforts will simply be more noise they have to contend with.
Part 2: What the CEO must influence
Professional loyalty marketers become skilled at dozens of strategies and tactics over time. Many of them could become Certified Loyalty Marketing Professionals, after coursework from the Loyalty Academy. However they choose to learn, the loyalty industry is evolving so quickly that if your loyalty leaders don’t keep advancing their skills, your program will naturally fall behind.
You as CEO, don’t have time to absorb that knowledge as well, but if you don’t know what to expect of a high-performing loyalty team, it will be difficult to know where to apply pressure in order to extract optimal loyalty ROI.
These are the three key areas of loyalty marketing which you can best influence as CEO. You can also find more information on leading loyalty initiatives in this blog.
1. Push your team to capture exclusive customer insight
Your greatest asset is exclusive customer insight. You already knew this, but possibly had not considered the implications.
You have some data on all customers and may even know a fair amount about some customers. But that data is probably only from within your own business. What if you knew whether your customers put premium gas in their car at least once per month, prefer premium brands to white label goods, or if they’re earning points 2,000km from home?
Those insights would help quite a lot with targeted marketing. A customer that buys one shirt for $250 is quite a different person than one buying 4 shirts for $250. And this insight can raise average conversion rates from 2% to over 10% – because your company becomes better able to segment and tailor offers.
If you don’t collaborate with complementary brands, you will have little knowledge about your customer’s true lifestyle interests, and how you can make your offering most appealing.
In fact, your data alone can even be misleading about how customers behave in most of their commercial relations. For example, I may fly to London on Ryanair but stay in a 4-star hotel. Ryanair thinks I am their type of customer and the hotel thinks I am a 4-star type person. Both brands could benefit enormously if they know which types of restaurants I frequent or the quality of shoes I wear.
I find that one company’s data about me rarely reflects my lifestyle preferences, stage in life, or my priorities at any point in time. It is only when you know what type of car I drive, how old my children are, what type of music I listen to, and whether I buy premium grocery brands, that you start to understand what triggers might drive more business with you.
Unique customer profiles pay recurring dividends
The unique profiles you are able to assemble about customers will be proprietary and exclusive to your company. The more you interact with customers, across more touchpoints, the richer your customer profiles – a flywheel effect that makes your position increasingly stronger, since your competitors won’t have access to this information.
Your top priority as CEO must be to break down the organizational complexity that makes it hard to build a single view of the customer. You must then push for collaborations with complementary brands that reveal new dimensions of the customer’s lifestyle preferences, so you really understand what makes your customers tick.
Fortunately, trends in marketing technology are on your side.
This will be the only plug I put in this article about my business. We foresaw years ago that brands would need to collaborate more in serving customers, so we built the global SaaS platform to make connectivity and collaboration between complementary brands easy – without the IT department constantly being the bottleneck.
The multi-brand collaboration described above is what coalition loyalty programs were designed to deliver. And, they have been very successful for 20+ years. However, they are typically operated by an expensive intermediary that has been siphoning off 30-50% of the value in the loyalty ecosystem to cover their operating costs and profits.
That is no longer sustainable.
Now, brands need to connect as peers via a thin layer of low-cost technology.
In such an open loyalty network, each company has complete control over which other brands they collaborate with, how much data they want to share, and how they might run joint marketing efforts.
99% of the companies in the world don’t compete with you. Hundreds of those complementary brands also serve your customers. They would also benefit from customer insights you could share. Such data-sharing between brands allows everyone to deliver more value and a better experience. The loyalty program gives customers the perfect gateway to opt into such creative uses of their data, in-line with GDPR and other customer privacy legislation worldwide.
Customers actually want brands to use their data to improve service, value, and experience.
There are stories about how brands have used customer data in spooky ways (Target, for instance, accurately predicting that its customers are pregnant), so we need to be careful about how we reveal what we suspect. But with Apple, Google and others applying stricter methods of helping customers protect their privacy (elimination of cookies, etc.), consent-based models are the only future-proof way to enhance direct marketing and collection of first-party or zero-party data.
Third-party data are like fossil fuels, while zero- and first-party data are like renewable energy.
Moreover, customers can get angry over having to provide the same data again and again, only to find out in the next encounter that the brand has learned nothing more about their preferences.
Over time, strengthening your data game will pay dividends, to the point that it seems formidable to competitors and raises their barriers to entry, or increases switching cost for customers.
But this capability can only be made real by your loyalty team.
Building on the CRM and customer data model, to understand new dimensions about each customer, is what feeds predictive analytics. No doubt you are working on many Artificial Intelligence (AI) initiatives.
Guess what? The algorithms only work with a lot of clean data. But not all data is equal. In fact, you may be inundated with too much data – which can make it impossible to discern signals from the noise.
Your loyalty program should orchestrate the delivery of your business strategy by every customer-facing function – i.e., every function that connects to a customer touchpoint. The end-goal should be the creation of customer profiles which enable increasingly meaningful value-creation for all stakeholders.
2. Uncover the mountains of gold among your mid-tail and longer-tail customers
As discussed above, there is a big difference between ’poor value‘ customers and infrequent customers. Those infrequent customers represent an untapped goldmine in revenue; their total spending with your competitors might even exceed your best customers’ spending with you.
Collaboration with complementary brands allows your marketing teams to hunt, among your partners’ customer bases, for more people that resemble your best customer segments, and extract greater customer lifetime value.
Your less frequent customers are probably spending about the same as those customers in your second decile – but with competitors. You just don’t know who they are because you are not providing a superior value proposition.
To find out what that value proposition should look like for these customers, you have to get them engaged in a dialog.
One way to appeal to these people is to dynamically determine how many points should be offered for various types of engagement, or purchases. This might mean offering 10% in points as a bonus if they make a second purchase within a certain period of time, or offering more points on higher-margin items or distressed inventory – rather than just 1% across the board.
In fact, adjusting down the amount of points given for habitual behavior may reduce your cost, because your most ‘loyal’ customers are probably the types of people who would be loyal even if you are not giving them points. You can then funnel those savings into the segments which need a little more encouragement
You may not even need your own loyalty currency. Less-frequent customers are often active in someone else’s loyalty program. They may prefer to collect more points from you, but only if those points can be in the programs they perceive as most valuable.
Allowing customers to earn the points that most motivate them is actually quite easy to achieve with modern SaaS technology. The data this will generate, and the new opt-ins you will realize, create value that far exceeds the cost of those points.
That is why collaborating with partners is key. Every customer has their own preferences, so being truly customer-centric means you adapt to their desires.
This is also relevant as customers spend much more time in marketplaces like WeChat, Alibaba, Rakuten, or Amazon – channels which you do not control. The days of managing customer touchpoints primarily in owned channels are over. Your teams need to learn how to keep your brand present and relevant, regardless of where the customer is spending their time.
3. Demand-action based on KPIs
How many times have you said, as CEO, that ‘we can’t manage what we can’t measure’ or ‘we must become more data-driven’?
If you want to walk the talk, then this naturally applies to loyalty marketing as well. You (or at least your CMO) probably already get some metrics such as total members, membership growth, total active members in the past 90 days, and perhaps loyalty value redeemed in the past 30-90 days.
Depending on how this information is presented, it may only represent vanity metrics. Hilton, Marriott, American Airlines and a few others now report more than 100m members. That is impressive, but irrelevant. What is important are metrics such as:
- what percentage of the base has been active in the past 30 and 90 days
- what percentage of points are being redeemed
- what percentage of customers have been inactive in the past year
…since these figures represent how many satisfied customers are getting real value.
Activity levels will tell you whether 20% of members are benefiting, or 80% of members. When you multiply the percentage of active members by total customers, you will get the percentage of total customers that are benefiting.
That number may be 2% of total customers. Is that number acceptable?
It might be 10% or 20%, but does even that number represent the type of engagement that will keep your business viable?
If you want to compete with Amazon, you have to get those numbers into the 60-80% range.
This is not impossible, but the degree of work and program redesign necessary will depend on where your program is today.
If you look at trendlines for these key metrics over the past 5 years, do you see steady progress toward reasonable numbers, or do they represent a stagnant program on auto-pilot that is missing the mark?
This is serious stuff.
As I suggested earlier, there are various things your loyalty leadership team can do to get a few percentage points in improvement here and there. But, there is only one thing that will really move the needle: collaborating with complementary brands, so your customers can earn with greater velocity, and redeem with more value that is meaningful to them. You obviously benefit from increased engagement, but improving loyalty engagement is about your customers – not you.
In any case, what loyalty KPIs do you keep track of, as CEO? The right metrics send signals about the results of your cause-effect efforts to engage customers of many different types. Every marketing action you take (the cause) will generate effects. Are your members demonstrating that they are engaged?
If you want to really be data-driven – and this is not just a buzzword – then no function in your business is better equipped than your loyalty program, to capture data at every customer touchpoint and drive better decisions.
As your digital transformation efforts progress, most of that data is generated in real time.
This ties into your AI initiatives. Feeding the algorithms to spot opportunities in real time requires LOTS of clean, real-time data. Getting this data across all customer touchpoints, in real time, means that the loyalty program cannot be a barnacle attached to your business. Rather, it must move to the center of your business model, where it can enhance interactions with every customer across all channels, and spin off relevant data that is immediately actionable.
Monitoring customer engagement can cost you (as CEO) 10 minutes per month if the right KPIs and dashboard are in place. Even allocating such a small amount of time can have profound effects, because the people you employ will stay focused on results when they know you are paying attention.
The same applies to metrics regarding the open collaboration with complementary brands. If, as a CEO, you monitor 90-day metrics such as:
- which partner brands have shown the greatest % growth in transactions
- which partners’ transactions have contracted the most
- which partner is producing the most affordable CPA
- how many customers were moved from one segment to another, based on new insights
…you’ll quickly learn which approaches by your loyalty team are most effective at keeping your brand top of mind. You’ll also be able to gauge the relative affordability of those approaches compared with other customer acquisition and retention tactics, such as cashback, discounts and affiliate marketing.
The loyalty department often operates as a silo or even an external company, leading to significant coordination problems with all other departments that engage customers. The data from the loyalty program should be at the center of your customer-centric approach, and fuel all touchpoints based on insight about the customer context.
While not the 3 most important areas of loyalty marketing for a CEO to influence, there are a few things CEOs often do that damage the loyalty team’s ability to execute.
Firstly, reorganizations. They put most people in limbo for months on end and give everyone a perfect excuse to do almost nothing. If you need to re-organize, do it swiftly, and make sure that the teams which are unaffected stay focused on measurable results.
Secondly, maintaining silos. CX teams have probably been fighting turf battles with your loyalty team. This is absurd, given that they both share common objectives. Since CX has now matured to the point where they deliver diminishing returns, perhaps you should push this skillset out into every department that has customer-facing functions. CX is not about your app, but about improving the customer journey in every online and offline touchpoint.
Third: failing to empower enterprising teams. Your loyalty team may have been asking for help during recent years, but because your CMO has bigger fish to fry, he lets the loyalty program run on autopilot. You are likely not aware that many people in the trenches know what to do – if given the permission to rock the boat (a little, or a lot).
Others in your loyalty department are paralyzingly risk averse. They need to recognize that the companies that are winning in the marketplace are those who accept modest degrees of risk. They are fast in taking calculated risks. Speed is the key differentiator.
Allowing team members to sit in endless meetings, discussing the reasons to NOT try something new, means you will end up like Nokia or Kodak. Empowering people to take decisions and try new things is what keeps your business relevant in the changing world.
And fourth, CEOs tend to support the CFO in efforts to de-value loyalty points over time. This type of inflation means that your members, who have worked so hard to earn points, end up with less purchasing power. You may find it convenient to wipe 10-20% of your liability off the balance sheet through a devaluation, but this action affects the trust you are trying to build up among customers. Without trust, there can be no loyalty.
Besides, if you follow the advice in our article on creating incremental loyalty value without incremental cost, your ROI will go up sufficiently so you won’t have to devalue the points – and your CFO will be even happier.
But, since your loyalty strategy is primarily operated and executed by your loyalty team, the greatest improvements will come from how you lead that team.
To get the best out of them, there are 3 questions you should regularly be asking your Head of Loyalty.
- How much do we know about our customers that is not based on their direct engagement buying or interacting with us?
The reason this question is important is because most customers spend 99.9% of their time with other brands – where you can learn so much about their lifestyle interests. In fact, the data from only your interactions can be very misleading.
- If you look at the intermediate level of managers on the loyalty team, how much ROI did each one produce in 2019*?
*2020 was a bit too unusual to use as a baseline
This question is important because the loyalty program overall might be hugely profitable, but when you get down to the functions performed by mid-level managers, you can find large numbers of people that don’t actually accomplish much. Your bureaucracy probably generates large numbers of meetings where most participants discuss the reasons to NOT do things. This needs to be flipped on its head.
- And finally, ask what percentage of points issued actually get redeemed each year?
If it is less than 40%, customers are earning too slowly, or your rewards are not very compelling. If less than 20%, your CFO may be happy, but your customers are not very engaged and are just collecting out of habit, rather than as a real incentive to complete desired actions. If you suffer low levels of redemption, there are enormous opportunities to co-create value with customers and partners, to dramatically improve engagement and business results.
If customer engagement levels have not changed much in the past 5 years, then your program is probably stale in the eyes of most customers.
Try something new and see how customers respond. Testing and learning with loyalty program members is a fairly low-risk way to test innovations. For example, Hilton allowed their members to spend points directly on Amazon a few years ago. The value is terrible, but the level of member engagement skyrocketed.
In closing, I’m always happy to hear the perspectives of others and respond to questions, so if any of these points (pun intended) are worth further consideration, I welcome the opportunity for a brief conversation.
About the author
Currency Alliance makes it quick and easy to extend your loyalty capabilities to drive deeper engagement from your frequent, as well as less frequent customers.Chuck Ehredt is the CEO and co-founder of Currency Alliance. Until six years ago, Chuck had never worked in loyalty industry , so he’s been enjoying fresh entrepreneurial insight to an industry with a lot of untapped potential, but a lot of entrenched ideas that seem less valid today.
Our low-cost, API-based software integrates seamlessly with your existing loyalty platform and/or MarTech systems in a matter of days. The micro-services architecture enables agile companies to enhance the ROI from existing investments in their enterprise CRM and Campaign Management systems.
You can then easily connect with your customer’s favorite brands, exchange valuable insights, and build greater customer value into your loyalty program.