Brands retool loyalty schemes for tougher times

A recession may be around the corner, so retailers are revamping their rewards programmes to find ways to keep their best customers and lure new ones
Fore Sr Illooped

Starbucks’ loyalty programme boasts an impressive 28 million members. But while customers may have signed up to earn free coffee, the rewards now go well beyond a cup of java.

In October, the coffee chain announced ‘Reward Together’, a new initiative which links its loyalty programme in the US with that of Delta Airlines. This allows members of both to earn reciprocal points when they spend at Starbucks or book with Delta: loyal customers of both brands can earn one mile with Delta per $1 spent at Starbucks. 

That offer came hot on the heels of ‘Odyssey’, a Web3-powered expansion of Starbucks’ loyalty programme that lets customers earn and trade non-fungible tokens (NFTs). This in turn can lead to other benefits, including a trip to the company’s coffee farm in Costa Rica.

As it updates its loyalty operation to retain and attract new customers, Starbucks isn’t alone. Punishing inflation and broader economic uncertainty are leading restaurant chains and retailers from Chipotle to Marks & Spencer and Amazon to roll out novel loyalty schemes as a hedge against slowing business.

“There are a lot of issues happening that are causing brands to really look to identify who their loyal customers are and to figure out how to hold onto them,” says Mary Pilecki, a principal analyst focusing on customer loyalty at Forrester Research. 

But there’s a fine balance to be struck to avoid going too far or moving too fast.

How to retain customers with effective rewards

With inflation soaring past 11% in the UK and the EU and above 8% in the US, cost savings are top of mind for consumers. That’s where the financial benefits of loyalty programmes – things like discounts, loyalty points and reward certificates – can help people stretch their budgets.

Pilecki advises retailers to ensure customers know their options for redeeming financial rewards linked to essential products that may have become more expensive. Such offers should be reserved for a company’s best customers. “You should do it for your truly loyal customers, not just anybody who walks in the door,” Pilecki says.

Mexican food chain Chipotle is grappling to maintain customer loyalty even as it raises prices amid growing costs. CEO Brian Niccol has signalled that the company is trying to better tailor its loyalty rewards towards different customer segments.

There are a lot of issues happening that are causing brands to really look to identify who their loyal customers are and to figure out how to hold onto them

“Some of it is obviously the low-income consumer. Some of it is also what they’re interested in, whether it’s having more access digitally or having a different experience when coming into our restaurants,” he said during a quarterly earnings call in October. 

Using its database of customer information, the chain can communicate with customers “so that we’re giving them relevant messaging that keeps them engaged with Chipotle”, he added.

Indeed, analysing customer data on a more granular level may be a smart strategy for retailers. That’s according to a recent study that analysed 15 months of data for 24,000 members of a subscription-based loyalty programme at a major retailer in Asia. The study in the Journal of Marketing Research found that while customers on average spent twice as much after joining the programme, some contributed much more than others to that increase. 

Such an understanding could help marketers better target future prospects, according to Raghuram Iyengar, a professor at the University of Pennsylvania’s Wharton School and a co-author of the study.

Earning a return visit from customers

Of course, retailers should also be aware that in leaner times people are more likely to consider dropping costly subscription programmes, like Amazon Prime, or simply switching brands for a cheaper option. 

As such, experts emphasise that loyalty programmes should be more than purely transactional to make customers feel appreciated. 

“It’s got to be about more than just points and discounts at the point of purchase,” says Jason Rzutkiewicz, founder of consultancy Get Transformative Advisory Services. That might mean offering perks such as exclusive product offers, early access to promotions or added convenience.

Marks & Spencer seemed to heed that message when it relaunched its Sparks loyalty scheme in 2020. This brought a focus on personalised offers and the opportunity to get surprise small gifts or a random free shopping trip, among other benefits. 

In October, the retailer said Sparks had since doubled in size to 16 million members, while it also announced the programme’s rollout internationally. That came as part of a £200m push from Marks & Spencer to upgrade its digital offering, including the M&S app and new backend tech. 

Other companies are following suit. A survey of CMOs conducted by Forrester earlier this year showed that 35% of brands had recently revamped their loyalty schemes and 29% planned to do so in the next 12 months.

Even retailers with well-established programmes are refreshing their offerings. Amazon, for instance, unveiled ‘Buy with Prime’ in April, which allows Amazon Prime members to get the same features, including free shipping and returns, when they shop at third-party merchants using Amazon’s fulfillment network. 

Similarly, Starbucks’ Reward Together programme is set to expand through alliances with other brands. 

Experimental loyalty schemes

These initiatives highlight retailers’ efforts to offer a wider range of rewards. Still, Pilecki cautions against making underlying changes too quickly or without alerting customers in advance.

She points to Dunkin’ Donuts’ loyalty programme revamp this autumn, which gave customers new ways to use their rewards points, including on food besides drinks. But a social media backlash erupted over a structural change in the programme which requires more points to redeem rewards. 

It’s got to be about more than just points and discounts at the point of purchase

To avoid that scenario, Pilecki advises that brands first survey customers for their views on the loyalty programme. Transparency around any changes – especially if they involve raising the ‘price’ of rewards – and being flexible regarding customer feedback are also key.

In their eagerness to earn loyalty, brands may understandably be inclined to grasp at pop culture trends. Starbucks’ Odyssey programme, for instance, is centered on NFT technology; it has drawn criticism for venturing too far from its core proposition of giving customers the virtual equivalent of a punch card.

Mohanbir Sawhney, a professor of marketing at the Kellogg School of Management, wrote of Odyssey: “Starbucks should remind itself why its rewards programme was so successful. The job it did for customers was clear and compelling: ‘Give me free stuff when I buy more from you.’”

Starbucks calls Odyssey its “next big innovation in loyalty” and a digital extension of its founding concept as a third place for people to meet outside work and home. The company said in November that it has seen unprecedented interest in the new initiative but declined to say how many customers have joined its online waitlist. 

A similar critique might apply to Chipotle’s embrace of cryptocurrency, both as an accepted form of payment and in relation to crypto-focused promotions requiring enrollment in the chain’s loyalty programme. Chipotle says it views crypto as a way to appeal to millennial and Gen-Z consumers. 

But as times get tougher, brands may well find a back-to-basics approach to customer loyalty more useful than forays into the metaverse.