Where’s the brand love? Creating an inflation-proof loyalty strategy
Loyalty inflation has sent programs into a downward spiral—but there is a way out
Loyalty in the post-pandemic world
During the COVID-19 pandemic, brands turned to their loyalty programs to extend a lifeline to their customers. They extended elite status to top-tier members, suspended points expirations, and offered lucrative bonuses. Even as consumer spending cratered, these generous offers helped brands maintain strong customer relationships.
Today, the loyalty landscape looks much different. As inflation has spiked in the broader economy, so too have loyalty programs tightened their belts. Brands have devalued their loyalty currency, restricted access to elite tiers, and slashed funding rates. This “loyalty inflation" risks alienating best customers and increasing churn—goals opposite those of successful loyalty programs.
Fortunately, there's a way out of this downward spiral. By introducing more flexible redemptions and new reward categories, brands can unlock the hidden value of their programs, tame loyalty inflation, and delight their best customers. We call it Connected Loyalty—and it's the future of loyalty excellence.
The Rise of loyalty inflation
The estimated $4.5 billion loyalty services industry performed well during the pandemic.1 According to a recent survey, over 60% of marketers said that their loyalty programs helped keep their customers engaged during the crisis.2 U.S. airlines survived the pandemic in part by borrowing billions from their credit-card partners based on future loyalty program spend.
But global economic headwinds have taken their toll on brands. Rising operating and fuel costs, for example, saw the global travel industry post a net loss in 2022.3 Although the banking and retail sectors have enjoyed healthy post-pandemic profits, the overall inflation rate has also driven brands in these sectors to cut costs.
With loyalty programs increasingly expensive to operate, and with billions in unredeemed program liability sitting on company balance sheets, the urge to cut reward funding and reduce program benefits is a powerful one. The result is loyalty inflation, driven by devalued points and anemic tiered benefits.
Consider these recent program changes:
Nowhere is loyalty inflation more evident than in the recent spate of loyalty program devaluations. These changes have seen members of popular and successful programs earning fewer rewards.
- Beginning February 13, 2023, Starbucks Rewards' 29 million members will need a minimum of 100 stars to redeem for a free coffee, tea, or snack — double the current 50 stars required.4
- Dunkin' Donuts loyalists took to social media to express their ire over the chain's new Dunkin' Rewards program, which replaces the previous DD Perks program. This new program requires members to spend $50 to earn a free cup of coffee, up from $40 in the previous program.5
- Marriott Hotels has ended a transfer bonus for Marriott Bonvoy members who transfer Bonvoy points to a number of partner airlines. The move devalues Bonvoy's loyalty points, as the elimination of the bonus drops the transfer rate from 2.4 to 3 points per mile.6
Reduced tier benefits
Loyalty programs offering tiered benefits to elite members have likewise increased spending thresholds and restricted benefits.
- In 2023, Delta SkyMiles members will need to spend an average of 33% more to maintain their Gold, Platinum, and Diamond Medallion status.7
- Starting March 2023, American Airlines AAdvantage members must earn 40,000 Loyalty Points to earn Gold status, up from 30,000. In addition, upper tier members will need to fly at least 30 segments to unlock elite perks.8
- In March 2022, electronics retailer Best Buy removed the Elite and Elite Plus earning tiers from its rewards program, moving all members to a 1% earning rate. Previously, higher tiers members earned up to 2.5% in rewards.9
These program changes are viewed as necessary course corrections by their operators. By devaluing their programs, however, these brands risk customer backlash and disengagement. If programs aren't worth the effort, then why will your customers bother with them?
Take Best Buy, for instance. In addition to the tier changes mentioned above, the brand also announced that rewards points will only be available to customers who hold a Best Buy credit card—other program members will now receive free shipping instead, with no chance to earn points. However, a recent Bakkt survey found that over half of Best Buy loyalty program members who were aware of recent changes preferred the opportunity to earn points over the option for free shipping.10 It’s clear that a lack of flexibility or choice in benefits is alienating customers with different behaviors and/or preferences. For example, someone who prefers in-store pickup may have little to no need for free shipping.
The loyalty inflation challenge
Chronic loyalty inflation has sent programs into a downward spiral, resulting in frustration for customers and brands alike. On the consumer side, recent evidence suggests that backlash against reward programs is increasing.
Some key challenges include:
Unobtainable rewards: An Arrivia survey reveals that only 22% of loyalty program members say the effort required to get a reward is “reasonable." Only 42% have used rewards to lower the cost of a trip.11
Insufficient fungibility: In a recent Bakkt consumer survey, 70% of respondents list the inability to convert loyalty points into cash and other digital assets as their top pain point in participation.12
Points expiration: According to a recent Codebroker survey, 56% of program members have abandoned a reward redemption because they didn't realize their points had expired.13
Limited redemption options: In another recent Bakkt survey, respondents listed “multiple options for redemption" as the top unfulfilled need from loyalty programs.14
Shifting goalposts: A 2023 Bakkt consumer survey found that nearly 40% of program members who were aware of recent changes feel they’re now earning fewer rewards when they spend. Another almost 40% said they feel it’s harder to earn the status they held prior to program changes. 15
As a result of these frustrations, program disengagement has increased, resulting in millions of dollars of points liability languishing on company balance sheets. According to some analysts, as few as 8% of airline miles are redeemed annually by frequent flyers. ValuePenguin estimates that the top five U.S. airline loyalty programs ended 2020 with a combined $27.5 billion in loyalty program liability.16
Loyalty “breakage," in which unredeemed points and miles expire, is inevitable. But excessive breakage runs counter to the loyalty management goals of increased spend and decreased churn. As a result, program operators are struggling to achieve their goals. The Arrivia survey revealed that nearly a third of loyalty executives struggle to demonstrate the value of rewards to their customers.17 Meanwhile, Bakkt® research found that 74% of consumers said they will either reduce spending (45%) or completely stop spending (29%) with a brand, if the brand makes it harder to earn rewards and maintain status. 18
The future of Connected Loyalty
The challenges of loyalty inflation have laid bare the essential question for loyalty program operators: How can brands operate profitable programs while building customer loyalty at scale?
The good news: Leading brands are overcoming these barriers to drive loyalty engagement. Next-generation loyalty programs are shifting the paradigm: Transforming from “value for a few" to “value for many;" from reward catalogs into rewards shopping experiences; from closed programs to connected partnerships and widespread loyalty commerce; from unobtainable reward thresholds to micro-redemption models; and from a transactional to an emotional focus. We call this new paradigm “Connected Loyalty"—and it will increasingly define the future of loyalty excellence.
Connected loyalty is driven by focus a on flexible redemptions: standing up new reward shopping experiences, new redemptions options, and new commercial partnerships to help members use more of their hard-earned points and miles and build emotional engagement.
To implement a Connected Loyalty strategy, consider these best practices:
Create commerce loops: Blend loyalty shopping and paying experiences across earn and burn categories that fully utilize loyalty currency and other digital assets. For example, Best Buy allows eligible American Express Membership Rewards and Citi Thank You members to make online purchases with a combination of points and cash.19
Offer new reward choices: Create unique and compelling moments of interaction through multiple channels that reinforce your brand. For example, the Landry's restaurant group allows their members to earn bitcoins points that track the value of bitcoin and can be redeemed in $25 reward increments based on the market price of bitcoin at the time of redemption.20
Build connected partnerships: Leading brands are unlocking program value by enabling earn and burn with likeminded partners. For example, beauty retailer ULTA and Target have partnered to allow members of both brands' loyalty programs to earn rewards when purchasing ULTA products at Target.21
Open loyalty storefronts: Brands are replacing reward “catalogs" with robust storefronts that allow program members to earn a spectrum of rewards, redeem points at the point of sale, and convert one loyalty currency to another. For example, Chase Rewards members can shop with points and cash to purchase the latest Apple products with the same shipping and service options that Apple's own customers enjoy.22
Embrace the Metaverse: Brands are leading their best customers into the Metaverse by incorporating NFTs, non-fungible tokens, virtual experiences, and crypto currencies into their reward portfolios. For example, Starbucks' new Starbucks Odyssey beta program will allow reward members to complete interactive journeys and trade collectible limited-edition NFTs.23
Deliver micro-personalization: Restrictions on the collection of third-party data have upended the digital advertising industry. In response, brands are increasingly combining zero- and first-party data with sophisticated analytics to deliver micro-moments of personalization that drive emotional engagement. For example, beauty retailer Sephora builds automated rules and triggers to send personalized offers to individual members of their loyalty program.24
Together, these best practices form the foundation for Connected Loyalty. These marketplace examples are but the first wave of what promises to be an exciting transformation of loyalty programs in the next few years.
The Future of Loyalty Excellence
Loyalty inflation is a persistent problem that will continue to mirror the general consumer economy. The saturation of programs in the marketplace will likewise make it difficult for brands to differentiate themselves. Empowered consumers who demand experiential benefits and rich rewards will continue to put pressure on program financials.
Fortunately, Connected Loyalty strategies offer a way out of this downward spiral. The future of loyalty excellence will be defined by new redemption and benefit models, the next generation of loyalty storefronts, the integration of new digital assets and virtual experiences, and micro-personalization driven by analytical insights.
The end game: a loyalty program that delivers value at scale to all of your members, not just the top 10%. Connected Loyalty drives a deep emotional connection that compliments your brand and builds long-term relationships. Loyalty inflation may be inevitable—but it isn't forever.