I frequently and fervently extoll the virtues of loyalty programs, both as a consumer and from the point of view of businesses whose profits are likely to come from frequent repeat customer and for whom product differentiation is otherwise difficult. (See for instance here.)

At the same time, loyalty programs can be poorly designed, and improperly conceived rules can become very costly for a company.

And I do my best to point out those poorly conceived rules! I make the most of many of them, and I’m comfortable doing so. Pushing the envelope on promotions and loopholes serve a very real economic purpose: by exploiting and exposing loopholes, companies are forced to get better. They’re forced to think through promotions. They’re forced to improve their computer programming. These things make commerce stronger.

That doesn’t say anything about whether an individual action is justified in any given circumstance. That broad claim about the world likely says little about individual ethics. But I sleep well at night.

Companies worry about the high costs that loyalty programs can create, and rightly so. I think a bit of hyperbole too often generates myopia and losses, but in fairness I thought it useful to pass along one such articulation of the excesses of loyalty programs.

IN RECENT years, many companies have rushed into designing loyalty programmes, but how many of these programmes destroy more value than they create?



David Phillips, the inspiration for the protagonist in the film Punch Drunk Love, emptied 10 US grocery stores of 12150 tubs of pudding to follow up on a promotion offering 1000 frequent flyer points for each pudding code submitted.



His return on investment of $3140 in pudding was 1215000 frequent flyer points at a cost to Healthy Choice Pudding of $25000 (they had to pay the airline two cents a mile).



Granted, this is an extreme (quickly discontinued) example, but there are still examples of poorly conceived loyalty programmes. Loyalty programmes’ logic is simple share value with customers who create value, so as to keep them coming back as long as possible.



Existing customers are more profitable than new customers, and it can be seven times more costly to attract a new customer than to keep an existing one.



For a modest implementation fee, new technologies can enable companies to identify those valuable customers, model the behaviours that make them valuable and track their explicit preferences in terms of product selection and sales and service channel use.



Sound too good to be true? It is. Anyone who has implemented a customer relationship management “solution” knows that the fee for the technology alone can be quite horrific.



Add to that the other change components (including revamping the sales force, retraining support staff and rewiring contact channels) and we are probably looking at a significant payback period. This, of course, excludes the cost of creating and administering a suitable loyalty scheme.



It prompts the question; while clients are fanatically banking cash-backs, beans, bucks, miles and points in return for their loyal patronage, what happens to the shareholder?

My own suggestion is that companies do best by returning real value to consumers, especially those consumers representing corporate dollars, and keeping tight control over costs in areas outside of customer value-creation, such as expensive technology and personnel. But that’s an ongoing debate. For now, it’s enough to recognize that there are two sides to the story.