The High Cost of “Ghost” Points: Will the short-term gains from high breakage gas discount and other “loyalty” programs yield long-term pain?
Almost all loyalty programs have some level of “breakage,” or points earned by customers that are never redeemed, but the collection of which still motivates consumers. Some companies and programs, however, rely on a huge level of breakage to make their economic models work. We like to refer to these points that are earned by customers but never redeemed, “ghost points,” because consumers still feel like they are earning something but eventually realize their rewards are vanishing. The earmarks of these high-breakage programs are often the issuance of points or coupons that expire within a month, or sometimes two. From SLI’s detailed research with over 10,000 customers and several days sitting “behind the glass” listening to focus groups, it is clear to us that while these programs may be creating some short term loyalty from existing customers, they will fail when faced with the truest test of a loyalty program: When consumers are presented with a competing offer, will they remain loyal?
The High Cost of “Ghost” Points
Why the short-term gains from high breakage gas discount and other “loyalty” programs will yield long-term pain.
SLI research shows that companies who promote commodity-based reward programs with many restrictions, limitations, short-term expiration periods and other trap doors, are actually training their customers to seek a better alternative. In our research with over 10,000 U.S. grocery shoppers, consumers of several leading U.S. supermarkets who claimed to value gas discount programs the most were also most likely to switch to a competing supermarket chain offering SLI’s coalition loyalty program where points don’t expire. In particular, consumers noted their interest in switching so that they could accumulate points over time instead of watching their points expire, and therefore have the option or choice to save up for more aspirational, unique, and compelling rewards. The vast majority of U.S. households interviewed preferred this kind of program to the existing discount-based rewards programs. We also discovered academic research from Harvard Business School that both supports and explains this phenomenon we found in research.
While there will almost always be breakage in a loyalty or shopping rewards program – some percentage of points issued will never be redeemed, as members move or drop out of the program for some other reason – we are concerned about the number of recent and seemingly popular programs that appear to rely on massive breakage to make their economics work.
For example, while many customers like the CVS ExtraCare rewards program, it is a perfect example of a program that appears to have generated short term customer loyalty with a high breakage model. We at SLI find ourselves frequenting the local CVS instead of the small, privately-owned convenience store next-door, even though the lines are almost always longer at CVS. We are incentivized mainly by being able to collect CVS ExtraBucks rewards points, and also by the seemingly “random” personalized coupon offers. The program is definitely increasing our loyalty to CVS, even at the cost of something we value highly—the time spent in line.
Because discounts like 25% off appear frequently and the ExtraBucks are only issued once per quarter, getting these rewards after a purchase gives the consumer a feeling of having won a small lottery. Though we are incentivized by earning points, we frequently forget to redeem the paper coupon ExtraBucks before they expire. It is not uncommon to hear of these receipts – sometimes up to $20 – being lost, forgotten about, put through the wash, or otherwise destroyed.
When SLI’s research firm, SocialSphere Strategies, conducted the initial U.S. focus groups in four disparate markets in May 2011, we were surprised to find how many participants also talked about losing their coupons or failing to return them before the expiration date. We heard moms sincerely expressing their disappointment in themselves for not adequately taking advantage of the points or discounts they had earned. While these moms complain about expiration dates, their real frustration appeared to be regret over not remembering or keeping track of the paper slips or elusive expiration dates – they hold themselves at fault. We don’t think anyone will disagree with the assertion that a loyalty program’s goal should not be to make the consumer feel bad about him or herself for missing out on a reward they tried to earn.
We observed this same problem in our research on supermarket gas discount programs, which all have multiple sources of higher breakage built right into the program design: minimum spending increments of $50-$100; 30-60 day expiration dates for points earned; and maximum gallons and /or “cents off” limitations. Although these programs are becoming ubiquitous – COLLOQUY recently reported that 70% of all U.S. supermarkets have some kind of gas program – research suggests that they have trained the customer to look for a better value proposition. In fact, SLI third party research found that these programs would not effectively retain customers when competing with the superior value proposition of an SLI program.
Using input from focus groups, SLI invested in thousands of quantitative surveys in markets across the country to measure consumers’ interest in joining our 21st Century shopping rewards program and their respective likelihood of shopping more at program sponsors to earn points. But before describing SLI’s new model, the survey asked respondents what other shopping rewards programs they were currently earning points or discounts from. Many listed supermarket gas rewards programs, like those currently operated by two of the largest U.S. supermarket chains – Kroger and Ahold USA. These chains offer shoppers a 10-cent discount per gallon of gas for every $100 spent at their stores. For those respondents who had redeemed for gas discounts, we also asked them to rate the program’s impact on their likelihood of buying more groceries to earn gas discounts. These consumers were then shown SLI’s program and rated their likelihood to join the program, and shop more at sponsors to earn points in an SLI program. Finally, we asked consumers which programs they would prefer – SLI’s new program vs. several of the existing gas and product discount programs.
At first pass, it appears that consumers value the gas programs highly: 43% of those who had redeemed for gas discounts rated the gas rewards program a 7-10 in high value on a 0-10 scale, and 60% rated the program a 6-10, indicating value at least above the neutral ranking of 5. (See figure below):
These were higher perceptions of value than we expected. Although SLI does not publish the full details of the company’s proprietary coalition loyalty program, two features will include points that do not expire and the option to redeem for “free” products, not just “discounts.”
SLI made the decision early on to invest in far larger quantitative research samples than needed to simply measure the U.S. household interest in joining our program and shopping more at sponsors to earn points. This investment has paid dividends on multiple occasions over the past year, as the large sample sizes (1,000 to 1,800 completes per market) have enabled us to look at behavior change by grocery shopper loyalty segment, household size, and other demographic and behavioral segmentation criteria.
We leveraged our detailed research respondent base of over 10,000 U.S. households to dig deeper into the value of the gas discount programs to see if they would increase customer loyalty when it really counts: when a competitor offers a new or better loyalty program.
Here’s what we found:
By competitor program, we mean a coalition loyalty program launched by a supermarket competitor. For example, Stop & Shop customers who highly valued their gas discount program were shown an alternative SLI designed program launched by Shaw’s and a coalition of sponsors.
The more respondents valued the gas discount program, the more likely they were to join a competitive SLI program, launched by a competitive supermarket to the one offering the gas discount rewards. Although this behavior might be counter-intuitive to those not in the loyalty business, this made sense to us as we know there is a segment of any population that are reward program “joiners” or “points people.” In the programs we have operated around the world, we have seen high correlations of joiners among different programs.
What surprised us was how these same respondents answered the next question: How likely would you be to switch to the competitive grocery store to earn points in SLI’s loyalty program? The results:
Thousands of grocery shoppers across America were telling us that the gas discount “loyalty programs” would not keep them loyal in the face of a competitive offering. These results were exactly the opposite of what we have seen in the programs we have launched and run around the world: the more consumers value a loyalty program, the more likely they are to stay loyal when a new competitor enters the market. This is one of the core sources of value from Frederick Reichheld and Bain & Company’s initial body of work on the economic value of a loyal customer. As published in Reichheld’s The Loyalty Effect: “loyal customers are less likely to defect to competitors.”
We also found that those who were interested in joining SLI’s program preferred our model to existing cash-back or discount programs, including the CVS ExtraCare program:
So what explains this phenomenon? Why do these participants in a customer loyalty program prefer another model? We believe there are at least three parts to the explanation:
- The programs have no barrier to exit.
- The programs are based on a commodity reward, and therefore have no unique or sustainable competitive advantage.
- The programs have actually trained customers to look for a better alternative, unless they are completely satisfied.
1. Points that expire within 30-60 days provide no barriers to exit.
One common element of all programs that have a short-term expiration date built into them: They have a glaring Achilles Heel – no barrier to exit. Programs like AIR MILES Canada and Nectar are designed to offer both “Dream Rewards” where members save up for that “once in a lifetime trip” and rewards that can be earned more quickly, including amusement park tickets and cash discounts. The desire to earn enough points for that highly aspirational dream reward keeps customers coming back week after week. If they stop shopping at Sponsors, they have given up on their dream reward. If your points expire after a month or two, you won’t leave anything “on the table” by switching to another program. These programs do not include any long-term incentive reward for continued loyalty to the program owner.
2. Commodity Based Rewards offer no sustainable competitive advantage.
As we have described in SLI’s White Paper Is the US Coalition Loyalty’s Afghanistan?, those grocers who originally launched gas discount “roll back” programs several years ago are now seeing competitors duplicate the reward and are forced into a “race to the bottom” to try to hold onto customer loyalty and somehow manage to achieve a positive ROI on their program investment. Since we published that article, we found an even more egregious example in Pittsburgh. Giant Eagle, an enterprise we have tremendous respect for, operates phenomenal supermarkets in multiple formats and was a pioneer of developing the gas discount program. Among other innovations, with Safeway’s Blackhawk Group, Giant Eagle used their gas discount program to increase sales of the incredibly high-margin-per-square-foot gift card kiosks.
But when visiting Pittsburgh to do store checks several weeks ago, we realized that Giant Eagle’s competitor Shop ‘n Save had not only duplicated their offer – ten cents off a gallon for every $50 spent on groceries – they even used a similar program name, calling their program Shop ‘n Save Perks.
Cash too, in the form of discounts or gift cards, also becomes a commodity reward. To be clear, we believe that many U.S. consumers will be attracted to the ability to earn points for free gas or groceries, especially if their points don’t expire and there is no limit to the amount of free gas or groceries they can earn, but that won’t be enough to differentiate a program over even the short term in the highly competitive U.S. market.
3. Training customers to look for a better alternative
One of our definitions of customer loyalty is:
“Loyalty is the presence of a value driven relationship that removes any consumer interest in seeking a better alternative.” Or put another way, if I am loyal to a particular retailer, I will always “look there first.”
Reward programs that are “better than nothing” and offer either low value or higher value but with many strings attached – complicated redemption calisthenics, confusing breakage or inconvenient “earn” and “burn” rules – may create a short term increase in sales as long as the competition has “nothing better.” But as SLI found when analyzing thousands of quantitative surveys from across the U.S., they do not appear to offer long term loyalty in the face of a better offer.
An academic model:
As part of our research for this white paper, we reviewed a classic Harvard Business Review article, “Putting the Service Profit Chain to Work”, by James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger, published in November 1995. This group of outstanding professors comprised part of Harvard Business School’s Service Management Group. They sponsored and taught the HBS Case Study, AIR MILES Canada, for several years.
In their research, the HBS professors observed that in many industries, loyalty varies significantly between those who are “completely satisfied,” (a 4.5 or higher on a 1-5 scale), and those who report they are merely “satisfied.” Part of the reasoning behind this was that customers who were not completely satisfied were open to “ a better alternative.”
Loyalty programs built on breakage and disappearing value are short-term loyalty incentives at best. Long-term loyalty solutions offer consumers just that: a guarantee to be rewarded for long-term loyalty, not a “take it or leave it” one way option to either take advantage quickly or miss out. A program that offers this value is characterized by having a portfolio of rewards including highly aspirational ones, one of the “6 A’s of Coalition Loyalty Success,” we originally published in 2011.
A second HBR article “Why Satisfied Customers Defect” by Sasser and Tom Jones, provided a more thorough and compelling exploration of why “partially satisfied” customers have significantly lower levels of loyalty than ‘completely satisfied” ones. The authors characterize businesses with a steep satisfaction-to-loyalty curve as operators in a “highly competitive zone” with the following characteristics: “commoditization or low differentiation, consumer indifference, many substitutes, and low cost of switching.”
After reviewing these articles, we realized that the gas discount and other “cash back” or product discount programs built these drivers of lower loyalty/ higher defection into their program design:
- Commoditization (gas discounts)
- Low differentiation (cash back or cents off)
- Short term points expiration (low cost to customer of switching)
- Many substitutes (70% of U.S. grocers offer some kind of gas discount program)
- Consumer indifference (prefer the SLI model)
If U.S. supermarkets and retailers continue to bet their loyalty strategies on programs that reward loyal customers with slippery value—i.e., the expiring gas rewards points and discount coupon offers that rely on breakage to fulfill—retail loyalty will watch history repeat itself in a race to mundanity. If first-to-the-gate players want to maintain a leg up on the field of “me-too” competitors, they must innovate beyond the realm of what is easily imitated. The offers we see today are trendy, but far from innovative, being built on expensive, unsustainable, and ever-less-competitive value propositions. Undifferentiated and rule-bound rewards will quickly drift onto the consumer’s list of things they are entitled to, thereby becoming high cost ineffective motivators.
U.S. loyalty has witnessed this cycle before – As with the proliferation of Green Stamps in the 1960s, these expensive rewards will gradually become simply a cost of doing business, and smart retailers will cut them out of their budget in favor of programs that offer consumers long-term, unique value at a lower cost. Retailers in Canada and the U.K. made this shift decades ago, with the adoption of the AIR MILES and Nectar coalition loyalty programs, now 20- and 12-years running, respectively and Brazil’s Dotz program is expanding rapidly based on the success of their initial supermarket and other retail partners.
Will the U.S. market soon follow this loyalty evolution toward coalition programs and their unique value proposition?
We believe the answer to this question depends on one to another, more important one:
Is there at least one senior executive at only one company in each of the requisite businesses willing to buck the status quo, to be an entrepreneur, do something different and revolutionize the loyalty program and customer centric marketing industry in the U.S. market?
“There is only one definition: An entrepreneur is someone who gets something new done.”
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