Loyalty programs are a powerful weapon for businesses that are looking to keep customers loyal to them and build revenue from it.

Yet many companies invest in these programs only to see them fail to deliver the results they’re looking for. Although the best ones are highly rewarding, underperforming programs can be a huge drain on resources and even result in lost customers.

In this article, we’ll explore why loyalty programs fail and what businesses can do to design a program that drives real, profitable growth.

By identifying common pitfalls, businesses can refine their strategies and offer more personalized experiences. Building stronger customer relationships leads to higher retention and increased lifetime value.

A thoughtful approach ensures long-term success and a competitive edge in the market.

Getting the economics wrong

One of the biggest challenges with loyalty programs is balancing cost and value. When programs are poorly designed, they can generate liabilities while failing to bring in profits.

Many businesses fall into the trap of offering discounts on products customers would have purchased anyway: think of a grocery chain that offers discounts on milk that customers would have bought at full price as it’s a staple item.

Instead, the program organizers must think about the program’s profitability. The grocery store, for example, could focus on offering grocery discounts or rewards on higher-margin items or products customers may not have purchased otherwise.

Online casino loyalty programmes do this type of promotion well by offering rewards on non-essential services or upgrades (such as bonus credits), access to exclusive games, or special promotions on higher-stakes bets, rather than just discounts on the basic gameplay.

When loyalty programs are too costly to operate or misaligned with customer behavior, they can reduce profitability.

An example of this is Plenti, a U.S.-based rewards program created by American Express. The program struggled because participating companies couldn’t agree on a unified value for points, which meant customers got confused and lost interest.

Programs like these can quickly become more of a financial drain than a source of customer loyalty.

Poor understanding of customer behavior

Beyond these financial pitfalls, many programs also fail to grasp their target customer behavior. They either don’t collect or ignore research into their consumer base, which means they come up with the wrong products.

Sometimes it’s a case of misclassification and they target the wrong people, meaning their true target audience don’t hear about a loyalty product designed for them.

The problem is often a lack of data, or the wrong methods used to collect useful information.An example might be a restaurant chain with millions of loyalty program members struggling to personalize offers because only a fraction had shared their contact information.

Errors like this are something every company offering reward programs such try to avoid.

Keeping attention

In today’s market, capturing and holding customer attention is harder than ever. Consumers are bombarded with choices, from challenger brands and mobile apps to a constant stream of digital content.

Younger demographics, in particular, are heavily influenced by social media recommendations. Often, they’ll use the likes of TikTok instead of Google search to find information, and companies fail to hit this area with their promotions.

The high volume of loyalty programs is also a factor. The average consumer takes part in a dozen programs, making it difficult for any single program to stand out. In some industries, like home furnishings, the rewards offered are simply too insignificant to be motivating.

In other cases, programs become invisible to customers, accruing points liabilities without generating any real loyalty.

How to Redesign Your Loyalty Program

So, how can businesses avoid these pitfalls and create loyalty programs that truly make a mark on their target customers?

It often needs a fundamental shift in approach, which we can summarize via the following steps.

Draw an accurate customer picture

First, developing a truly accurate profile of your customers is hugely important. This involves going basic demographics and delving into their preferences and behaviors. The key here is to prioritize high-quality, actionable data over sheer volume, which requires a skilful team of analysts.

Companies that can use this information to create highly personalized experiences will get the most success. An example might be a retailer reclassifying its loyalty tiers and starting targeted promotional campaigns according to them.

Understand what those customers want

Next, understand what your customers truly value. Personalization is key. Some customers may prefer exclusive experiences over discounts.

An entertainment company, for example, that discovers that its early access to events is far more valuable to its customers than traditional points-based rewards should put that on its list of priorities.

Easy tracking and simpler terms are highly desirable. Once you have a hypothesis about what different customer segments value, test it rigorously. AI tools can even simulate customer behavior to make this process quicker.

Come up with a great hook

Every successful program needs a compelling hook. Amazon Prime’s free shipping, for example, is a powerful draw, but Prime has evolved into an interconnected ecosystem of offerings.

Again, in-market testing is crucial to determine what works with your audience.

Gamification is another powerful tool, particularly with younger demographics. Tiered rewards and limited-time prizes make people want to engage and drive sales. Some brands even partner with gaming platforms to reach a wider audience.

Build a consumer community and get partners

Building a sense of community is very important. People connect with brands they feel a part of.

This could be a shared platform or forum where fans can submit and vote on ideas for new offerings. Social media communities are also great for this.

A network of partners is also key. These partnerships should be strategically aligned with your brand and offer real value to your customers.

A great example is Hyatt’s partnership with Peloton, offering in-room fitness equipment and classes, which is a clever way to tap into the wellness trend.

Don’t be afraid to test and scale

Building a successful loyalty program requires investment, but it also needs lots of trial and error.

Start small, test and learn, and scale up as you refine your approach. Combining fundamental parts with innovation will lead you to a loyalty program that not only drives sales but also transforms customers into passionate brand advocates.

Why Loyalty Programs Fail and How to Make Them Work

A well-designed customer retention strategy can be a game-changer for businesses, but only if it aligns with customer needs and market trends.

By understanding behavior, offering personalized value, and continuously refining the approach, companies can turn retention efforts into long-term success.

The key is to remain adaptable, innovative and focused on creating meaningful engagement that fosters genuine brand loyalty.