How to Create a Successful Customer Loyalty Program

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Having worked with Starbucks since 2004, as I began my journey to my first of two books about them (The Starbucks Experience and later Leading the Starbucks Way), friends and colleagues are quick to contact me whenever Starbucks makes the news.  That goes for both good and bad news!

Recently Starbucks announced a change in their highly regarded loyalty program and I heard both praise and deep criticism.  Sadly, I felt very old because in 2004 the mere mention of a loyalty program at Starbucks was not well-received.

In those days of yore, leaders were concerned about decreasing product value by giving away a 13th drink to customers who had purchased 12.  There is nothing like a recession for brands to embrace the need to reward customers for loyal behavior.



In the recent change to the Starbucks loyalty program, the company is moving toward a reward system based on customer spend not simply based on customers making a set number of purchases.  Rather than giving a customer a “high priced item for free” after that customer purchases a set number of potentially low priced items, Starbucks will link rewards to the dollar amount a customer actually spends.  While this change makes intuitive sense the data will determine the wisdom of the move (Something tells me there have been ample number of financial projections run to support the change).

Given the large number of editorials and commentaries written about the Starbucks loyalty modification, I thought I might address key elements of a successful loyalty program.

1) Know What Target Customers Value – Like most aspects of business, success in loyalty program creation begins with listening. You have to know what your target customer groups want in order to set-up an effective reward structure.

2) Drive Profitability – Every customer should be treated caringly and with respect.  That said, high-value and incipient high-value customers should be rewarded for and encouraged to enjoy as many of your products and services as possible.  Customers who are engaged with your brand should have their contributions to your proitability rewarded.

3) Study Game Theory and Intermittent Reinforcement Principles – Game theory and psychological principles of intermittent reinforcement are helpful in capturing and retaining the attention of participants in your loyalty program.  Think of slot machines, as the classic example of intermittent reinforcement (the machines pay off with enough frequency to keep people in front of them).  Panera bread has a loyalty program which motivates customer behavior through intermittent reinforcement.  As for game theory, reward programs benefit from many components like mastery, setting levels, immediate recognition, and the ability to celebrate in one’s own social network.

4) Set Clear Attainable Rewards – Put simply the more complicated the rules the less effective the reward structure.

5) Make it Fun – This is about rewards and playfulness.  It is not about the more serious aspects of business.  At Starbucks, the reward program was first jazzed up on the mobile app by having the customer scorecard reflect stars that fall into an on-screen cup.  Designers jazzed it up further by having the stars bounce around in the cup as a customer changes the orientation of their mobile device.



The wisdom of Starbucks loyalty program changes will ultimately be reflected in customer return visit frequency and customer spend.

The wisdom of our programs will, in part, be reflected in how well-we adhere to the key elements highlighted above!

6 COMMENTS

  1. You can always count on wisdom from Joseph! Thanks for this post. I particularly liked the game theory advice. We forget the power of surprise and how unexpected can keep an affinity program fresh and exciting while a predicable pattern can be taken for granted and some failing in the valence of attraction and retention. Keep up the great work!

  2. Chip, you are truly one of the pioneers in our field and, as such, your kind comments mean a lot to me!

  3. All of your suggestions can make a customer loyalty program more effective. McKinsey studies have found, however, that most participants consider loyalty programs to be bland and unengaging; so, in addition to your recommendations, we’ve found that there is another missing ingredient. Like customer experiences that are memorable in addition to driving perceived value, loyalty programs also benefit from a concerted effort to make them, and their elements, connect more on an emotional level. A sense of fun is one emotional factor, but program members need to feel a high degree of trust that the program is more for them than for the sponsor’s benefit.

  4. I think the gamification of loyalty has caused some to lose sight of goals. Goals can be different for different companies, so I won’t be prescriptive, other than to recommend not falling into the trap – as many companies do – of pursuing “having a loyalty program” as a goal.

    WSJ Magazine ran an article on the topic of loyalty for their Soapbox column on Saturday, March 5th. Six well-known people gave their views on loyalty. Arne Sorenson, CEO of Marriott International, provided a pragmatic perspective: “Loyalty in business really comes down to two things: quality and value . . . If you give people good product, they’ll keep coming back.”

    If a “loyalty program” creates that outcome, by all means, do it. Otherwise, just call it “Marketing and Promotion.”

  5. Michael, what a massive contribution to this discussion by hitting on the “trust” variable. I am starting to believe that “trust” is at the core of most business and personal opportunities. Thanks for engaging with me here. Joseph

  6. Andrew, few people are willing to admit when their loyalty programs are little more than “marketing and promotion.” Thanks for calling out the important distinctions! Joseph

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