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How Rewards Are Running Loyalty Programs Into the Ground

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Somewhere in the hinterlands of Papua New Guinea there's a coffee cart that doesn't have a rewards and loyalty program. Imagine the day Anthony Bourdain eventually stumbles upon it; he will celebrate the unfettered purity of the culinary experience.

But if current trends are any indicator, the celebration will be short-lived when our intrepid explorer discovers that the owner isn't really an icon of simpler times: He's just waiting for his solar-powered UPC scanner to clear customs so he can launch GuineaPointz.

Reward and loyalty programs are everywhere. It's no surprise that when you consider the commercial impact. Boosting customer retention by 5 percent can increase profits by as much as 80 percent. This is a major reason that CEOs from New York to New Guinea are creating loyalty programs in an attempt to forge stronger connections with customers.

Related: Trouble in Paradise? How to Reignite Customers' Interest in Loyalty Programs.

The fatal flaw of loyalty programs. The average American belongs to 18 different loyalty programs, and yet 77 percent of loyalty programs that focus on awards alone are failing within the first two years. The root of this problem is that there's a big difference between human loyalty and corporate loyalty.

Our research has shown that most companies have structured their loyalty programs in a manner that's delivering the exact opposite of the mutually beneficial relationship consumers are seeking.

The problem stems from the fact that the corporate interpretation of loyalty bears almost no resemblance to the well understood -- and highly aspirational -- feeling that people everywhere have for their friends, family, God, country, football team and dog. Only by reintroducing elements of human loyalty into the corporate loyalty model can companies expect to see their customers truly develop a genuine affinity for their brand and see tangible results.

Related: How to Go 'Cha-Ching' With an Affiliate Program

1. Respect your customers from Day 1. JetBlue recently announced an innovative take onrespecting new customers through its TrueBlue Mosaic Status Match program. The airline essentially invited frequent-fliers with established elite status on other airlines to switch and enjoy JetBlue's frequent-flier perks immediately.

By placing the unique needs and experiences of these potential fliers above the rules of its established loyalty program, JetBlue has opened itself up to acquiring a whole new set of loyal customers.

2. Recognize customers' individual needs and preferences. A one-size-fits-all rewards program is much more prone to being commoditized than a personalized approach. If a customer must buy 10 ice cream cones to get a free sundae and only eight at a competitor's, chances are a company's going to see a steady stream of customers heading across the street.

But introduce an element of personalization to the way the company runs a loyalty program and this will not only generate increased customer retention, the most loyal customers will share their positive experiences with other potential patrons.

Related: Hotel Loyalty Programs: Loyalty Not Required

3. Create a relationship that's reciprocal. The Starwood Preferred Guest program, which my company worked on, offers an example of this principle in action. For years, SPG followed the traditional loyalty program script, resetting members' points to zero every 12 months if there wasn't any activity.

In 2012, SPG introduced the innovative concept of lifetime loyalty through its SPG Lifetime program. The lifetime loyalty concept suddenly made the entire SPG loyalty program less about what customers could accomplish in 12 months and more about their building a lifelong relationship with them.

4. Deliver frequent rewarding experiences. This would replace the concept of rewarding customers only when they reach the summit. Dangling status, perks and exciting experiences as the prize to force consumers to climb up the steep slope to earn loyalty points -- only to be knocked back down if they waver in their dedication by failing to drink the requisite number of lattes, travel enough miles or swipe their club card a sufficient number of times in a 12 month period -- is not the foundation for a sustainable program.

Instead structure a program to deliver ongoing incremental value to customers. This way, a business can maintain their loyalty and benefit from their patronage for years.

Introducing human loyalty into acorporate loyalty program means a big change. But by breaking with the belief that loyal behavior is a means to an end, a company can shift the paradigm from a transactional battle of monetary-value extraction to a relationship that delivers real bonus for the consumer and the company over the long haul.

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