Latest / The CMO Podcast with Fexingo: Marketing Leadership, Budgets, and Executive Strategy / The Hidden Cost of Brand Loyalty Programs
Transcript
- Lucas: Loyalty programs are one of those marketing tools that almost no one questions. Every CMO I know either has one, wants one, or is spending a ton of money to fix the one they have. Luna: Right — it's almost a requirement now. But I think the real question is whether they're actually worth it. Lucas: Exactly. And there's a study I came across recently that really reframes the whole thing. It looked at the loyalty programs of 14 major U.S. retailers — names you'd recognize — and found that fewer than 15 percent of members generate about 80 percent of the program's cost. The bottom half of members, in many cases, cost more to serve than they ever contribute in revenue. Luna: That is a brutal stat. So the program itself is actually a drag on profitability for most members? Lucas: Exactly. And by the way — if these marketing conversations have sparked something you've actually used at work or even just a better way of thinking about a problem, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. And it keeps us ad-free, which I love. Lucas: So back to that stat — the asymmetry is huge. Most loyalty programs are structured to reward everyone equally, but the economics demand that you treat your best customers much better and, frankly, design a path for the bottom half to either upgrade or leave. Luna: That sounds almost counterintuitive. Don't you want to keep as many members as possible? Lucas: You'd think so. But consider American Airlines. Their AAdvantage program is one of the oldest and most valuable loyalty programs in the world. But it's also a massive liability. At the end of 2025, they reported over $6 billion in deferred revenue on their balance sheet just from unredeemed miles. That's billions of dollars in future cost that hasn't hit the P&L yet. Luna: So those miles are essentially a debt they owe to customers. And every time someone redeems a mile, it costs American real cash or seat inventory. Lucas: Right. And the problem is that the bottom half of members — the ones who fly once a year or just have a credit card — they still accrue miles and eventually redeem them. But their lifetime value to American is maybe a few hundred dollars, while the cost to serve them — the miles, the customer service, the marketing — can exceed that. Luna: So what's the solution? Do you just cut off the low-value members? Lucas: You can't really kick them out. But you can redesign the program so that the economics work. Starbucks is a great example. In 2025, they overhauled Starbucks Rewards — they moved from a purely transaction-based system to one that rewards frequency and higher spend per visit. They introduced a tiered structure: Green and Gold. Gold members get more perks, but they have to maintain a certain spend level each month. Luna: I remember that. And didn't they also change how stars are earned? It used to be one star per transaction, regardless of how much you spent. Lucas: Exactly. Now you earn two stars for every dollar spent, which means a $6 latte gives you 12 stars, but a $2 coffee only gives you 4. That naturally pushes higher-spending customers into Gold faster, and it makes the program more profitable. The result? Same-store sales in the U.S. grew 9 percent in the year after the redesign, and the program's cost to serve actually dropped because they weren't giving away free drinks to people who barely spent anything. Luna: So the key is to segment your loyalty program by profitability, not just participation. That makes so much sense. Lucas: Yes. And I think the metric every CMO should track is cost to serve per tier. You need to know exactly how much it costs you to deliver the rewards and benefits to each segment of your loyalty program. If the cost to serve for your bottom tier is higher than the gross margin they generate, you have a problem. Luna: And that's the hidden cost — the one that doesn't show up on the marketing budget because it's embedded in the cost of goods sold or in customer service. Lucas: Right. And it's not just the direct cost of rewards. It's the operational cost of running the program: the IT infrastructure, the data management, the customer support calls about expired points, the marketing emails to inactive members. All of that scales with membership, but the revenue doesn't scale proportionally. Luna: So for a CMO who's thinking about launching a new loyalty program, what's the first thing they should do? Lucas: I'd say start with a simple calculation: what's the minimum lifetime value a customer needs to have to make the program profitable for them? Then design your entry tier so that only customers above that threshold can actually earn meaningful rewards. Don't let everyone in for free. Luna: That's a really sharp filter. It means your marketing spend goes to the right people. Lucas: Exactly. And it also means you can afford to be generous with your best customers because you're not subsidizing the bottom half. The best loyalty programs, the ones that actually drive shareholder value, are designed to lose the bottom half of members — or at least to convert them into paying customers. Luna: So the goal isn't to maximize membership. It's to maximize profitable membership. Lucas: Precisely. And that's a hard shift for a lot of marketing teams because they're measured on enrollment numbers and active users. But the CFO is looking at the liability on the balance sheet. The CMO who can bridge that gap — who can show that a smaller, more engaged base is more valuable — that's the CMO who gets a seat at the table. Luna: I think that's the real takeaway here. It's not about being anti-loyalty. It's about being smart about loyalty. Lucas: Yeah. And next time you get a marketing email with 'you have 500 points expiring soon,' just remember — that email probably cost more than your points are worth.