Latest / The DTC Marketing Podcast with Fexingo: Direct-to-Consumer Brands, Shopify, and E-Commerce Growth / Why DTC Brands Are Killing Their Loyalty Programs
Transcript
- Lucas: There is a quiet panic happening in the direct to consumer world right now. I am looking at internal metrics from several mid-sized apparel and home goods brands, and they are all seeing the same thing: their loyalty programs are actively hurting their bottom line. We used to think that rewarding repeat buyers with points and tiered discounts was the holy grail of retention. But as of late September twenty twenty-six, the math has changed so fundamentally that keeping those programs alive is basically setting cash on fire. Luna: That sounds extreme. How do you justify killing something that keeps customers coming back? Isn't churn the enemy? Lucas: Churn is the enemy, but only if the customer is profitable. The problem is that most DTC loyalty programs are structured around volume, not value. They incentivize frequency by offering deeper discounts or free shipping thresholds that ignore the cost of goods sold. When you give a loyal customer a fifteen percent discount just because they have been buying from you for three years, you are not building loyalty; you are training them to wait for a sale. And in a market where advertising costs are still elevated, that fifteen percent is often eating directly into your net margin. Luna: So you are saying that the people who love your brand the most are the ones you are subsidizing the hardest? Lucas: Exactly. Think about it. A new customer comes in at full price because they found you through an ad or a search. They buy once. Then they join your loyalty program. Six months later, they buy again, but this time they use their points to get twenty percent off. You have now given your biggest discount to your most engaged user. Meanwhile, the new acquisition cost you forty dollars to bring in. That first purchase might have been barely break-even, but the second purchase is pure loss. Over time, your entire customer base becomes conditioned to only buy when discounted. Luna: I have seen this with my own subscriptions. I cancel things the moment they stop feeling exclusive and start feeling like a vending machine. Lucas: That exclusivity is what is missing. Most programs feel transactional. You swipe, you earn, you redeem. It is boring. It is also expensive. I spoke with the CFO of a mid-tier bedding brand last week. They had a loyalty program that accounted for thirty percent of their revenue, but after accounting for the discounts given, it was actually dragging their overall company margins down by two percentage points. They decided to sunset the points system entirely and replace it with a simple early access model for new products. Revenue dropped initially, but margins stabilized immediately. Luna: Two percentage points is huge for a brand that size. What did they replace the points with exactly? Lucas: They replaced it with community status. Instead of getting money off, members got early access to limited-edition colorways and were invited to virtual design consultations. It cost them almost nothing in terms of COGS. It didn't require inventory write-downs. It just made the customer feel special rather than cheap. And here is the kicker: their repeat purchase rate actually went up because they weren't waiting for a coupon code. They were buying because they wanted the product, not because they had a voucher burning a hole in their digital pocket. Luna: So the shift is from financial incentive to emotional incentive. That makes sense psychologically. Lucas: It does. But there is a trap here. Many founders are afraid to pull the trigger because they think loyalty programs are table stakes. They see every other brand doing it and assume it is mandatory. But the data from Q three of twenty twenty-six shows that the brands growing fastest are the ones simplifying their offer. They are cutting the noise. They are realizing that complexity kills conversion. If you have to read a FAQ page to understand how to redeem your points, you probably won't. Luna: Right, friction is the killer. If I have to log in, check my balance, and apply a code manually, I’m just going to leave and go to Amazon. Lucas: Amazon wins on convenience. DTC brands win on identity. If you try to compete on convenience using a clunky loyalty platform, you will lose. But if you compete on identity by making your customers feel like insiders, you can charge full price. The key is understanding that your best customers do not need your help to save five dollars. They need to feel like they are part of something that aligns with their values. Luna: Do you think this applies to all categories, or is it mostly fashion and home goods? Lucas: It applies to everything where repeat purchase is possible. Even software companies are seeing this. SaaS loyalty programs that offer extra storage or features for free often end up cannibalizing upgrade paths. When you give away premium features for free to retain users, you devalue the premium tier. You create a segment of power users who expect everything for free. It is much better to offer service-based perks. Priority support. Dedicated account managers. Things that scale well but don't eat into the product margin. Luna: Priority support is a great example. It costs labor, sure, but it doesn't dilute the brand's perceived value. Lucas: Precisely. Labor is fixed. Product discounts are variable and they compound. If you give away product, you are giving away asset value. If you give away attention, you are giving away service. Attention is cheaper in the long run if you structure it right. It also creates a stronger bond. People remember the helpful human more than the ten percent coupon. Luna: This feels like a fundamental rethink of what 'reward' means. We have been trained to think reward equals discount. Lucas: We have. And that training came from the brick and mortar era. Coupons in the mail worked because they were scarce. Now, every email you get is a coupon. Scarcity is gone. So the reward has to be experiential. It has to be about access, recognition, or utility. Not just subtraction from the final price. Luna: Let's take a brief pause here to talk about how we keep this conversation going. If these marketing insights have helped you rethink your own strategy, consider supporting the show. Listener support is what keeps us independent and able to dig into these numbers without ads. You can find us at buy me a coffee dot com slash fexingo. Any contribution helps us keep producing these deep dives for you. Lucas: Yeah, and seriously, it makes a difference. It allows us to spend more time on the research side. Thanks for listening. Luna: Back to the topic. So if a brand wants to pivot away from points, where do they start? Lucas: They start by auditing their current redemption rates. Look at the percentage of customers who actually use their points. In many cases, it is less than five percent. Those are dead weights. Then look at the average discount given. Is it eroding your margin? If yes, cut it. Start small. Maybe you launch a beta program for your top ten percent of customers. Offer them something non-financial. Early access. Exclusive content. behind the scenes looks. See if retention holds up. Luna: Is there a risk that customers will revolt if you remove the points? Lucas: There is always some noise. But if you communicate the value clearly, most people accept it. You frame it as upgrading their experience. You say, 'We are moving away from points because we want to offer you better things.' It is a narrative shift. And if you keep your best customers happy with the new perks, the switchers will leave anyway. And those are the customers you probably didn't want to keep in the first place. Luna: The switchers are the ones who only care about the deal. Removing them might actually improve brand health. Lucas: Absolutely. It cleans up your data. It clarifies your audience. When you stop attracting bargain hunters, your marketing messages become sharper. You don't have to scream 'SALE' anymore. You can whisper 'NEW COLLECTION'. That is a massive shift in tone. It signals confidence. And consumers respond to confidence. Luna: It also changes the creative direction entirely. Less urgency, more aspiration. Lucas: Exactly. Urgency is for clearing inventory. Aspiration is for building brands. If you want to be a lasting brand, you have to build aspiration. Loyalty programs based on discounts are inventory-clearing mechanisms disguised as retention tools. They are inefficient. They are messy. And they are dying. Luna: So the future of loyalty is curation, not accumulation. Lucas: Curation is the word. Curating experiences, curating access, curating relationships. It is harder work than setting up a points engine. It requires more thought, more empathy, more actual engagement from the brand team. But it pays dividends in margin and brand equity that points never will. Luna: I wonder if this will lead to a consolidation of loyalty platforms. If everyone stops using points, do those companies vanish? Lucas: Maybe. Or maybe they pivot to offering the service-based perks. There is tech that can manage priority support queues or early access lists. The underlying technology isn't going away. Just the logic behind it is changing. From transactional to relational. Luna: Relational is a much harder metric to track than points earned. Lucas: It is. But NPS and sentiment analysis are getting better. You can measure how people feel about your brand over time. Points are easy to count. Feelings are harder to quantify, but they are worth more. Because feelings drive willingness to pay full price. Luna: So the ultimate ROI of a good loyalty program is that it makes discounts unnecessary. Lucas: That is the goal. To reach a point where you rarely need to discount at all. Where your customers buy because they trust you, not because they saved five bucks. That is the sweet spot. It is rare, but it is possible. And it starts with killing the points. Luna: It’s a scary leap for founders, but maybe a necessary one. Lucas: It is. And for those willing to make it, the margins speak for themselves. The question is whether you want to be a discount store or a brand. The answer usually writes itself once you look at the P&L. Luna: Thanks for breaking that down. It’s definitely a perspective shift. Lucas: My pleasure. Let’s see if anyone else catches on before we do.