Latest / The Retention Marketing Podcast with Fexingo: Email, SMS, and Loyalty for Repeat Customers / Why Your Loyalty Program Is Killing Your Margins
Transcript
- Lucas: If these marketing conversations have sparked something you've actually used, or even just helped you rethink a campaign, I want to mention that listener support keeps this network ad-free and independent. Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, I appreciate that transparency about how the show gets made. It helps us stay focused on substance over sponsor noise. Lucas: Thanks, Luna. Let’s get into the meat of it. We need to talk about why so many loyalty programs are quietly bankrupting the brands that run them. Most companies treat loyalty as a discount channel first and a retention tool second, which is a fundamental error in judgment. Luna: That sounds like the classic trap of trying to buy loyalty instead of earning it through genuine value. Lucas: Exactly. And the data from this quarter shows that point-driven rewards are the worst offenders. When you give away points that translate directly into cash-equivalent discounts, you aren't creating a habit; you're creating a transactional relationship where the customer leaves the moment a competitor offers a slightly better coupon. Luna: So the brand is essentially subsidizing the customer’s defection to the next best offer? Lucas: Precisely. You’re training them to wait for the reward rather than valuing the core product. Look at the major airline alliances from the early two thousands. They spent billions on frequent flyer miles, only to realize they were flying empty planes to fill seats for people who would have paid full price anyway. The margin hit was catastrophic. Luna: But airlines still run those programs. How do they justify the cost now? Lucas: They don’t rely solely on flights anymore. They’ve shifted toward co-branded credit cards and hotel partnerships, which are high-margin financial products. The flight itself is just the hook. For most retail and consumer goods brands, they don’t have a banking division to fall back on, so they’re stuck with low-margin physical rewards that eat their gross profit. Luna: It feels like they’re using a sledgehammer to crack a nut when a simple conversation would do. Lucas: That’s the thing though. It’s not about conversation; it’s about perceived value. Consumers love the dopamine hit of seeing a progress bar move toward a free item. But that dopamine is cheap. It costs the brand very little in actual fulfillment but convinces the customer they are getting a deal. The problem is that cheap dopamine doesn’t build emotional attachment. Luna: Right. If I’m just chasing a free coffee, I’ll go to whichever shop gives me the fastest path to that cup. Lucas: And that’s exactly why we see such high churn in traditional point-based systems. The switching cost is zero. Once you hit your goal, you leave until you start accumulating again. A truly sticky loyalty program needs to raise the switching cost through exclusivity or experience, not through arithmetic. Luna: So we’re moving away from points and towards access? Like early access to sales or private events? Lucas: Access is huge. Think about how Amazon Prime changed the game. It wasn’t about points; it was about friction reduction and exclusive content. When you pay for a membership, you psychologically commit to using it to recoup the cost. That creates a powerful behavioral lock-in that points never could. You’re not waiting for a reward; you’re utilizing a benefit you already own. Luna: That makes sense. The sunk cost of the membership fee drives the behavior more than any potential future discount. Lucas: Exactly. And for brands that can’t charge a membership fee, they need to look at tiered benefits that feel elite. Not just 'you bought five things,' but 'you’ve unlocked our VIP lounge.' It’s about status. Humans are status-driven creatures. Giving someone a badge that signifies they are part of an inner circle is far more valuable than giving them ten percent off. Luna: But how do you scale that without it feeling artificial or fake to the average customer? Lucas: You keep it simple. The best tiered programs have only three levels. Entry, Mid, and Top. If you have five levels, nobody understands how to climb them, and the middle tiers feel meaningless. Take a look at Sephora’s Beauty Insider. It’s clean. You know what you need to do to get to Rouge. The perks at the top are tangible, like early access to new products, which creates scarcity and desire. Luna: Scarcity is a much stronger motivator than a generic discount code. It triggers FOMO rather than just savings. Lucas: FOMO is real, but it has to be earned. If everyone gets the perk, it’s not a perk. It’s just standard service. The key is ensuring that the top tier is reserved for the top five percent of customers by revenue or frequency. That protects your margins because you’re only giving away expensive experiences to the people who actually contribute the most to the bottom line. Luna: So it’s a filtering mechanism as much as it is a reward system. You’re identifying your whales and feeding them specifically. Lucas: Yes. And the rest of the base gets treated fairly with basic service. This prevents the dilution of your brand promise. If you give everyone VIP treatment, you lose the ability to differentiate your highest-value customers. That differentiation is where the long-term loyalty lives. Luna: It seems like a lot of brands are afraid to make those hard distinctions. They want everyone to feel special. Lucas: They do, but that’s a vanity metric. Feeling special doesn’t pay the bills. Profitable retention does. You have to be willing to let some customers feel ordinary so you can make your best customers feel extraordinary. That’s the trade-off. And it’s one most marketers struggle to accept because they think equality is the goal of loyalty. Luna: Equality is for democracy, not for business strategy. Differentiation drives profit. Lucas: Spot on. Now, there’s another angle here that’s becoming critical in late twenty twenty six: the integration of sustainability into loyalty. Customers are increasingly aligning their purchases with their values. Brands that reward sustainable choices, like choosing digital receipts or returning packaging, are seeing higher engagement rates than those offering pure discounts. Luna: That’s interesting. It turns the loyalty loop into a value alignment loop rather than just a transaction loop. Lucas: It does. And it builds a narrative around the brand that is harder to replicate. A competitor can match your discount tomorrow. They cannot easily match your community’s shared commitment to sustainability. That creates a moat. It’s deeper than price. It’s identity-based loyalty. Luna: So the loyalty program becomes a platform for the customer to express who they are, not just where they spend money. Lucas: Exactly. And that shifts the dynamic completely. You’re no longer competing on price; you’re competing on meaning. That’s why experiential rewards work so well. They create memories. A memory is non-transferable. You can’t sell a memory to someone else. So once a customer associates your brand with a positive, exclusive experience, that association stays with them regardless of market fluctuations. Luna: Memories are definitely stickier than coupons. But how do you measure the ROI of an experience compared to a hard discount? Lucas: You track repeat purchase rate and average order value over time, not just immediate redemption. With discounts, you see a spike in volume that drops off immediately after the reward is claimed. With experiences, you see a gradual increase in frequency and basket size as the relationship deepens. The curve is smoother but steeper in the long run. Luna: So patience is required. You can’t expect overnight results from a value-based loyalty model. Lucas: Correct. It’s a garden, not a factory. You plant the seeds of trust and exclusivity, and you water them with consistent, high-quality interactions. Discounts are like synthetic fertilizer. They make things grow fast, but they burn the soil over time. Sustainability matters. Luna: I love that analogy. It really highlights why so many legacy brands are struggling to pivot away from their old promotional habits. Lucas: They are. Because changing the incentive structure requires rethinking the entire P&L. You have to accept lower short-term margins for higher long-term lifetime value. It’s a hard sell to boards that are obsessed with quarterly earnings. But the market is shifting. Consumers are smarter about manipulation. They see through the points games. Luna: They’ve been burned enough times. They want authenticity and real connection, not just a math problem disguised as a gift. Lucas: Right. And the brands that get this right will dominate the next decade. Those that cling to the point-trap will find themselves bleeding margin to competitors who offer genuine belonging. It’s a structural shift in how value is exchanged between buyer and seller. Luna: It feels like we’re finally moving past the industrial age of marketing into something more human-centric. Lucas: We are. And the tools are there. Data allows you to personalize those experiences at scale. You can tailor the exclusivity to individual preferences. It’s no longer one-size-fits-all. It’s hyper-personalized status. Luna: Hyper-personalized status. That’s a phrase worth remembering. It changes the whole calculus of retention. Lucas: It does. So, when you review your own loyalty setup, ask yourself: am I buying behavior or building it? If it’s just points, you’re probably losing money. If it’s access, status, and shared values, you’re building an asset. Luna: A powerful distinction. It forces you to look at the psychology behind the transaction, not just the transaction itself. Lucas: Exactly. And that psychological layer is where the real competitive advantage lies. It’s invisible, it’s hard to copy, and it pays dividends for years. That’s the kind of retention that survives market cycles. Luna: I think that’s a good place to pause. We’ve covered a lot of ground on how to stop subsidizing churn. Lucas: We have. And I hope it gives you a clearer lens for evaluating your own programs. What’s one change you’d make if you had to fix your loyalty model tomorrow?