The Loyalty Program That Isn't Working
Verdant Outdoor sells hiking and camping gear through 12 stores and an online shop. Two years ago it launched a points-based loyalty program costing about $600,000 a year to run. Management assumed it would lift repeat purchases. Instead, overall revenue is flat, and analysis shows that 70% of program members were already frequent buyers before joining. Redemption costs have risen, and the program's email open rate has fallen to 9%. The marketing director proposes adding a paid tier with free shipping and early access to new products. The CFO questions whether the program should exist at all. The CEO wants a decision within a month.
1. Diagnose why the loyalty program has not increased revenue.
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The core problem is selection, not persuasion. If 70% of members were already frequent buyers, the program is largely paying rewards to customers who would have bought anyway - a classic case of rewarding existing behavior rather than changing it. The $600K is therefore mostly a margin transfer, not a growth investment.
The falling email open rate (9%) suggests the program's communication channel is also weak, so even the marginal members are not being activated. Flat revenue alongside rising redemption costs means the program is consuming budget without moving the metric it was designed to move.
A proper diagnosis separates three groups: loyal customers (already buying), occasional customers (the real target), and lapsed customers (need reactivation). The program should be judged on whether it shifts the middle group's frequency, not on total membership or points issued.
2. Evaluate the proposed paid tier and recommend a path forward.
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A paid tier with free shipping and early access can work, but only if it targets the right customers and is priced to cover its costs. Free shipping is a real benefit for heavy gear, and early access appeals to enthusiasts - but those enthusiasts are likely the same 70% already loyal, so the tier may again subsidize existing behavior.
Recommendation: Restructure rather than simply add a tier.
- Segment the program. Keep a low-cost recognition layer for existing loyal customers and build targeted offers for occasional buyers, where incremental behavior is possible.
- Make the paid tier self-funding. Price it so shipping and access costs are covered by the fee, and measure incremental purchase frequency among members who join versus a matched control group.
- Set a decision rule. If incremental revenue from the occasional-buyer segment does not exceed program cost within 12 months, wind the program down and redirect budget to acquisition or product.
The CFO's question is the right one: the test is incremental profit, not member count or engagement metrics.