According to a 2019 Bond Brand Loyalty study that focused on loyalty programs’ influence on consumer behavior, 79% of consumers surveyed said loyalty programs make them more likely to continue doing business with brands.
You’re on a long flight, which is nearing its destination. As you hear the pleasantries and announcements about starting the initial descent, thank you for flying with us, etc., you also hear the inevitable. The staff will be coming through the cabin with a very, very special offer. You can get a bonus 50,000 miles if you sign up for their loyalty credit card program. 50,000 miles, you think. That’s a huge number, I wonder what you could spend that on? While you know nothing about the rules of the loyalty program, the staggering amount is tempting even with zero context. You sign up for the program, and a smug part of your brain congratulates you on being so special that you are now the account holder of 50,000 miles, ready to be spent on luxurious vacations.
Based on this, statistics tell us that two things, completely at odds with each other, will likely happen.
First, you will very likely become more loyal to this brand. While you might not pay double the fare on your next flight, you may be willing to spend 5-10% more than a competing flight just to get your loyalty point/mile bonus. In fact, you are 79% more likely to become a more loyal customer once you are signed up to this type of program, according to a Bond Brand Loyalty study.
Second, your loyalty will very likely go unrewarded. Yes, you will earn points, have a balance, and be able to spend these points. However, due to a variety of reasons, you will likely leave up to 85% of your points unspent, according to a Smile.io study.
So what is happening here? Are loyalty programs a scam? Should you ignore them? Not necessarily, but it is important to know the different factors at play, the limitations, and what to expect. It’s also helpful to know that some companies are frustrated by this as well, as people spending loyalty points can cost travel companies, but also offer massive benefits. There are some groups even working to tackle the problem head on, such as Arakis and their Web3-based platform. Let’s dive into why loyalty programs are so troublesome, why they leave most points unused, and what both consumers and businesses can do to create a better path forward.
Loyalty Points: A Limited System
So what are the biggest limitations to loyalty points systems today? We know that most points go unspent. Is this systematic manipulation by companies to avoid paying out? In some cases, it’s possible. However, the problem itself is more complex and many of the root causes are due to the evolving nature of these types of programs.
The key issues that create unnatural limitations to loyalty programs can be narrowed down to two areas: interoperability and flexibility.
If you think about a travel company and the program from their perspective, you can start to understand these frustrating limitations. Say you are a large hotel chain. You’d like to encourage your customers to seek out your hotels when traveling, so you set up a loyalty program. Customers can earn points and use them toward free nights. This is a great start, but quickly encounters complications. First, customers can only use these points in cities where your hotels are. While this is obvious, it also means that unless you are one of the top hotel chains globally, there are a lot of markets your customers travel to, but you don’t serve. Second, any loyalty program makes certain assumptions about the cost of rewards. This means that there are likely certain high peak times you don’t want customers using rewards, as it makes the rewards cost you more than planned. There are some ways to work around this, but it creates limitations nonetheless.
Why can’t companies just partner up and share loyalty rewards? In fact, sometimes this does happen, and it can broaden the value and usability of points. However, the compatibility is complicated and requires a lot of work to create a seamless system. More importantly though, companies create loyalty programs to create loyal customers. While customers would be grateful to use rewards with a partner company, most companies want the customers to earn and use those rewards only with them to foster a closer relationship and create repeat business.
That said, we’ve seen more and more partnerships trying different programs to collaborate on rewards. There are certainly advantages here, and customers seem to stay loyal with those businesses who offer strong rewards. Those rewards are only more valuable if they can be used across other businesses, creating greater customer satisfaction. However, these collaborations are limited and are certainly not the norm. To find a way for customers to be able to use that untapped 85% of points, another solution is needed.
Room for Improvement
Frankly, there has to be a better solution. Some groups, such as Arakis, are working toward a global system that travel companies can join and use. The program leverages Web3 in order to standardize currencies, keep transparency through on-chain transactions, and have endless scalability with the goal of continuously onboarding more travel partners.
Head of Arakis, Semil Vithani, shares some of the alternatives that travelers have today, proving just how badly we need a global system.
“If you’re not using a global system such as the Arakis travel app, there are unfortunately only stressful options available to make the most of your loyalty points when visiting a location that doesn’t accept them directly. Consider the following alternatives:
- Explore Partner Programs: Check if the loyalty program has partnerships or alliances with other travel brands that operate in the desired location. Some loyalty programs have agreements that allow points to be earned or redeemed with partner companies, providing alternative options for travelers.
- Convert Points to Other Rewards: Some loyalty programs offer the ability to convert points into other forms of rewards, such as gift cards, merchandise, or experiences. Travelers could explore these conversion options and use their points for non-travel-related benefits.
- Transfer Points to Another Program: If there is an option to transfer loyalty points to another loyalty program that operates in the desired location, travelers may consider transferring their points to that program. However, it’s important to assess the transfer ratios and any associated fees to ensure it’s a worthwhile conversion.
- Cash Value Redemption: In some cases, loyalty programs offer the option to redeem points for a cash value or credit that can be applied towards travel expenses, even if the specific location doesn’t accept loyalty points directly. This can provide travelers with flexibility to use their loyalty currency for their desired travel experiences.
- Mix Loyalty and Cash Payments: If loyalty points cannot be fully utilized, travelers can consider combining loyalty points with cash payments to cover the expenses. This allows them to partially offset the cost of their travel while utilizing the benefits of their loyalty program.”
It’s important to point out that these are all great options and can help travelers convert rewards into value. The problem is, these options are often wishful thinking, and few programs offer any of them, let alone all these alternatives. This was the thinking behind Arakis: to build the structure needed to transform travel rewards into usable currency. When the platform is complete, the goal will be to have rewards that can not only be transferred and redeemed across the ecosystem, but to have rewards that can be traded, bought, and sold directly with other travelers. This would quickly transform that 85% of untapped potential into a completely efficient and utilized reward system. Yes, travel companies will have to redeem more rewards. But they will also be reinforcing the sense of loyalty that customers have, generating a greater sense of customer satisfaction, and encouraging more travel which will then strengthen the entire industry. It’s not a difficult concept. If you offer rewards to your customers for their loyalty, everyone wins when you ensure those rewards have true value.