The Loyalty Illusion: Why Points Don’t Create Love

Summary

Business Lunch Podcast Summary
Episode: The Loyalty Illusion: Why Points Don’t Create Love
Hosts: Roland Frasier & Ryan Deiss
Date: September 19, 2025

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Main Theme Overview

This episode dives deep into the harsh reality behind so-called "loyalty programs"—pointing out why traditional points-based systems no longer create true customer loyalty or love, and often backfire. Roland and Ryan examine why so many of these programs fail, explore the financial incentives behind them, and offer a framework for auditing and building loyalty initiatives that actually foster brand love, rather than resentment or transactional hostage-taking.

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Key Discussion Points & Insights

1. The Loyalty Illusion & Loyalty Penalty (04:15)

• Definition: The 'loyalty penalty' is when loyal customers end up paying more or getting less value than newcomers. For instance, internet, phone, and cable companies often offer better deals to new customers than to longtime ones.
• Consumer Frustration: Both hosts note they’ve become disillusioned with loyalty programs—once heavy users, now essentially indifferent due to the hassle and devaluation.
  • “They've done such a good job of making it such a gigantic pain in the ass to use that I've just… they won.” – Ryan, [04:29]
• Financial Drivers: Many programs are driven by spreadsheet-obsessed finance teams, leading to frequent reductions in value and increased consumer cynicism.

2. Emotional Connection vs. Transactional Traps (10:46)

• Quoting Wharton’s Peter Fader:
  • “True loyalty is when people stay even though they could switch, not because they're trapped, not because the switching hassles that much.” – Roland, [09:39]
• 57% of consumers spend more with brands they’re emotionally connected to—yet 71% of loyalty programs don’t build this connection (Accenture).

3. The State of Loyalty Programs—Case Studies

• Airlines: Airlines now generate more from selling miles to credit card cos. ($25B/year) than from flying passengers. As points become less valuable, both consumer interest and credit card tie-ins are declining.
• Southwest & JetBlue: Praised for simplicity and transparency; early positive drivers of loyalty now eroding as their programs morph into transactional, less consumer-friendly models.
• Starbucks: Their program drives increased in-store visits—users come twice as often as non-members—but over-discounting has eroded margins and threatened its premium cachet.
• Hermès & Luxury: Successful “loyalty” at the ultra-premium level is about earning access to products and experiences unavailable to the general public—status, exclusivity, and unique experiences, not discounts.

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Ineffective vs. Effective Loyalty Programs

Transactional Loyalty: Why It Fails

• Points, discounts, and cashback are incentives, not loyalty.
• Complicated redemption processes, low transparency, and devalued points drive apathy.
  • “It’s a case study, I think, in transactional loyalty—which is an oxymoron.” – Ryan, [14:21]
• Short-term margin gains (from unredeemed points) often undermine long-term loyalty and can erode tens of billions in brand value.

Relationship-Based & Experiential Loyalty: What Works

• The most successful programs grant status, access, or unique experiences rather than just discounts.
• Emotional connection and genuinely helpful/nice customer service trump almost any incentivized program.
  • “Brands forget that nice is free. And so much loyalty can be created simply by being nice, simply by being kind…” – Ryan, [26:41]

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Five-Question Loyalty Audit Framework ([15:39 – 28:55])

1. Value to Cost Ratio – Are the rewards actually worth it? Is redemption rate above 30%?
2. Transparency & Simplicity – Can customers explain the program in 60 seconds?
3. Frequency of Wins – Do customers see quick, habitual benefits (e.g., Starbucks)?
4. Emotional Connection vs. Switching Cost – Are clients staying because they love you, or because leaving is painful?
5. Financial Sustainability – Does the program drive incremental profit, or just discount existing spend (potentially harming margins)?

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Memorable Quotes & Moments

• “If your program feels like a trap, you don’t have loyalty—you have hostage taking.” – Roland, [29:04]
• On luxury “loyalty”:
  • “Does your loyalty program grant your most loyal people higher degrees of access and experience, or does it merely allow them to buy more at a discount?... Discount is a mistake.” – Ryan, [21:33]
• On focusing objectives:
  • “What if we just create… actual loyalty?” – Ryan, [30:08]

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Roadmap to Building Loyalty Programs that Create True Love ([29:04 – 42:29])

1. Set Clear Objectives – Emotional connection first; retention, referrals, and higher spend are symptoms, not goals.
2. Choose Your Currency – Status, access, and unique experiences > points or cash-back.
3. Set a Fair Earning Ratio – 2-5% back in value for customer spend is fair (but consider higher if it buys true loyalty).
4. Emphasize Tiers & Aspirational Access – Let users earn increased status and rare privileges, not just discounts.
5. Onboard with Early Wins – Immediate, visible benefits hook engagement.
6. Daily Integration – App notifications, real-time balances, and gamification build habit.
7. Continuous Auditing – Use the five-question audit regularly to maintain value.

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Takeaways and Action Steps

• For Business Leaders:
  • If you have a loyalty program, run the five-question audit now.
  • Consider shifting from transactional (discount) to relational (experience, status, access) rewards.
  • Ask: “What would need to be true about our brand for customers to earn the right to give us more money—by qualifying for premium/luxury access or products?” ([42:29])
• For Consumers:
  • Don’t be passive. Shop around, negotiate, and periodically threaten to switch to keep brands honest.

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Notable Quotes with Timestamps

• “True loyalty is when people stay even though they could switch, not because they're trapped, not because the switching hassles that much.” – Roland Frasier, [09:39]
• “It’s a case study, I think, in transactional loyalty—which is an oxymoron.” – Ryan Deiss, [14:21]
• “Brands forget that nice is free. And so much loyalty can be created simply by being nice, simply by being kind, simply by being just over the top, helpful.” – Ryan Deiss, [26:41]
• “If your program feels like a trap, you don’t have loyalty—you have hostage taking.” – Roland Frasier, [29:04]

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Engaging and Useful for Non-Listeners

This episode equips listeners with a critical lens to assess both the programs they manage and those they participate in as customers and offers concrete steps for creating truly effective, emotionally resonant loyalty initiatives. The key message: loyalty is earned through authentic relationships, status, and meaningful experiences—not through points or discounts.

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For more, follow Roland & Ryan on their socials and tune in to the next episode of Business Lunch for further deep dives into business success, strategy, and culture.

Transcript

[A]

Hey, Ryan here. Before we dive into the show, let me ask you something real quick. Are you a seven or eight figure founder who's tired of carrying the whole business on your back? If so, then you're exactly who we built. Get scalable Live for this is the only room where real business owners just like you come together to share what's working. Now, when it comes to strategy, scale, and exits, there's no fluff. It's just results. And it's happening November 18th through the 20th in San Diego. And yes, Roland and I will both be there. You can grab your ticket [e-mail] and don't forget to use code LUNCH to save 25%. Again, getscalablelive.com, code LUNCH. All right, let's get you into today's.

[B]

Episode was interested in. There was an article I saw that was talking about the loyalty illusion and loyalty penalty and things like that and talking about loyalty programs. And so I thought that was really interesting. So here's our hook today. Basically, have you ever noticed how your Internet bill quietly creeps up after the first year? Or how your airline miles seem to buy you less and less? Yes, I have. Business Insider reports that US Consumers lose billions in value each year from loyalty programs that quietly devalue the rewards, hike costs, or trap customers in a loyalty penalty. So today we're going to unpack why most loyalty programs don't work, how to audit yours if you already have one, and how to build one that actually drives customer love and profit. Hey everybody. Welcome to the Business Launch podcast with your hosts, my wonderful partner, Ryan Deiss, and myself, Roland Fraser. Ryan, how you doing today?

[A]

So dang good. Cause I got to hang out with you all last week.

[B]

That was actually really fun. Good meeting with our founders board members at the meeting. And then also wonderful dinners courtesy of Chef Adam and some pretty good wines courtesy of the courtesy of you in France and California.

[A]

Yeah, one of my favorite things in life is just getting to walk into your wine cellar and just pick.

[B]

That was fun. I was surprised. I had told Ryan I said, pick whatever you want. And I liked the selection. It was a deep cut selection. Yeah. Which I thought was pretty fun. Yeah.

[A]

I mean, you know, you have everything pretty much. I mean, if you know anything about wine, Roland's Wine Cellar has everything. I mean, it's got all the best stuff, period, bar none. You name it, it's in there. But there are a lot of great wines that you can get, right. Like there's some amazing wines that you can find. And then there's some amazing wines that you just can't get anywhere. And so but that might, may not be considered like some of the, the crazy cult, you know, type stuff. And so yeah, opted for some of the.

[B]

You, you chose a crazy cult wine. It's just a lot of people that know the big famous names don't know the, that that is a cult wine, which is.

[A]

Right.

[B]

That's the best.

[A]

You know, maybe one of these days for super secret insiders, we'll tell them exactly what the wine was. Yes, I like it.

[B]

I like it.

[A]

Cool.

[B]

I was interested in, there was an article I saw that was talking about the loyalty illusion and loyalty penalty and things like that and talking about loyalty programs. And so I thought that was really interesting. So here's our hook today. Basically, have you ever noticed how your Internet bill quietly creeps up after the first year? Or how your airline miles seem to buy you less and less? Yes, I have. Business Insider reports that US Consumers lose billions in value each year from loyalty programs that quietly devalue the rewards, hike costs, or trap customers in a loyalty penalty. So today we're going to unpack why most loyalty programs don't work, how to audit yours if you already have one, and how to build one that actually drives customer love and profit as opposed to holding them hostage. So that's what we're talking about today. And I just wanted to see first, do you have any thoughts on this? Have you experienced this, this loyalty issue that's going on?

[A]

Yeah, as a consumer, I have. And I'll tell you, it's so frustrating and they do such a good job of pencil whipping you that I've kind of given up.

[B]

Right. You know, like airlines especially.

[A]

Yeah, yeah. Because you, this used to be your thing. Like you would, you were the loyalty guy. Like, you would, the points guy. Like you would be the person who would be optimizing all the points. And I've got tons of points. I've got tons of Amex points, tons of American Airlines point. Like all the points. And it's such, they've done such a good job of making it such a gigantic pain in the ass to use that I've just get. They won. They won. But I'll tell you, as a result of it, I'm no longer loyal to anyone. So I guess mission accomplished.

[B]

Like definitely not mission accomplished. Right?

[A]

Exactly. Yeah, I mean, I guess mission accomplished. And you know who did this? The people who did this were the, the financial folks. I will guarantee you somebody with a finance degree Sitting at the office was like, you know, we could just make these couple little changes here and there. I bet nobody would notice. And look at all the money that we could save. And they're, they're spreadsheeting these things to death.

[B]

Yeah.

[A]

And they won. They got their way. And as a result of this, they've effectively killed the Lords program. So now I don't do it. I don't do them anymore for you.

[B]

And I didn't take the time to research this because I didn't think of it now that we're talking about it. But for me, I'm in the same place that you are. And so I wonder how many people are there. I do know that we are blessed and fortunate enough to be able to, you know, afford to buy what we want to buy generally and fly the class that we want to fly and all that. I don't anymore want to take the risk of not getting first class, for example, I don't want to take the risk of being on a flight that has 14 connections. I don't want to take the risk. I don't get the hotel I want or the room that I want at the hotel. And I'm perfectly, I, you know, I can tell you basically what I used to do and the benefits I used to get, which was, you know, probably six figures a year of benefit, I just don't care about anymore in terms of choosing a particular provider. I do enjoy that. All my business stuff I run through my credit card and therefore I have lots of miles. And now I just take this stupid paltry, like a penny a mile basically thing. If you've got a million miles, you can get $10,000 worth of stuff. And I'm happy that I can click on the use your points for that. You know, use your points as dollars. And so that's nice, but it doesn't keep me with American Express or anybody else. Definitely. Marriott lost me years ago. We had, because of our event before, remember that super high Marriott thing? And actually because of the Centurion card, we have the highest loyalty thing on a lot of other things. But it's like you said, it was just such a hassle even signing in because they ended up going with like pass keys and all these things. I just, I don't care. It literally has zero impact on any loyalty for me. And honestly, if it didn't pop up as something I could click and use, I wouldn't do it. So the next thing for the brilliant finance MBA graduate to do is just go, hey, people, don't care. Let's just save all that money, too, and just obliterate all loyalty programs. So is there a place for them still, do you think?

[A]

I think there's an opportunity now for somebody to come back and actually do it right and be loyal again. And I'm thinking about. I think that we have reached peak disloyalty. And I'll tell you why I think we've reached peak disloyalty. Because if I were to ask probably 20 people on the street, hey, who is define a brand that really is known for customer loyalty, customer love? Just their customers really do like them, and they seem to really like their customers.

[B]

They.

[A]

The name that I bet would come up more than any other is Southwest Airlines. That's the name that would come up more than any other. And yet Southwest Airlines has now done away with all of the things that everybody loved about them. Bags used to fly free. Now they don't. Right. Every little thing that they used to do that made them what they were, they now have gone away with. So I think that this is going to create an opportunity because there's going to be so much contrast for somebody to once again compete on just simply being nice and friendly where before it might have gotten a little commoditized.

[B]

Yeah, I think there's a disconnect between the goal and how they're getting the goal that they want. And so I want to talk first, like, about the loyalty penalty. So if you haven't noticed what Ryan and I have noticed, basically the concept is that the loyal customer actually ends up paying more than new customers, because loyalty programs aren't as good as incentives that are put out to get new customers. And this is constantly annoying to anybody that's got like, Internet or streaming rates on cable packages. Quit and then go back. You'll get a way better deal than if you stay. My phone company. How many times have you talked to your cell phone company where you're like, hey, are there any better plans now? Oh, yeah, there's. This one would save you this much money. Like, why don't you just tell me that? And I know that it's a financial reason, but it's so disrespectful to your customers that are there that it's really annoying. Car insurance premiums are raising year after year no matter how good a driver you are. You get these discounts when you start, and then they dissipate. Airline miles we talked about. I like this. This is Wharton's. Peter Fader said, true loyalty is when people stay even though they could switch, not because they're trapped, not because the switching hassles that much. And this is the disconnect to me, as Accenture found that 57% of consumers spend more with brands to which they feel emotionally connected. But 71% of loyalty programs fail to engender that connection. And that, to me is the disconnect is, is we want people to be emotionally connected, and the loyalty program should make that happen. But what is it, 71% of them fail to achieve that objective. So I like, that's, to me, something very wrong with the way people are doing loyalty.

[A]

Yeah. And that's really what I was. What I was trying to say when talking about Southwest Airlines is that is the opportunity. That's the opportunity right now that every single brand seems to have let go. And certainly all these brands, they basically said, let's replace these very hyper transactional loyalty programs for actual customer loyalty, for actual brand liking. They don't have to like us anymore if we just put them in a program where they get stuck. And I think what these brands are now finding out is that that's not good enough anymore. And it's not good enough when everybody's got one of these loyalty programs, and it's not good enough now that they've started pencil whipping all their people. And consumers are waking up to the reality that these deals just aren't good. But I think it's creating opportunities for brands who are just willing to do a little bit of customer bonding.

[B]

It is. There are other drivers, though, and I think it's gonna be. It's kind of the sequence that built it. It will fall apart the same way. Because I didn't really understand this until we started looking into it, but the airlines actually receive more from selling miles to credit card companies than they do from flying passengers. $25 billion a year.

[A]

Good God.

[B]

That's insane, right? Yeah.

[A]

And now it's gotta be like, all their margin, Right?

[B]

It is that because the people that are looking at credit cards, including me previously, are looking at it and saying, yeah, I want one mile or five miles for every dollar I spend on my credit card company. And so, I mean, on my card. And so I'm going to choose that card. And although I'm not really inclined to switch at this point. And so that's what they're using to drive new people in. But that's only because the miles are perceived as valuable. And as the miles are devalued because they're not treating them right, this will ultimately disappear as a way to get revenue because nobody's going to care. And then the credit card companies are going to stop buying the miles from the airline companies because the promos aren't going to work. And so, like it is ultimately destroying $25 billion a year of value by devaluing what they've got, especially since the breakage is so high. And the other kind of things that are going on right now is these frequent flyer programs are shifting from distance flown like you used to get a mile for, you know, every mile that you flew to dollars spent, so that you basically just get credit for the dollar you spent, which is way less than miles. So that's kind of an interesting thing too. Like if I get. It was less expensive for them to give two or three or five miles per dollar spent. That sounds better than give you 700 miles credit for the flight that you flew that was 750 miles. Like that's an interesting thing to think of too. And so British Airways, they raised the thresholds. And I'm a British Airways, I forget what the name of the thing is.

[A]

Member?

[B]

I don't even use them anymore. They scrapped the distance based tiers. There was a huge customer backlash from it. So basically there was press. The loyalty scheme is dead. And all this. So, like, it is something that's becoming more and more aware. And Southwest, as you mentioned, they were praised for transparency. Like you actually know what you're getting. And no blackout dates and simple accrual points per dollar. So I thought that was kind of interesting from a case study standpoint.

[A]

It just still seems to me like this is the wrong. This is the wrong way to actually create customer loyalty. This entire thing has. It's a case study, I think, in transactional loyalty, which is an oxymoron.

[B]

Right.

[A]

I think you can call it something. I just don't know that you can call it loyalty programs. You can call it incentive.

[B]

It's not a reward, it's incentive. That's the thing that's happened. Yeah, it's an incentive program. They've conflated those two things and they're not. They're not at all the same.

[A]

Yeah. So if you want to do it. Because does anybody think that if you've got somebody who once or twice a week they go to Chick Fil A and they love Chick Fil A and they love Chick Fil A because Chick Fil A is closed on Sundays and that aligns with their values. And when they, you know, go to Chick Fil A, the person at Chick Fil A is so nice. Does anybody think that if Kentucky Fried Chicken starts offering a punch card program that somebody's going to be like, well, screw Chick Fil A, I'm going to Kentucky Fried Chicken? Of course not.

[B]

Of course not. Right? That's maybe a few, but not like, not. That's not what got them the brand loyalty in the first place. So, so let's talk about like a loyalty audit framework. So how do you know if your company's loyalty program is helping or hurting? What, what are your thoughts on that? Based on kind of the things we looked at.

[A]

Yeah, you got one.

[B]

Do you have it all figured out.

[A]

Or we do it on the spot?

[B]

No, no, I got several. So the first is. So basically five audit questions to see if it's, if it's working, the value to cost ratio. So are the rewards actually worth it? What's the redemption rate? And like, so how many people are actually using it? Are they like you and me and we don't care. And the only reason that I redeem American Express points at this point is because it literally shows up as a button I can click and I can spend free money that I didn't know that I had. That's like, that's the only reason I'm never going to their site. I'm never going to look up how many miles can I trade anymore for airline miles? Because I just feel like none of it's worth it and my time is definitely worth more. So the red flag is if your redemption rate is less than 30%, that's a bad thing, isn't it?

[A]

Kind of perverse incentives though, because on one hand you want people to use it because it shows they value it. But on the other hand, your margins increase dramatically if they don't use their points. This is.

[B]

But that's why, that's the short sighted thing though, right? Your margins increase. But what's the cost of the loyalty program too? Like, is it getting you what you want? Because if people aren't using it, then it's probably not driving the sales or continued patronage that you want. Because if they're not using it, that's not why they're like, like they aren't loyal. You know, they aren't.

[A]

They aren't. I get that. I guess that's what I'm saying. Like, but it does create these kind of perverse misaligned incentives where you want them to use it, but you don't want them to use it that much. It's just gross. All right, keep going.

[B]

Yeah. So the second. So first is value to cost ratio. Red flag if it's under 30, if redemption is under 30%. Second is transparency and simplicity. Can a customer explain it in 60 seconds? I love that as a, you know, like, it's like that five second. Was it mom test that was out for a while. Can you explain anybody's airline loyalty program in, I don't know, even 60 minutes? Probably not. So can you explain it in 60 seconds? JetBlue, another airline that gets really good marks for this. Their true blue program. One point per dollar, no blackout dates. Lots of praise for simplicity. So have you found that they're generally pretty freaking complicated to understand?

[A]

Yeah, JetBlue is great. And I'll tell you, Southwest Airlines used to be really, really simple. You got enough points and, and somebody just got to fly with you for free. You got like a free companion pass. And I thought that was really smart. In any loyalty program that effectively allows you to include somebody else in it. That to me makes a lot of sense because now it's built in referral as well. I think that that can be really, really smart.

[B]

Yeah, and, and maybe getting new customers because, like, you can't always take your family or your, you know, or somebody like that. And so you ask a friend, hey, do you want to go with me? And then they're like, oh, the Southwest is pretty cool, you know, and then they acquire a customer. Could be pretty good.

[A]

I like peanuts.

[B]

Third is frequency of wins. Are customers rewarded often enough? And I think this is really good to build a habit. So Starbucks rewards users visit two times more frequently than non members because they can. They get stuff much more often. The threshold to get a benefit is very, very low. So I thought that was interesting. Two times more frequently than non members. So that's clearly driving what they want. Right. They want you in their shops more because you're going to spend money. You spend. If you spend the same dollar amount each time, you're spending twice as much as you would if you didn't have.

[A]

The loyalty program wasn't, though. I feel like we did an episode on this, like, and maybe it was a year ago, and maybe I'm kind of conflating two things, but Starbucks was basically in the toilet recently. I don't know how they're doing right now, but one of the problems that Starbucks had was margin compression. And one of the reasons they had margin compression was because of all of these different loyalty programs and the discounting that it culture that it was creating. And they were no longer considered this luxury brand that was selling you know, expensive coffee. They now were effectively turning themselves into this discount brand still trying to sell expensive coffee. Yeah.

[B]

And, and they opened 100 stores that were grab and go that they are currently closing because they, they, they realized that the experience of, of the European coffee, you know, bistro was what was lost when they went that. And so, so they don't make it as a discount brand. They make it as a brand that gets you to come and visit. So I'm guessing that the person who's grabbing and going is really just shopping deals much more like, like they don't care where they're gonna go as much as the one that's gonna go and sit and stay is gonna spend enough to make the margin make sense, whereas the grab and goer literally cannot order another cup. Right.

[A]

I guess, I guess the question I've got is, is the existence, the presence of this type of, you know, this type of benefit, this loyalty program, this points program, does it feel high end to you? And not, not every brand is a luxury brand. Like so not every brand does this matter. But it seems like if you want to position yourself as premium or luxury. I can't imagine Hermes necessarily doing a loyalty type program.

[B]

They have one.

[A]

Do they really? Okay, you would know.

[B]

They, they, they have one. And what it is, is the ultimate cool, high end thing is kind of like Patek Philippe you can't buy or AP Audemars Piguet. Right. You can't buy the better stuff unless you have, and they keep a score. So you have a score. And so if you want to buy a Birkin bag or something like that, it ain't going to happen unless you are rated a certain level. And, and all of those, that's Protect Elite, all of them have that.

[A]

See that this is different though, and I think that this is important. Does your loyalty program grant your most loyal people higher degrees of access and experience or does it merely allow them to buy more of what you're already offering at a discounted rate?

[B]

I think that's a really important discount is a mistake.

[A]

Yeah, exactly. If all your loyalty program is, is if it's just another form of discounting. I'd be really, really, really careful if the loyalty program offers higher degrees of status and access. All about it. Because probably at that point what you're doing is creating more loyalty because what you're doing is making, you know, expanding the relationship, getting closer to your people.

[B]

Status, access, convenience. Like I just yesterday or this morning? Just yesterday. Yesterday. I'm, I've got to go to Las Vegas and for meetings. And I saw that at the Wynn which is kind of our combined preferred hotel there. They're the Four Sixes Ranch, which is the ranch that actually I think a lot of Yellowstone gets filmed on, has a pop up restaurant for a limited period of time and it's completely sold out, you can't get into it. So, so I, I called Wynn Private Access which is a loyalty program that I'm, I'm a member of and said hey, and it's all sold out and everything. Can you get me in? When do you want to come? Gave them the date, absolutely no problem. Done. Now I couldn't have gotten in. So that's access. But then at the same time in something as basic as the Terrace Point Cafe there where we have casual, you know, dining or a couple of the other restaurants with Red 8, you can't, you can't make reservations but if you're in Private Access you can make reservations. And also there's a line cut line for Private Access members that just get to skip everything and go around. Even though I've been to breakfast there in the morning to get their world famous best in the world pancakes. And the line stretched around like the, you know, like 40, 50 people in line waiting and we walk right in because we've got that. So that's convenience, right? I don't have to wait. I think that's like you can buy the stuff that you can't buy. You can get special editions or drops. You get first access to that stuff. Those are all smart 100 acre that you and I are both on the allocation list of wine wise, right. If you want special bottles like Deep Time or Precious or Dark Arc and you know, or crypto, those are all only available to people that are their VIPs and they tell you when you log into their site you're a vip, you know and you know that if you don't buy, you know, for a while you're not going to get to keep to be a vip, you know, or you get booted off the list. So those are all to me wins that make sense and which goes to like that's what's talking about frequency wins that goes to. We're really talking now about number four, which is emotional connection versus switching cost. Right. Are they staying because they want to or because it's painful to leave? And I think we've really covered it well. A negative case study is that T Mobile faced heavy churn in their subscriptions when their perks app was cut back and the Customers realized that loyalty was really basically just like free Netflix. Right. Just not, wasn't really worth anything.

[A]

So you and I face this with a vendor that we had where, you know, we basically were like, hey, we're done. We, you know, we want to cancel. And they're like, oh, sorry, you know, you're like three days late from when you were supposed to tell us you want to cancel, you're in it for another year. We're like, really? So your entire business model is basically locking people into 12 month contracts. Screw you.

[B]

Yeah, like, and knowing that they don't want it and how much bad press, because I would actually mention their name. But I'm not gonna, if you're not gonna to me, I'm gonna tell everybody that story and they're gonna be like, oh, I'm never gonna use those people. And I know a few people and you know a few people and that's just such a dumb, dumb thing to do. The, the last one, the fifth one, is, goes to your Starbucks thing, financial sustainability. So does it drive incremental profit or just discount existing spend? Because that would be bad.

[A]

Right?

[B]

And there's a Deloitte study that showed poorly structured programs can cut margins by 10 to 15% if they incentivize behavior. That would have happened anyway. So like if you're going to go to Starbucks and you would have hung out and bought five coffees while you typed your great American novel, you know, wearing your scarf, then you've just screwed yourself because you're giving people especially like those quick wins if it's too frequent. Like if I can earn the benefit while I'm there and then not have to spend the money that I would have otherwise spent, that's, that's obviously not going to work. So I think that was what you were talking about there, right?

[A]

Yeah, yeah. I mean, and look, I think when it comes to a lot of this brands, forget that nice is free. And so much loyalty can be created simply by being nice, simply by being kind, simply by being just over the top, helpful. This is what builds so many brands today. And you know, when you think about a lot of the great brands, this is what Southwest Airlines did well, this is what Chick Fil A still does well. This is what Four Seasons and a lot of the great, you know, a lot of great hospitality brands have been able to do at scale, except when they don't, is they're able to, to deliver great service and they're able to do it over and over and over again. And I think so Much of it is just recognizing that actual loyalty is created when actual relationships are created. And that happens the same way that all relationships are created, right. When there's, you know, a genuine exchange there of values. And, like, so start there. Like, I really think that's important because none of this stuff is going to make up for your people just being a jerk to your customers. And that really comes from the top. So, I mean, as leaders, we've got to mirror that and model that for our people. And I'll also say, as we were talking about this, I was thinking more and more and as I was reading this article, like, okay, loyalty programs, they're just stupid. They have no place. You shouldn't do this. That's kind of where I was going. And then when you said what you said about Hermes, I will now amend that to say, I think the only thing good loyalty program that. That does make sense is one that gives the people that. That access that we talked about, that. That additional status, and then honors and.

[B]

Encourages the emotional connection. That's.

[A]

Yeah. And then ideally, it's built on that. That foundation of relationship that's already there anyway. So people desire to get closer, because if they don't like you, they're not going to want to get. Want to get closer. So I think if you can build that, then loyalty programs make all the.

[B]

Sense in the world.

[A]

And it's got me thinking, like, how could we do this for. For more of. For more of what we're doing? I think it makes a lot of sense.

[B]

I agree.

[A]

I agree.

[B]

Which is why we have these business lunch discussions. I like that. So the bottom line on that is if your program feels like a trap, then you don't have loyalty. You have hostage taking. So if you are building one from scratch, let's talk about a roadmap. It starts with, what is my objective? Am I trying to have higher retention? Do I want bigger order baskets? You know, higher average order value? Am I looking for referrals? Because people love it so much. Oh, my gosh, you got to come in. That's. That's the first thing. What. Do you have a thought on that? Like, is there any one of those or others you can think of that, like, you feel like should be the objective? Because I feel like the objective should be. Should be more to drive the emotional connection than anything else. Like, because you want. Because then the separation is like, it makes you want to be closer to the brand, which is going to make you spend more and make you refer more and make you stay longer as Opposed to saying, I want retention to increase by 17%. Yeah.

[A]

Aren't all of those outcomes of actual loyalty? Right. I mean, that's the thing. Like, if we all want to create so much process around this, it's like, what if we just create. Wait for it, actual loyalty? You know, and again, because what all of this assumes is it's transactional loyalty. That is not real loyalty. And so they're trying to create transactional outcomes. If you create actual loyalty, you will get each and every one of those things that you just mentioned.

[B]

I would argue that those aren't. That those might be your objective, but they are symptoms of actual loyalty and they're good for monitoring and measuring. Yeah, exactly. So then the second thing would be to choose your currency, and it could be points, cash back, status, access, experience, convenience, you know, but. Excuse me, not convenience, but points, cashback, status, experiences. And I. I kid because when we play any game, like if we play. If I'm playing pickleball and somebody's like, yeah, I just don't want to, you know, run too fast to get the ball because, you know, I don't want to hurt myself. And I'm like, yeah, but this game's for 10,000 points. And they're. What do you mean? Like, it's for 10,000 points. That's. If you win this game, they're like, points for what? I said they're redeemable anywhere that accepts these points. They're like, well, where is that? Nowhere.

[A]

It's no points. You can trade in for a gold star.

[B]

That's exactly.

[A]

What's a gold star worth? 250,000 points.

[B]

This game's double points. Exactly. So. So what is the currency, though? You do want to decide that Sephora Beauty Insider is a good one. They've got tiered perks. And I actually, I will say I forgot about Sephora. They've got tiered perks and experiential Rewards that drives 80% of revenue for members. Sephora. I will actually spend more money because at the store, if my points are close to a thing, I'll. I'll get, you know, they'll be having some promotion. I'm like, oh, that'd be cool. I'd love to have that and give it to my wife.

[A]

Right.

[B]

Or, you know, I'm doing Christmas shopping and, you know, really well, too. Yeah, yeah.

[A]

For.

[B]

Who does Nordstrom.

[A]

Nordstrom, yeah, they used to do that really well.

[B]

Yeah, I was. Nordstrom has also lost it for me because I. I used to care and they. But. But they've taken. Like they used to give free alterations and things like that. There's some things that now I'm paying for that I didn't ever pay for before.

[A]

And it just annoys me now they stopped being nice. I'm telling you, man, it, like the, it's, it's about doing the little things, right? It's amazing. Like, brands stop doing the little things and then all these other things that they want to try to engineer in lieu of don't matter anymore. And that's, that's the problem. Like when your people aren't nice, when you don't do the little things like free alterations because you're trying to save a buck, you lose a whole lot more in the unmeasurables.

[B]

So you and I would argue that status, experience and points, not cash back for the currency, ideally. Right?

[A]

Yeah. Cash back feels gross. I mean, that just feels like. Yeah, like, you know, tipping your spouse after the brand. To me, like, that's not good.

[B]

So step three is set a fair earning ratio. I like this as a benchmark. 2 to 5% of the customer spend as the value of the thing they get. If it's a, like a value, a thing that's not experience, that's the cool thing. So, so, like, think about this. If I spend $1,000 and I'm going to get 20 to 50 bucks back in value, I'm not super excited about it. Like at Nordstrom, you get the certificate, right? They send you the, you know, hey, you're going shopping or something like that. And I, I do like getting those. It doesn't drive my loyalty or my purchasing decisions there. Like Sephora actually does, but there it doesn't. Maybe because it's so. Because it's just transactional is just a discount basically. Because they're going to send me a gift certificate for 20 to 50 bucks if I spend a thousand. And sometimes I get triple points. And so I'd get $150, you know, but I had to spend 10 grand to do it. Neiman Marcus does this where they have. If you have a Neiman Marcus card, you know, if you spend $10,000, you get 1,000. So it's a 10% value that you get that has in the past caused me to spend a little bit more to, to hit. Like if I spent 800 bucks and I'm 200 away from getting 10% off, I'll probably buy the extra 200, which never works out to be the exact amount. So you spend 300, you know, so that probably does work. For, for them. And that's a luxury brand. So. So Nordstrom is maybe arguably kind of a luxury brand, but Neiman Marcus for sure is. So I, I think it, it's working there. But I like that 2 to 5% is of spend for the value because think about how do I stay within that range but give something that has way, way higher perceived value. It's the. Well, now you get access to this special drop or now you can buy this or now you get into this area or you can go into this back room or you can get to hang out with these people or you get. I just got a invite to go hang out with Jason. I can't think of his last name at Jason at 100 acre. Yeah, it's, it's, you know, hey. Huh.

[A]

Searching the W. I can't remember his last name either. I can't think of it.

[B]

But anyway, to come to his, you know, up 200 acre and hang out and he's going to cook and I like you. You know, he's to me like a great copywriter. He's like, you know, and screw your preferences and your dietary requirements. I'm cooking whatever the, you know, if I want to cook and. And men were men wearing perfume will be shot on site by myself. Like, you know, just great. But like, what does that cost him really to hang out and, you know, smoke his new 100 acre cigar and drink some of his wine that he's already got? Probably not a lot in terms of it, but it's perceived by people that are really high on, you know, highly into that you have to pay for it actually, but you're paying for it, but you still want it if you're into, you know, to that. And so like, I think he's really nailed the. And you know, and he's the one. He's really nailed the experience and the access and he's the one that is, if you buy enough in your vip, you get these special kinds of wine that only can be got by the people that are there. To me, none of that is 2 to 5%. Right. It's very, very low what it costs him. And. But the perceived value is way more than I spend $10,000 and I get a $50 card.

[A]

So I think that's like 5% low, actually. When you can. When you consider most brands are spending anywhere from 15 to 30% on customer acquisition. I mean, what's it now worth to keep them? 5% seems kind of minimal. Especially I mean, the lifetime value. If we can increase the lifetime Value of that customer. Boy, it, Yeah, I would say I.

[B]

Have to play with it. But I think this is launching a program. So I think as a start, before you really know what's working, that's a good place. I would argue. You know, just like I said, Neiman, you know, goes 10 plus but not on like total spend. That's on a particular spend like during a particular promo period or something like that. So maybe you have to look at it and see. But, but I think if you're willing.

[A]

To, to spend 2 to 5% as actual like actual cost, actual expenses, you should be able to have a much higher perceived value. If there's anything experiential whatsoever like you know, and then the example that you used, if you've got a high enough, if your brand is, you know, strong enough, maybe what it completely pays for itself because all they have, all your loyalty brand really is is the ability for people to give you more money.

[B]

Yeah, right. Which is which, which Jason does a really good example, good job of the step four is the tier for aspiration. So like silver, gold, platinum. The case study here, Amazon prime has a paid tier of $139 a year and that drives two times higher spend. 93% renewal rate after year one. Amazon definitely does that well I think. And that's like I don't see myself never, I don't see myself ever not having Amazon Prime. They could raise the price fairly significant and I still feel like I'm getting a good value. But that is actually I'm doing that transactionally. I'm not loyal to Amazon because of that. It doesn't make me stay at Amazon. It makes me pay for their loyalty program because I look at the numbers and just say that's a good deal. Right?

[A]

Yeah, people stop. People aren't allowed to use Amazon as an, as an example. They're a monopoly. They won every, they won Internet. You don't, you don't get to use Amazon. So yes, I agree, I agree with everything you said. But yeah, like that's, they're going through.

[B]

A radical reshuffle now that we should talk about. We should remember to talk about that on one of these episodes. Okay. Five is early wins, onboarding bonuses, first purchase perks. Six is daily integration. So app notifications, real time balances, gamification. How do you get people to continue to interact with it? That makes sense. And then the last step seven, continuous audit quarterly health check using the five audit questions that we started with on how to audit. So I think it's Basically, the best programs don't just reward. They actually become part of your customer's daily habit loop. That's, that's really what we're thinking about. We want people thinking about our brand and their loyalty to it all the time, if possible.

[A]

Right. And making sure that it's causational, not correlational, that it's causing people to actually buy more. Not simply that the people who would have already bought. You got to join this thing and you're creating complexity and you're, you're maybe reducing your margin by giving the people who would have already done this thing, you know, more stuff, more discounts. That's why I don't like discounting, because very often when you give people discounts for making additional purchases, you're giving people discounts, and they're the people who would have bought anyway.

[B]

You're also training them not to buy unless they get a discount. So to me, like the whole, that's, that's why I hate sales. You know, like as a, as an entrepreneur owning businesses, I don't really ever want to have a sale. I want to have now, I will let you buy this or you can buy this other thing or a bonus when you buy this. You get that. But I hate buy now it's 20% off Black Friday special, 40% off. Because I'm not going to have anybody buy, you know, unless they absolutely have to have it, probably between August and November because they're waiting for the Black Friday pricing. So I'm just teaching them not to do that. I think that's such a mistake. So a couple takeaways then. Basically, if you already have a program, run the five question audit this week. Is your program working? Does it meet those things that we talked about? If you don't have one, launch a pilot program with some sort of simple cashback or point system. Before scaling into tiers. We recommend against cash back, but if you feel like you have to do it, you know, test it and see. And then if you're a consumer, don't be passive. Negotiate, shop around and diversify your loyalty portfolio. Because you're probably paying too much. If you're in a portfolio right now, you might be better served to switch and switch back than to stay or contact the company. Because you can definitely do this, like with companies like American Express, and say, I'm about to leave because you're offering this, and then I'm going to come back and sign for it. Can you just do this for me now? And sometimes they'll say yes, sometimes they'll say no. It depends on who you get on the phone. But the question really isn't do loyalty programs work? Because I think they do when done right. It's just, does your, does yours actually make people love you or resent you?

[A]

Right.

[B]

That's. Does it really work? It only works if it makes you have customers that are more loyal.

[A]

Right? Yeah. I think another action item that I would add to that, it's a question you can ask and it's a question that I'm going to start asking for some of the brands that I've got some portfolio oversight and a question that I'm going to ask of some of our portfolio CEOs and general managers. What would need to be true about this brand and about the customer or client experience that we're providing for us to have the kind of loyalty program where, where the top level would be us giving access, giving people the ability to give us more money. Right. So it's not about discounting, but it is truly at a certain level, we're going to let you give us more money than you're able to give us right now and that other people are able to give us. I think that that is the ultimate sign of a really, really, really strong, strong, strong brand. And where I saw that, it's funny, for the first time I think we're getting close at scalable with, with Founders Board because Founders Board is very, very limited in the number of people who are let in. And we had somebody attend there, a entrepreneur, business owner that you and I have known for a very, very long time. I invited to come just as guest, somebody who's like, yeah, we've known him for a really long time. Like, hey, come check it out. Maybe one of these days you'll know you'll want to join. He said, I'm making it a goal because kind of starting up a new business that I'm making it a goal to be able to join this by the end of the year. And so it is becoming an aspirational type program and I think that we can get it to where it's at that place. And I know that we do similar things for private client type things. We don't make it available to everybody, but we will make it available to some. Hey, you now have the ability. We've worked, we believe in working together before we work together. So what. What needs to be true about your brand, dear listener. And, and to all of our portfolio company CEOs, what needs to be true about our brands for the loyalty program? To be okay. You now have earned the right to give us more money. You now have earned the right to qualify for this higher level product, this higher level of service. That, that I think is a, is a cool question to ponder.

[B]

Yeah, I agree. I agree. I love it. Well, hopefully this was helpful to you guys. We would love to hear your loyalty experiences and stories. Definitely share, reach out on social, tell us what you think and hopefully you found this valuable. If you did, we'd love for you to share it with other people. Tell a friend and we'll see you next time on Business. L.

[A]

Hey, before you go, if this episode sparks something, a fresh idea, a little clarity, or even just the comfort of knowing that you're not crazy for doing this whole entrepreneur thing, then I want you to imagine what happens when you're in the room with 750 other founders who are right there with you. That's what Get Scalable Live is all about. Three days, San Diego, November 18th through the 20th. And again, this event was built exclusively for seven and eight figure business owners who are looking to scale something real. There's no fluff, there's no ego, there's no washed up celebrities delivering keynotes with zero takeaways. This is just strategies, systems and the copy and paste tools and tactics that you actually need to scale. There's amazing stuff at the front of the room, of course. Course. But also at dinner, in the hallways and over drinks where the real conversations happen. You're going to get great stuff there as well. So if you've ever thought I can't step away or this whole thing breaks or I built something that works but it's starting to feel like a trap, then this is your room. Roland and I are going to be there. Our team is going to be there. And if this is your year two level up, you should be there too. Head to get scalablelive.com use the code LUNCH to save 25% off of your ticket. Again, get scalablelive.com and code LUNCH. But you need to do it now. Not only are prices going up, but this event absolutely will sell out. It does every year. So if you're ready to finally step out of the chaos, if you're ready to build a business that scales without you, and if you're ready to surround yourself with people who actually get you, go to getscalablelive.com, use the code LUNCH and I will see you in San Diego. Trust me, you're going to be glad that you did.