Launching a loyalty program is easy. Closing It Is Suicide

Last month, a retail executive called me in a panic. "Our loyalty program is bleeding money,"  he said. "But when we tried to scale it back, customers went nuclear on social media. Our NPS dropped 30 points overnight."

I wasn't surprised. My spontaneous first thought? “I told you so.”

Here's what happened: His company launched a points program that seemed simple. Spend €100, earn 100 points, and redeem for €3 rewards. Clean math, right?

Wrong.

Six months later, they realized they'd built a 3% discount system with 30% operational overhead that they could never, ever shut down.

Welcome to the loyalty economics trap that quietly bleeds millions from retail balance sheets around the globe.

The Seductive Lie Every Executive Believes

Every loyalty program pitch starts the same way:

"Customers will spend more, shop more frequently, and stay loyal longer. The program pays for itself through increased lifetime value."

The CFO nods. The CEO approves. Marketing celebrates.

The costs hit immediately:

• Technology platform: €50,000-500,000 setup
• Point liability: Growing with every transaction
• Customer service: Handling redemption complaints
• Program management: Full-time team required
  The benefits? Always "coming next quarter." :)

Most point-based loyalty programs are expensive customer discounting systems disguised as strategic initiatives.

After analyzing dozens of failed programs across retail, I've learned something painful: most loyalty points-based programs are expensive customer discounting systems disguised as strategic initiatives.

Why Your Customers Will Never Let You Stop

Here's the part no consultant tells you during the sales pitch: Once customers receive loyalty benefits, they become psychological owners of those benefits. This isn't my opinion. It's behavioral science.

In Predictably Irrational, Dan Ariely shows that people hate losing something they have twice as much as they like gaining something new. Your loyalty program triggers what psychologists call the "endowment effect": customers begin treating earned points as their property, not your gift. I learned this the hard way during my time transforming loyalty at IKEA.

Every program change, no matter how small, generated immediate customer revolt:

• "You're stealing from loyal customers!"
• "This is a bait and switch!"
• "I'm switching to your competitor!"

We weren't stealing anything. We were optimizing a program that was hemorrhaging money. But try explaining that to a customer who feels you just took €50 from their wallet.

The business reality: Loyalty programs are like government entitlements. Easy to create, but politically suicidal to remove.

The €50M Mistake: Real Numbers from Real Companies

Let me show you the hidden math that destroys most loyalty programs:

Typical Program Economics:

• The customer spends €1,000
• Earns 1,000 points (1¢ each)
• Redeems 800 points for a €8 reward (80% redemption rate)
• Program overhead: €2-3 (technology, service, management)
  Total cost: €10-11 for €1,000 in sales
  Translation: You're giving customers a 1% discount with a 25% operational markup.

A simple 1% coupon would cost exactly 1% with zero overhead.

But wait, it gets worse with compound damage:

• Customers delay purchases waiting for "bonus point" events
• Your best customers become most price-sensitive (they learn to game the system)
• You create liability that sits on your balance sheet
• Every customer service call costs €15-25

One major European retailer I consulted for spent €47 million on its loyalty program over a three-year period. Their incremental revenue? €12 million. They paid €47 million to generate €12 million. That's not marketing. That's financial suicide.

The Three Warning Signs Your Program Is Doomed

After auditing dozens of failing programs, I see the same pattern every time:

Warning Sign 1: The Excitement Trap

• What you hear: "Customers love earning points!" 
• What it means: You're giving away margin for no real behavior change.

Warning Sign 2: The Complexity Spiral

• What you hear: "We need to add tiers and bonus categories to increase engagement."
• What it means: Your program doesn't work, so you're adding complexity instead of value.

Warning Sign 3: The Metrics Mirage

• What you hear: "Program members spend 20% more!"
• What it means: Your best customers joined your program. Correlation isn't causation.

The Psychology That Traps You Forever

The scariest part isn't the money you lose. It's that you can never escape once you start.

Try to reduce benefits, and customers revolt. Try to increase earning requirements, and they cry "devaluation." Try to shut down the program, and they switch to competitors.

Remember JCPenney? Their attempt to eliminate complex loyalty promotions contributed to a 25% sales drop and cost the CEO his job.

The Hard Questions Every Executive Must Answer

Before you launch that loyalty program, honestly answer these questions:

• Can you monetize it externally? Do banks or partners want to buy your points?
• Do you have adjacent services to cross-sell? Can loyalty drive revenue beyond core products?
• Will customers pay upfront for benefits? Is your value proposition strong enough for paid membership?

If you answered "no" to all three, don't launch a traditional points program. You're about to build an expensive discount system you can never shut down.

The Bottom Line

From time to time, I have the opportunity to speak with executives who have launched loyalty programs, believing they were investing in customer relationships. Instead, they built expensive customer entitlement systems that they can never escape.

The hard truth: Most loyalty programs would be more profitable as simple discounts without the operational complexity.

The strategic truth: Real loyalty comes from exceptional experiences, not accumulated points.

The financial truth: Unless you can monetize externally, charge upfront, or cross-sell profitably, your loyalty program will slowly bleed your company dry.

The psychological truth: Once you give customers something, taking it away feels like theft. Even when it's destroying your business.

So, are you building customer loyalty or customer entitlement?