Why Loyalty Programs Don't work for Most DTC Brands and Where to Spend Your Time Instead

Background

Times are tough for a lot of eCommerce brands. That means most brands are torn on where to spend their limited time and budgets.

About 20-50x per month, I chat with brands about where they should (and shouldn’t) invest their resources.

Loyalty programs almost always come up as an option, and the incredible Cherene Aubert at Bobbie said what every strategic brand manager should have picked up on now:

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I totally agree with her. And I want to use basic economic principles to explain what makes most DTC brands immune to viable loyalty programs.

What is a loyalty program?

First: let’s clearly establish what a loyalty program is.

A loyalty program offers rewards, discounts, or other special incentives and are designed as a reward for a customer's repeat business.

Sounds pretty straight forward but in order to find success, brands have to understand that they should be striving for a good loyalty program - one that sustainably drives repeat purchases.

Sustainably is the operative word here. Winning the game of eCommerce requires improving your unit economics in the long term. So if your loyalty program is driving more repeat purchases just by offering discounts, for example, you’re not actually efficiently driving repeat purchases. Instead, you’re eroding your customer’s perspective on brand value.

In this thought piece, let’s focus on good loyalty programs.

What drives loyalty?

In order to even begin to build a good loyalty program, you need to spend more time understanding what drives consumer loyalty. I’ll start with a generic overview:

Consumers are surprisingly rational with their purchase decisions. They spend in a way that prioritizes themselves.

Many brands naively believe that if they build a cool enough program, buyers will stick around. But that’s incorrect and naive.

Human beings are deeply self-interested - particularly when it comes to economic decisions.

That means buyers only display loyalty if and only if they believe that spending with you today will make their lives better/easier in the future.

I hate to be the one who offers a bitter dose of reality, but gone are the days where consumers buy from your brand just because they love your brand and what it stands for. In our digital-forward world where there are thousands of brands touting the same benefits, shoppers feel limited guilt buying from your nearest competitor.

I hate to be the one who offers a bitter dose of reality, but gone are the days where consumers buy from your brand just because they love your brand and what it stands for.

Anyone can build a perk-filled loyalty program known to man, but if your buyer isn’t convinced that you’ll continuously sell products that they’ll always want, they will not be loyal to your brand.

How to encourage loyalty

Following the above logic, there are really only 2 conditions under which a rational consumer will reliably opt-into your loyalty program

[Reliably here means they don’t just sign up to get a quick discount but rather there is a true self-interested commitment to continue spending with you]

1. Your brand offers such a wide assortment that the shopper knows there will likely always be something that they want to buy from you
2. Your brand offers a commodity that the shopper needs to buy on a recurring basis AND they have been convinced that your brand is the best fit for them

Offer a Wide Assortment

For obvious reasons, this recommendation is not easily implementable. However it does drive home the point around consumer’s psyche when exploring loyalty programs.

The reason Sephora, Autozone’s, and Nordstrom’s loyalty programs are so successful is not the perks that they offer. It’s because shoppers know both retailers will always offer a slew of inventory or services that the buyer will inevitably want in the near term.

Sephora’s hailed as a beauty retailer that will always carry the best/most compelling beauty products. The moment they stop merchandising products that shoppers are looking for, the shoppers will go elsewhere.

Nordstrom’s expansive catalogue of goods and services virtually guarantees that someone will always be able to find something that they want at one of their stores.

Any an automobile owner knows (or at least should know) that there will always be some amount of upkeep required to keep the automobile functional. Because Autozone covers virtually all of those services required to keep an automobile functional - their loyalty program works.

Pointing back towards Cherene’s tweet which inspired this article: the average DTC brand is incapable of offering a wide assortment. DTC typically works best when you offer a small universe of products and drive costs down + volume of purchases up in order to build a big, profitable business.

I'll reference this graphic more and more in the near term, but for now it provides a healthy overview on levers you can use to improve the unit economics of your DTC brand.

Make it easier to purchase a recurring commodity

This point is where I’m probably going break some DTC hearts.

No matter how perfectly your product is formulated, or how cool the branding is: 99% of consumer brands are a commodity.

It is a highly substitutable product which means you’ll have to earn your buyer every single time.

But that doesn’t mean you should lose all hope!

By understanding that a rational consumer has little reason to pick you, you can tap into another behavioral mechanism that’s just as effective for driving loyalty: subscriptions.

Earlier I made the argument that shoppers only become loyal if they are convinced that committing today will make their lives better/easier in the future.

When it comes to commodity goods, brands need to absolve the pain of finding the right product in order to create a loyal consumer base. Take coffee for example: I know I want to drink it every day. I know I have a particular threshold for what I want it to taste like. But the cost of having to find the perfect brand every single time I need a new bag of coffee is a nightmare.

THIS is where a subscription loyalty program works well.

What’s the difference between a subscription program and a loyalty program you might ask?

Generic loyalty programs require repeatedly encouraging a shopper to spend with you. In this case, you still require them to think before buying your commodity.

On the other hand, subscription programs are a subset of loyalty programs. In this case, you put the purchasing decision on autopilot. And one can argue that you’re making the consumer’s life easier by removing the cognitive burden of having to choose a commodity to repurchase. With subscriptions, once you’ve convinced your buyer that your product is good enough to meet their needs, make their life better/easier in the future by removing the decision fatigue required to replenish that product.

Simple as that.

Closing

After all of this, hopefully you can see and understand that loyalty programs simply aren’t for every brand. So when it comes time to figuring out which projects to prioritize, I’d recommend using this framework to forecast if you’ll see the results that you’re hoping for.

And let me know what you think of this! I’m thinking it will be part of a larger series that helps eCommerce brands understand where to spend their limited time and resources.

Until then,

Kimiloluwa

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