Loyalty Programs Suck

Let's start with a question.

06.30.25
Introduction
What's better?

Purchase a cup of coffee for $5.
(If you’d like to learn more about these Machination diagrams, visit here.)
Or...

Purchase a cup of coffee for $5 and receive 5 points.
The latter clearly has more value, however one question remains.

What do the points get you?

That's where the problem lies.

Loyalty programs suck.

The issue isn’t their performance but their design. They don't understand motivation.

To understand this, we need to take a step back.
Lay of the Land
Loyalty programs are in fashion for a reason.
"90% of loyalty program owners reported positive ROI, with the average ROI being 4.8x" (Queue-it)

They work.

They provide an additional reason for people to stick around.

For example, let's look at two of the popular strategies:

Point-Based Systems

In point-based systems, you earn points for each purchase, which can later be redeemed for rewards, usually discounts.

For instance, you might earn 5 points for every item purchased, accumulating enough to exchange for a $5 coupon.
(To simplify, we'll abstract the "Transaction" element going forward.)
Tiered Memberships

Tiered loyalty programs categorize individuals into different levels based on spending. As you progress through higher tiers, they unlock more benefits.

For example, a program might offer a discount to standard members, while VIP members may receive additional discounts and exclusives.
Missed Opportunities

These programs work.

But they are not efficient.

#1

The limited scope of rewards.

Many companies follow the “buy 10, get 1 free” model, essentially offering discounts.

This is intended to create a positive feedback loop, participants purchase in exchange for more of the same product (as visualized above).

However, this approach assumes sustained interest in the product.

If a person believes the product is flawed or gets bored, it doesn't matter how many points you send their way.

They will leave.

Solution
(... other than to fix the product)

Variety.

Instead of using coupons as the sole reward, brands should look to provide an array of prizes.

This would allow you to craft experiences that appeal to the participant as individuals and partners rather than a customer.

Examples include:

Discounts
The default reward.

Early Access
Providing early access to brand initiatives.

Voting Rights
Allow people to vote on your brand and its direction.

Experiences  
Visiting company headquarters, appearing in company ads, etc.

#2

Imagine you're a student at a 4-year university.
It offers only a single course.

You attend the same class repeatedly. No variation.

This is the second missed opportunity.

Limited actions.

Many programs focus solely on purchases.
Essentially replicating our one-class university situation.

Providing only one path to rewards is detrimental.
It creates a transactional experience for individuals and puts a cap on the brand's growth potential.

Solution

Autonomy.

The goal is to provide freedom.

The more actions you allow an individual to take, the more likely they will be able to express their gratitude in ways you can't predict (aka emergence).

Some brands have saw this gap and have responded by adding actions, such as:

Social Actions
Following on social media.

Referrals
Referring friends to the brand.

Leaving Reviews
Providing product feedback.


However, in most cases, these actions only work for a limited time.
After completing, people are back to earning points solely through purchases.
Ultimately, the more actions that are added, the better the experience for everyone involved.

However.

We're still looking at loyalty programs based on its current model.

It's time to evolve.
Unlocking the Potential
Loyalty programs have amazing potential.

However, they are often subject to traditional restraints.

If we change the view from viewing these programs as transaction enhancers to viewing them as game systems, we may be able to uncover a new experience.

Introducing Gamification

For this piece, I will use the Merriam-Webster definition:

Gamification
noun
1. the process of adding games or gamelike elements to something (such as a task) so as to encourage participation

The goal of both loyalty programs and games are to encourage more engagement.

In gaming, players are motivated by progression, unlocking rewards, and making meaningful choices (along with other factors).

However, many existing loyalty programs rely on static, repetitive transactions, which, as described above, can become monotonous.

To create an engaging loyalty program, brands should look to incorporate essential elements, such as:

Autonomy
Offering participants multiple ways to earn and redeem rewards.

Progression
Ensuring participants feel a sense of growth as they engage with the system.

Reward Variety
Introducing variable prizes that adapt based on participation.


This approach gives individuals a reason to return — not out of inertia but genuine interest.

Now that we’ve outlined some key principles, let’s explore how these mechanics function within a structured system  by introducing the concept of engines.

Static vs. Dynamic Engines
Drawing inspiration from game mechanics, as discussed in Game Mechanics: Advanced Game Design by Ernest W. Adams and Joris Dormans, we can categorize loyalty programs into two types of engines:

Static engine
noun
1. Produces a steady flow of resources over time for players to consume or to collect while playing the game.

A traditional point-based model resembles a static engine, where points are accumulated fixedly based on specific actions.

For each action completed, a predetermined number of points is awarded, with no opportunities to enhance the flow.

Such systems often lead to stagnation, as participants may leave when they no longer find the product valuable.
Dynamic engine
noun
1. A source that produces an adjustable flow of resources. Players can invest resources to improve the flow.

Similar to a dynamic engine, Membership tier models allow participants to take actions that improve their point accumulation.

For example, upgrading to a higher tier might enable an individual to earn more points/actions than the basic tier.

However, this is typically a one-time activation without mechanisms to regulate point accumulation (aka friction), resulting in an enhanced yet similar experience to the basic tier.
Before we conclude this section, I'd like to revisit one essential point.

The Importance of Autonomy

"Human beings have an innate inner drive to be autonomous, self-determined, and connected to one another. And when that drive is liberated, people achieve more and live richer lives." (Drive)

Freedom is crucial.
Everyone is unique.

You can see the importance of this concept within contests, such as Trials of Fate, #KHonSteam, and #DreamCard . Some prefer straightforward transactions, while others seek to optimize for value.

By providing multiple actions and rewards, brands can cater to this spectrum, enhancing the program’s appeal.
Quick Recap
Let’s recap what we’ve covered so far:

While effective, traditional loyalty programs often lack autonomy, engagement variety, and long-term appeal.

Many rely on single-action earning methods (typically purchases) and basic rewards (usually discounts).

While these methods work, they lack the flexibility and interactivity to maximize long-term appeal.

Throughout this piece, we’ve explored ways to evolve loyalty programs beyond static transactions, making them more adaptive, rewarding, and engaging for participants. This includes:

#1
Broadening the scope of rewards to increase appeal and motivation.

#2
Providing multiple pathways to earn rewards, granting greater autonomy.

#3
Incorporating gamification to make the loyalty experience feel more dynamic than routine.

These improvements shift loyalty programs from static transactions to interactive, evolving systems.

Now, let’s see how these principles apply to one of the world's most successful programs.
Starbucks Analysis
"Starbucks has a higher customer retention rate of 44% than the industry average of 25%" (CoffeeDasher).

Starbucks is a retention behemoth, with a key component being Starbucks Rewards.

Their approach is straightforward, centering on a point-based model. Let’s take a high-level overview of this program's main mechanics.

Notes:
#1
This analysis focuses on Starbucks's U.S. market, acknowledging that international markets may employ different strategies, such as tiered memberships.

#2
The machinations you see below are not an exact representation, as Starbucks, along with participant usage, data is unavailable to the public and changes based on the promotion.


Main Mechanics

App Requirement

Debatable move.

Depending on the implemented mechanics, a native app could provide an unbeatable personalized experience.

However, requiring individuals to download an app is risky, as that's an additional barrier to entry. What advantages you may gain with a native app, you may lose in conversion rate.

Given Starbuck's brand recognition, the drawback may be minimal. However new brands may not be as lucky.

PoS programs, like Square or SAAS companies, like Antavo and Open Loyalty, will give you similar, if not better, functionality, but with the added convenience of being located closer to the point of purchase.

Static Engine
Points are known as "Stars" in this program's economy; participants earn them through two primary actions:

1 Star per dollar
Paying directly through the app.

2 Stars per dollar
Using a preloaded Starbucks Card within the app.
This structure provides a reason to keep funds within the Starbucks ecosystem, essentially committing people to future purchases.
Dynamic Elements
Starbucks doesn't make much use of actual dynamic elements; however, they have incorporated some brand events to add some variety, such as:

Double Star Days: Occasional promotions where participants earn double stars on purchases.
(To turn dynamic, you could provide participants with the ability to choose their own double star days, such as a voting system)

Bonus Star Challenges: Personalized challenges offering extra Stars for trying different products.

(Will visualize in a subsequent section)

Rewards
Starbucks offers a tiered redemption system, providing participants the freedom to choose rewards that align with their interests:

‍25 Stars
Customize a drink with an extra espresso shot, syrup, or alternative milk.

‍100 Stars
Redeem for a brewed hot, iced coffee, tea, or bakery item.

‍200 Stars
Enjoy a handcrafted beverage, hot breakfast item, or parfait.

‍300 Stars
Select from a lunch sandwich, protein box, or salad.

‍400 Stars
Choose select merchandise or at-home coffee products.
Deep Dive

Earning Stars
As mentioned earlier, there are only two ways to gain stars, but more generally, there is only one: purchasing. This runs into our one-class university problem.

To prevent this, Starbucks has implemented challenges to increase the variety, one being a popular game mechanic.

Bonus Star Challenges
Image for Loyalty Programs Suck: Hades Weapon Bonus
Hades is a well-known classic in the gaming world. To severely simplify, your goal is to pick a single weapon and use it to beat the game in one go.

To prevent players from routinely using the same weapon, the designers implemented a 20% bonus on resources if they choose an unfamiliar one.

Similarly, Starbucks has implemented Bonus Star Challenges to get participants to double down or try new products.

These challenges offer additional Stars when participants purchase specific products or visit several times within a set period.

For instance, an individual who typically orders a frappuccino might be prompted with a seasonal frappe challenge for extra Stars.
To further enhance this strategy, Starbucks could introduce limited-pool challenges.

These would allow only a set number of individuals to take the mission to redeem.

Allowing the most interested individuals to get an exclusive prize.
(To make this challenge more dynamic, allow individuals to choose the challenge they want to aim for.)

Reusable Cup Benefit
Given Starbucks's focus on sustainability, they have implemented a challenge to aid: Reusable Cup Benefit.

This initiative rewards participants with extra Stars for bringing in their reusable cups.

Even though they've recently changed the benefit mechanic, the value is there. If you like stars, sustainability is a route to access them.

This initiative accomplishes three key elements along the way:

#1
Provides autonomy in terms of possible actions within the reward program.

#2
Protects the environment from the cups that would be thrown away.

#3
Saves Starbucks costs as they can produce fewer of those cups.

Great implementation, although to enhance the impact even further, Starbucks could make reusable cups an integral part of its brand.

Here's a potential stak:

#1: Offer customizable cups that gain you stars when used (Foundation).

#2: Provide accessories, as rewards, for these cups, which can be redeemed at the local Starbucks.
(Bonus points if each accessory provides a unique benefit)

#3: Add a seasonal bonus challenge asking fans to share pictures of their cups under #mycup.
(This is more of a branding thing, entirely up for debate)

The intention is to create a loop of sharing, leading toward probable seasonal virality:
(I have reduced the purchase delay and reward cost to better visualize the viral loop)
(This diagram hypothesizes the actions if this stak is implemented. The exact % increase is unknown.)

Now, let’s look at the other side of the coin:
Rewards
Starbucks’ rewards system stands out for its tiered approach, giving members the freedom to choose how they redeem.

This allows participants to apply various strategies, i.e., use immediately vs save for merch.

However, there can still be improvements.

The gold standard is autonomy.

This is where the concept of static versus dynamic engines comes into play.

Engine Recap
In the context of rewards programs, a static engine offers fixed methods of point accumulation and redemption.
Participants earn points through predetermined actions and redeem them for specific rewards without much variation.

Conversely, a dynamic engine introduces variability and participant control into the system. It allows multiple strategies for point accumulation and redemption.

Introducing Consumables
A practical way to implement a dynamic engine is through consumables.

In video games, consumables are temporary items or abilities that assist players in overcoming challenges. They offer flexibility and strategic depth.

Duolingo is a big fan of this mechanic.
Image for Loyalty Programs Suck: Duolingo Streak Freeze Picture.
Applying this concept to Starbucks: consumables could serve as rewards that temporarily enhance participants' ability to earn stars or access benefits.

For example, Starbucks might introduce a Point Multiplier Consumable.

Point Multiplier Consumable Sample Bio

Description: Increase star accumulation rate for a limited time.

Cost: 20 Stars

Effect: 2x multiplier on Stars earned on your next purchase
This approach differs from Starbucks’ current Double Star Days, where participants receive Double Star opportunities on preordained days.

With the consumable approach, participants have the autonomy to decide if they'd like to participate and when to apply the multiplier, adding another tool for them to strategically use.

‍Balancing the System
Introducing consumables does not come without risk. If not managed correctly, it could lead to an inflated economy, loss of profitability, and boredom for the participant.

To mitigate this, introducing friction is essential.

Friction
noun
1. A drain that consumes resources produced by a player. They act as constraints designed to prevent positive feedback loops from becoming unmanageable.

An example would be to introduce usage caps. This will limit the number of times a consumable can be used within a specific timeframe.

For example, a participant can use the Point Multiplier Consumable twice a month.
Another friction mechanic to mitigate hoarding is introducing a constant drain on participants point's over time.

Starbucks has addressed this through its point expiration system, requiring accumulated Stars to be used within six months.
By integrating gamification elements like consumables and balancing the system with friction, Starbucks could add another layer of strategy, appealing to different preferences and reaching different individuals.

Notable Mentions
Throughout this piece, we’ve dove into various aspects of gamification, yet many elements, which are associated with gamification, haven't made their debut due to time.

Features such as leaderboards, badges, and multiplayer components can add an added layer of complexity, making the program more interesting.

When executed thoughtfully, these elements can create a platform for self-expression, competition, and community.

However, when not, they risk becoming superficial additions to the user interface.
Conclusion
Engines. Friction. Rewards.

These are the core components of many games, and by extension loyalty programs.

If you're looking to glue these components together in the most rewarding fashion:

Embrace autonomy.

Allow participants to engage on their terms.

This autonomy may lead to one of the holy grails within game design: emergence.

The more tools you can provide as inputs, the more likely you'll be surprised at the output.
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