About the episode

That satisfying ding when you scan your rewards card. The little thrill of watching points accumulate. The smug satisfaction of using miles for a "free" flight. Sound familiar?

We're all players in the massive loyalty program game – whether we're collecting coffee stamps, airline miles, or cashback percentages. But here's the million-point question: Who's really winning?

Is that loyalty card in your wallet a golden ticket to genuine value, or are you just a willing participant in the most sophisticated customer retention scheme ever devised?

Steve Hui, founder of iFLYflat, explains the psychology behind those irresistible point systems, the real mathematics of "free" rewards, and the critical difference between programs that genuinely reward customers versus those that incentivise loyalty more than deliver true benefit.

This episode is hosted by Dr Juliet Bourke with insights from Professor Barney Tan.

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Transcript

Dr Juliet Bourke: Whether you're shopping online, at the supermarket, or planning an overseas trip, loyalty and rewards programs are everywhere.

Steve Hui: There's the airlines – Qantas, Virgin, Singapore, Emirates. You've got the credit cards – American Express, NAB ANZ, Citibank. Supermarkets, travel and then even health insurance. Basically in every industry there's a loyalty program.

Dr Juliet Bourke: As business leaders seek more cost effective growth strategies, these programs have boomed in an attempt to drive repeat business. But launching a rewards initiative for your customers isn't the only way businesses can capitalise on point schemes.

Steve Hui: Payroll, paying the ATO, stock, suppliers... Basically every dollar a business spends, you can actually earn points.

Dr Juliet Bourke: This is The Business Of, a podcast from UNSW Business School. I'm Dr Juliet Bourke, an Adjunct Professor in the School of Management and Governance. Steve Hui is the founder of iFLYflat, a consultancy service helping business owners make the most out of loyalty programs. He's seen firsthand how effective these types of programs can be, but also how they can go wrong if customer expectations aren't met. So Steve, how do loyalty programs work?

Steve Hui: Loyalty programs are really just there on a commercial basis to get repeat business. But sometimes I feel like loyalty programs... the better word is actually a reward program. Because loyalty is supposed to be a two-way street, but nowadays it more and more feels like it's a one-way street, that the customer is loyal to the business but the business is not really that loyal to the customer.

Dr Juliet Bourke: Yes, I think we do think of it as a win-win, don't we? The company is getting your loyalty and you're getting some benefit in terms of points towards something or a discount, or something like that. But I think we do think of it as supposed to be even.

Steve Hui: Yeah, we think it's even, and we feel like when we have a time in need or when we want something, that the program will also respond in kind. And what I always keep hearing is that they're disappointed that the company is like, "Oh, we're not going to do that for you." So there's a mismatch. Whether sometimes a company should do something for you or should not, it's hard to tell. Because, of course, the person is emotional where a company is not. But most of the time I do feel like people are disappointed, and that's when the loyalty program is not delivering what the customer thought the loyalty program was supposed to deliver.

Dr Juliet Bourke: So really, this use of the word loyalty expects reciprocity. But reward is just you've done something, made a purchase, and the company is giving you something. So why do they use the word loyalty then?

Steve Hui: Because companies want loyalty without really acting for it. So loyalty is an emotional word. Normally, you say loyalty amongst friends or loyalty amongst colleagues type thing. So therefore that means that at one point in time for all the stuff you've done for someone that they'll replicate, and they'll do something back for you. So that's why I feel like if companies call the program rewards they'll have less of a blowback when they don't deliver, because it's much more of a transaction rather than loyalty, which is much deeper in people's hearts.

Dr Juliet Bourke: So let's talk about how they work, sort of the nuts and bolts of that loyalty/reward program. How do companies design their programs?

Steve Hui: They design their programs generally in a tiered level. So they want you to do certain actions, and... let's say they give you points. So if you make X number of purchases they'll give you some points, and then those points can be converted into something of value later. So we're talking very general. And then there will be a next tier, because for any business, there's always going to be some people that will spend more than others and they want you, effectively, to spend more. In this sort of like commerce driven world, it's more about spending more equals more profits. So they just want to extract you to keep coming back more and more. So things like, say, Mecca has a loyalty program and they don't really have a point system. The more you spend, you get different types of boxes. And I know my wife is a very big fan of Mecca, and I think most Australian women are because of the cosmetics and all the different samples they give you.

Dr Juliet Bourke: How do loyalty programs create the buy in for the first user and then maintain that buy in over time?

Steve Hui: So that can occur at all levels. So for example, supermarket rewards like Flybuys – you collect 2000 points and you can get $10 off your shopping. So although $10 to some people not very much, but the feeling of getting something for free is something so deep in people's hearts that everyone will want to take it. On the flip side is that you can actually, if you were to accumulate your points, then you can swap it for first and business class seat that you might not want to spend money on – your own money on – and that's the aspirational reward. So I love frequent flyer programs, or I love points programs, which allow you to swap a lot of points for something really aspirational that you otherwise just wouldn't want to spend your money on. Not because you can't afford it, so we have plenty of clients that can clearly afford it, but they love to bargain more than spending the money.

Barney Tan: Fostering loyalty and repeat business is the main goal of reward programs, but an additional benefit, and often a more strategic one, is collecting data on customers to refine our marketing efforts even further. In academia, this is called data-fuelled intimacy – the ability to use transactional and behavioural data to anticipate customer needs and personalise experiences.

Dr Juliet Bourke: That's Professor Barney Tan. He says this data can have big payoffs for businesses, but only when it's used with customer consent.

Dr Barney Tan: A well known study conducted in the field of marketing showed that firms that combine loyalty program data with analytics and customer relationship management practices can actually lift their customer lifetime value by double digit percentages. In practice, this intimacy could take the form off, for instance, your Woolworths Everyday Rewards program, right? Knowing when you stock up, for instance, on pet food every three weeks and then maybe nudging you with a discount every time you need to stock up. It could be, for instance, Qantas spotting that you book holiday flights a year out, and then emailing you a flash sale exactly when you start to plan for your holidays. So the result is actually a virtual cycle, because better targeting leads to higher redemption, which leads to richer data, which then in turn sharpen the next offer. And customers, on the other hand, feel seen, feel like companies are paying them attention, and the companies that do this also see stronger retention and bigger baskets. Of course, the flip side would be data fatigue, or worse, backlash, if customers feel stalked or spammed. And this is where the principles of permission-based marketing absolutely has to come in. Permission-based marketing is based on three principles. The first is consent. You need to ensure that you have opt in. Customers need to be able to choose the channels, the frequency of being contacted, and the kinds of offers that they receive. Secondly, there needs to be value exchange. Every communication must deliver genuine value – for instance, a meaningful discount, early access to sale, or perhaps information that is not generic but really specific, tailored to the customer's needs. And the third principle is you need to have transparency and control. With privacy policies you need to make sure that they're clear and easy to understand, you need to allow customers to easily toggle their data sharing settings, and the option – most importantly – to opt out at any time. Now, programs that get this right, for instance the Mecca Beauty Loop in Australia, they send curated rewards, boxes and personalised tutorials only to members who said, "Yes please," because the value is obvious. Engagement rates stay high and complaints stay low if you do this right. Meanwhile, brands that ignore permission queues can pay a hefty price. Think of the public pushback, for instance, when companies over email, cross financial and health data without consent, or sell lists to third parties. Beyond reputational damage, regulations like the GDPR in Europe and the Australian Privacy Principles give regulators teeth to fine offenders. So the playbook is clear, use loyalty data to build intimacy but not intrude on the customer's privacy. You need to test and learn but only within the boundaries the customers have set, and you need to make opting out and adapting your data sharing settings as easy as possible. If you do that, loyalty programs become more than merely point engines that encourage repeat purchase. They can evolve into something that enables trusted, data-driven relationships that benefit both the business and the customer for the long haul.

Dr Juliet Bourke: And so, Steve, curious about iFLYflat. Your business model, effectively, is about advising people how to acquire points and use those points, is that right?

Steve Hui: That's right, yeah.

Dr Juliet Bourke: I'm sure there's more to it than that. Tell me, the more to it than that.

Steve Hui: Yeah, so I feel like there's so much value in points. My background is Bachelor of Commerce, CPA Accountant, so my mind's always thinking, how do you maximise something? The fundamental thing of business I believe is do more with less. So points is one of those things where you can actually get upside. So we help, generally, small/medium sized business owners earn points from all their spending. So you can actually earn points for payroll now, paying the ATO, stock, suppliers... basically every dollar a business spends you can actually earn points. It comes for a fee, so that merchant fee someone has to pay. Either the business owner has to pay or their supplier has to pay. And then the magic is it's not about how much you pay in fees it's can you get more value than what you paid for? So then if you convert those points to business class, you actually get about double the value. So if you earn your points at two cents, you can actually get about four cents of value every time you spend those points.

Dr Juliet Bourke: Just slow it down for me. How do I get double the value of my point? Or my dollar, I should say.

Steve Hui: So for example, a business class flight return to Europe would cost about, say, $12,000 to buy. Quite a lot of money for one flight. But you can have the same flight if we redeem about 350,000 points. So effectively, you're converting 350,000 points into something that's worth retail $12,000, but you can get those points for roughly two cents each. So you're getting $7,000 of value to convert into something about $12-15,000. So that's where you get the uplift in value.

Dr Juliet Bourke: So what is the value proposition then for, let's say, Qantas? Because they just gave a seat away for $7,000 but it actually would have cost them $12,000. So there's a loss there of $5,000. Why is Qantas the winner?

Steve Hui: They're the winner because those seats were spare. So on every flight there's actually going to be spare seats that they won't sell. And when you think about the long term, they know that on certain flights, certain routes, certain seasonal periods, there's seats that just won't sell. And those are the seats that are given to frequent flyer points. So they're basically selling spare seats, but only to people who have points.

Dr Juliet Bourke: Airline companies are known not only for their reward points, but also status credits – where you work your way from silver to gold to platinum to platinum one, for example, and you get more benefits. Do you think people are more attracted to the points or the status?

Steve Hui: I think people are more attracted to the status, because you have many examples where people who are close to losing their gold status, and they'll tell you about it. They'll tell you about "Oh, I'm only 10 points away. I might have to do a trip to Melbourne just for the weekend," for no other reason except to get this 10 status credits. So status credits is something that I think pains people more, because they can lose it. So you have to maintain status every year. So status is the one thing that you'll hear people talk about all the time, about not having enough status or just missing out.

Dr Juliet Bourke: Is there an emotion that goes through these rewards programs? I know you talked about loyalty as an emotion then, but what makes them feel valuable if, in fact, they are just a reward program, not a loyalty program?

Steve Hui: They feel valuable because once you've got the points, it doesn't feel like money anymore. So it feels free, and then whatever you redeem with those points gives you this real good feeling that you've earned it. You got something that you wanted, but you didn't spend your money on it. At that time you didn't pay for it, and that's the magic about loyalty programs.

Dr Juliet Bourke: So what common mistakes do businesses make with their loyalty programs? I know a mistake might be even calling it a loyalty program, you prefer reward. Other mistakes that they might make?

Steve Hui: I think program owners tend to think that their loyalty program is more loved than it is. They feel like, "Oh, we've got a loyalty program. We've got X number of members, so therefore people must love us so much." But I think the love only lasts as long as what's in it for me? So therefore you have to keep giving them a value exchange, otherwise there'll be a mismatching. "Why are you still sending me marketing material when there's nothing in it for me?" So I think that's where businesses need to continue to really keep showing the carrot, so to speak. So therefore there's a win win – there's a win for the company because then they get more sales, but then they have to show love to the consumers otherwise, they sort of go to whoever when it's convenient for them.

Dr Juliet Bourke: When it's convenient and I also feel like sometimes there are transition points in that loyalty relationship. So if your points are about to expire or you're going to drop down another tier below, then you start to make choices again about "Am I going to stay this particular brand, or am I going to move?"

Steve Hui: Yeah, that's danger zone. If the points expire that's the worst feeling for a customer, because they feel like they had something and then they've lost it. Although they chose to do nothing with it, the feeling of loss makes them remember all the things they could have done with it, even though they probably had not done anything with it the last five years. But by taking it away, straight away, that feeling of loss. For the program operator, when someone's points go to zero, that's like a clean slate. That means that they have no need to continue with you. They could change at that point in time. So a lot of programs, the smart ones, will very quickly give you something to recover some of those points, so you still have skin in the game.

Dr Juliet Bourke: And what about common mistakes that users make?

Steve Hui: Not realising how much the points are worth. Because everything's relative – if you feel like your points are worth $50 then you might be happy just to get something that's worth $50. But if you know your points are worth $300 then you'd never accept anything that's worth $50 because now you know the value. So the points have a minimum value and a maximum value. The minimum value of one point is about half a cent, which is basically the value redeemed for gift cards. And then you have the upper range of between three and five cents per point. So you get a difference – 8, 9, 10 times the value between the top and bottom.

Dr Juliet Bourke: Let's look at credit cards, because I think that's where consumers and business owners are probably accumulating the most points on a day-to-day basis. Talk me through how that works.

Steve Hui: I think the thing to cover about credit cards is you're not actually using it for the credit, you're using it for the payment mechanism. So if you take away the credit part of the credit card and if you're effectively using it like a debit card, then you're really just using to pick up the points. And some people might say, "Well, why does debit cards not have frequent flyer points?" Because it's all about the margin. So when you use a credit card, the merchant, the cafe, the shop, they have to pay a fee to the credit card company – around 1.5 per cent or 1 per cent or so. And generally, they absorb the fee because they want you to buy their product. So in fact, then you're getting those credit card points at no cost to you. And that's the gem, because if you don't use a credit card that fee doesn't get paid, and therefore there's no margin to keep that points.

Steve Hui: Yeah, so every single credit card is actually very different. Not because the annual fee is different, but every single credit card has different points earning rates and different partners. So the key thing is that every dollar you spend some cards might earn, say, 0.2 of point, another card might earn 1.5 points. So if you're going to spend that dollar any way, in terms of accounting buying, maximising the value, well, why not spend on a card that earns you the highest points? The next factor is actually, which partner does your points convert to? So some cards earn points direct to Qantas. So every dollar you spend earns points that convert straight to Qantas points, whereas other cards earn points into your rewards program, and then those points can be converted into Virgin or Singapore or Cafe points. Most people, I'll say, is they don't think about what points they want. They pick the card first. But actually it should be the other way around. Think about what type of points you want and then find a card that earns those points in the most cost-effective manner.

Dr Juliet Bourke: So are you going to let us in on the secret of which cards garner better points?

Steve Hui: Sometimes I've heard people signing up to credit cards just to get the points, use the points and then ditch the credit card. How do organisations mitigate that risk?

Steve Hui: So that is someone reacting to your reward. So a company has designed a certain reward – ANZ started it years ago, they were the big ones that said, "Here's 120,000 Qantas points if you sign up to our card." So they designed that reward. But they also need to design mitigating factors so people can't game it. The reason I've mentioned ANZ is because I feel they were the ones in the Australian market to follow the US copy. So in America, there's heaps and heaps of credit cards that offer bonus points. Some of them you can just cancel and then sign up again and get your bonus points again. So they didn't have a system where they prevented you from re-signing up. And I'll say that's their fault, because they created a program that said, "Sign up, get the points, cancel, sign up, get the points." If you create a system that does that, then why wouldn't people do it? Because that's the smartest way to get more points for lower cost. So they were the first to create this credit card churning. And now that's in the mindset people feel like they're crazy not to churn, because you get all these banks offer you points for a small annual fee, and then you just swap from one bank to the other. So someone in the industry created that, and there's nothing they can do now.

Dr Juliet Bourke: And now it's hard to walk it back.

Steve Hui: Yeah. So I always feel like it's all about a reward for an action, and it's not the customer's fault that they take the bait and they do exactly what you want them to do. And when they start doing things on repeat, which you didn't want them to do, then why didn't you create something to stops that repeat behavior.

Dr Juliet Bourke: What do you think is the future of these programs? Where do you think they're going to expand and grow for businesses?

Steve Hui: So a lot of businesses still don't have access to offer rewards to encourage repeat business, and a lot of businesses need to think about whether they need to. So a lot of businesses contact me and say, "Steve, should I get a loyalty program?" And I ask them the question, "What do you want your customers to do?" So you're giving them a carrot to do something – that's basically what a loyalty program is. If they're already coming to you and spending money, then actually you should spend that money rather than giving them a discount, potentially just make your product even more awesome, so that they're not going to go anywhere else. The only reason why you create a loyalty program and give people a reward is that potentially they're not doing something that you want them to do. Like they might not be using all the features of your program, or you want to encourage them to shop here and there, so therefore you're going to give them reward that if you shop at A and B, then we give you some points. Then that encourages people to shop at A and B. There's no point giving people points to do something they would go and do anyway, because the danger of that is if you ever change your program they'd be like, "Well, I'm used to these points. Why are you devaluing the program now?" So then you actually cause to solve problems that were never there in the first place. So loyalty programs are complicated because it creates a change of psychology, and then it creates an expectation. If you create an expectation that you can't fulfill, there can only be unsatisfactory outcomes from that. So loyalty programs are awesome, but they also could be terrible for a company.

Dr Juliet Bourke: Thanks to Steve Hui for joining us on this episode. The Business Of podcast is brought to you by the University of New South Wales Business School, produced with Deadset Studios. If you've enjoyed this episode, you're in luck. There are many more episodes already in The Business Of feed, covering everything from marketing to leadership to crisis management. Scroll back in your feed now to choose from our catalogue of interviews with the brightest business leaders in Australia.

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