Marketing Expert Evaluates Breach of Contract in Long-Term Customer Loyalty Program


Marketing Expert WitnessA tobacco company from Michigan operated a customer service rewards program for 16 years. Under the terms of the program, the company urged consumers to purchase cigarettes, to save certificates included in packages of the cigarettes, and ultimately, to redeem their certificates for merchandise featured in catalogs distributed by the company. The plaintiffs allege that, in reliance on the company’s actions, they purchased cigarettes, enrolled in the program, and saved their certificates for future redemption. They allege that the company abruptly ceased accepting certificates for redemption, making the plaintiffs’ unredeemed certificates worthless. The plaintiffs brought this action for breach of contract, promissory estoppel, and violation of two California consumer protection laws.

Question(s) For Expert Witness

  • 1. What is your familiarity and understanding of customer rewards programs?
  • 2. If a company that operated a 5+ yearlong loyalty program had ended it, how would they notify participants that the program is planning on being terminated?
  • 3. If a company properly notified participants, what are the protocols for being prepared for the influx of redemptions?

Expert Witness Response E-007806

The starting point for notifying customers of the end of a program is the program rules. These typically state that “the operation of the program is at the sole discretion of the program operator,” or something similar, which means that technically the program operator can shut down the program however they see fit. However, this is far from a “best practice,” especially in light of the fact that the program participants are likely to be among the brand’s most dedicated customers. A more considerate and common route is to notify participants several months in advance that the program will be ending. This is usually done via U.S. mail, backed up by email where possible. A notification would also be shown on the program website. Once the “earn” period has ended, participants are also given at least a few more months in which to redeem for their rewards. Although there is likely to be a groundswell of redemptions initially, many members will continue to participate in order to build up to a specific reward that they are close to attaining, and to achieve the maximum benefit before the end of the program. The actual number of redemptions can vary tremendously, depending on factors such as average rate of participation, typical redemption activity, average outstanding number of certificates, and several other factors. While there are no protocols in terms of specific steps to take for the increased redemption, program operators often add or include gift cards or gift certificates to the reward mix in order to have options for which there are no inventory restrictions. A starting point for the engagement of an industry expert in this case would be the program Terms & Conditions, as well as several different kinds of documents (for example, samples of member communications, screen shots of relevant pages, etc.). The information I have provided here is very general in nature. I would anticipate spending several hours in building an in-depth knowledge and understanding of the program, its key metrics, program rules and operations, customer behavior, and in particular, how the shutdown was managed.

Expert Witness Response E-007852

I have given a variety of industry related talks, composed press releases, and have published numerous papers in both academic and professional outlets. There are a variety of ways to notify the consumer. The key is in managing damage control. The firm would need to go to great lengths to assure the customer that they were entitled to the rewards earned. Anything short of an extended phase-out would have public relations nightmares all over it. In fact, I currently have a paper under review that speaks to exactly the fact that loyalty program managers need to be careful when making any program changes. Think of the disasters with Citibank, Netflix and Verizon back in 2012, and these were little changes. I have only heard of companies that modify loyalty programs as opposed to terminating them completely. Simply put, consumers adapt to a certain state of affairs and then react when it is changed. This is a strategic management process that for financial and revenue reasons, you would need to allow time and or incentives for redemptions to come in at a rate the firm can handle. It is all about consumer good will here. The program as described seems to be very much modeled on the original grand daddy of loyalty programs: The Sperry and Hutchinson S&H Green stamp program.

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