10 May The Dirt on Loyalty Programs
Here are some of the best and worst practices of loyalty programs.
Can Loyalty Programs Achieve Loyalty?
The short answer is no. Loyalty is hard enough to win in love and war, so there is virtually no hope of a customer remaining loyal when it does not serve their interests.
What can Loyalty Programs Do?
Nunes and Dreze suggest there are five objectives that a loyalty program can serve. The important thing is to establish what you want to achieve and design a program that will do this.
Keep customers from defecting
This can work well when the client needs one and only one service provider, such as for their mobile phone or home internet. Points, miles, bonuses offered to these customers can help form a barrier to switching.
Win a greater share of wallet
Classic example is earning points for purchases. It can encourage customers to do more with you and bundle purchases they may have split across multiple providers.
These are best when the value increases with expenditure. For example, Homebase UK offers customers a 2% discount card. When you spend 400 pounds or more, this becomes a 10% discount for the rest of the year.
Stimulate Extra Purchases
Buy eight car washes, get one free. This may make a customer have their car washed more regularly as they move toward the goal of the freebie. This can have a marked effect on turnover.
Yield Customer Insight
Powerful if you can get it right, but expensive and complicated to administer. Tesco is a great example of a company that uses sophisticated data analysis of consumer shopping behaviour. When it sends out its quarterly catalogue, there are four million versions, highly customised for products each shopper is likely to desire.
Make a Profit
Some loyalty programs make a profit of their own. However, they have to be managed as standalone businesses in their own right.
American Airlines sells bulk miles to 22,000 companies and makes $2 billion per year. The miles are then used by these companies as part of their own rewards schemes. You would only want to do this if you need a boost to your bottom line and have the resources to manage this business (e.g. if the rest of the business is making a loss, like American Airlines was at the time).
Focus on one or two objectives. The majority of loyalty programs limp along and don’t really achieve anything.
Get Exchange Points Right
The authors call this ‘divisibility’, but it is simply the number of times and value points where a customer can receive their reward. For example, a $50 reward for every $500 spent is more appealing than $10 for every $100 (not valuable) or $100 for every $1,000 (too much of a stretch). Some customer research would be useful here.
This is described as ‘endowed progress’, but it has been shown to work in the authors’ study of the car wash. By using one loyalty card that was ‘buy eight, get one free, and a second card that said ‘buy ten, get one free” where the first two were stamped as an introductory special offer, they found that those with the headstart got more regular washes and redeemed the length several days earlier than the first cardholder group.
Sticky & Slippery
The authors argue that customers prefer pleasure rewards to utilitarian rewards (such as cash bonuses). They suggest electronics, entertainment, and other items are ‘stickier’ or more memorable and form a lasting emotional connection. Utilitarian objects such as groceries or basic appliances are considered ‘slippery’ and are easily forgotten.
One caveat I would make is that this article was based on studies in the United States and was written in 2006 (pre-GFC). This may or may not hold true today in Australia. [My own experience has shown that a customer group asked to vote on a competition prize overwhelmingly chose a cash reward rather than motor scooter, iMac computer, or holiday voucher.]
Expand the Relationship
I like this suggestion. If someone buys a coffee from you each morning, it’s a fair assumption that they like your coffee. A tenth free will be appreciated, but they are loyal anyway. How about offering a free cake, cookie, slice, sandwich, nut bar, something that will extend their experience of your offering and stand out in their mind.
For this reason, airlines like to upgrade passengers to first class because it delights the passenger and creates an emotional and memorable experience. And guess what? Think they’re going to keep news of the surprise upgrade to themselves? Bragging right, friends. Bragging rights.
Rewards can be behavioural too
It doesn’t always cost money to reward customers. Your high-value clients may appreciate their own phone line rather than waiting in a call centre queue. They might want to get directly in touch with you and not the receptionist. Valuable business customers have their own personal bank managers, priority services are offered to profitable patrons of casinos.
Here are some common errors.
Rewarding the Disloyal
What is the point of having a fly buys style card if every supermarket has one similar? Customers will just collect cards from each supermarket and use whichever card is for the store they are in. It doesn’t reward loyalty or encourage fidelity to one provider. If one loyalty program is very confusing, they’ll roll their eyes and harrumph. Life’s too short to stretch our cognitive powers for the sake of basic staples.
Don’t make it like a discount
Shop here and get a petrol voucher worth 2 cents a litre. But wait. Now the other place is offering four cents! Discounts only go one direction – down. Price warfare is not a nice place to be.
“Your Loyalty Program is Betraying You” by Joseph Nunes and Xavier Dreze in Harvard Business Review, April 2006.