To Use Customer Loyalty Programmes - or Not

(Please note that this is a somewhat longer article on the pros and cons of Customer Loyalty Programmes)

Introduction

My wallet has become too thick and bulky to carry around effectively anymore, and this is mainly due to the sheer number of “loyalty cards” that I need to carry around. For example, I have frequent flyer cards for six different airlines, two grocery retailers, three restaurants, three hotel chains, two car hire companies, a toy shop, a book shop, a DIY chain, and a movie card. This is over and above the standard set of credit/debit cards (including petrol cards,) medical aid card, AA card, and a romantic card that my wife gave me on my birthday. Clearly, it’s impossible to carry around almost thirty cards, so I now leave most of them at home.

But I’m not an exception. In a report by Colloquy in 2011, they found that the average US household has enrolled for more than 18 “loyalty programmes,” although they are active in less than half of these. But the news gets worse: There are roughly $48 billion in reward points and miles issued annually, with at least one-third ($16 billion) going unredeemed by consumers. Active membership has slipped and overall growth has changed direction in Colloquy’s 2013 report. In fact, about 85% of respondents said that they haven’t heard a thing from the companies where they applied.

Loyalty programmes and frequent buyer programmes can be very useful for companies trying to create a base of loyal customers that come back over and over again. Overtly, they are designed to reward customers who purchase from a company frequently, and/or in substantial amounts, but in reality these programmes can help your business to find out more about your customers and their needs, communicate more effectively with them, and get them to behave more loyally to your business.

But they often fail at all of these, because customers use them randomly based on what they are purchasing. Thus, for example, if I am flying to the UK, I use my Virgin Atlantic card to get points – provided that the flight on Virgin doesn’t cost a lot more than a British Airways flight. (I try to avoid SAA like the plague!) If we are going out for a meal, we may or may not choose to go to Spurs, but the main decision isn’t because of the “points” earned.

In this article I will focus on what you can do to make sure that your loyalty programme works for you, rather than the other way round. I will point out the relative advantages and disadvantages of such programmes, and share with you some examples from which your business can learn. Finally, I’ll end off with some tips to ensure that your programme is successful – if you decide that it may be worth the trouble and expense.

First, however, we need to distinguish between loyalty programmes and short-term promotional programmes which, for a defined period of time, give customers some reward for buying at the business. So, for example, when a burger chain offers one free burger and an ice-cream if you collect 9 stamps on a card when you pop in, this is not usually a typical reward programme – although customers are rewarded for their repeat business. Another example is when a petrol chain let’s kids collect stickers every time their parents purchase stuff from the shop – and then swap the stickers for a cuddly toy. These are examples of short-term marketing promotions.

True loyalty programmes, when properly structured are really about identifying, maintaining, and even increasing the yield from best customers, through long-term, interactive, value-added relationships. It is, in some way, an acknowledgement from companies that 80% of their sales and turnover are contributed by 20% of their customers. But my premise is that if you don’t use the information that you collect to create a better customer experience, then you are giving away stuff that can be expensive for your business.

And it can backfire – badly. In a widely-reported incident, one of SA’s top retailers used a young customer’s reward card to identify that she was pregnant. With great excitement, they sent the 18-year old mum-to-be a congratulatory card, and some additional information about nutrition and pregnancy. Nothing wrong with that, you may say, except that this particular young lady didn’t “own” the card: her dad did, and he knew nothing about his precious angel’s pregnancy. Great embarrassment and heartache all round.

The first industry to really pioneer frequent buyer programmes was the airline industry in the USA, and this has, of course, now spread not only to most traditional airlines, (their own customers were defecting to the competitors,) but to many other industries worldwide, including hotels, banks, retailers, and mobile telephone companies.

Successful companies that offer rewards, (if any,) fall into one of three categories. There are those which run their programmes most simply and efficiently, without too much infrastructure, such as the example of a burger chain giving customers a simple paper card which gets stamped at every purchase, and the customer gets a free burger or meal after ten purchases. These are very short term in nature, and the benefit rarely exists in the period following the withdrawal of the reward when things go back to normal. Thus, they can be seen as promotional efforts rather than true reward programmes, and they are only successful if specific objectives are achieved.

The next type of company that succeeds is that which positively attracts customers to the programme based on the programme’s distinctive benefits – but those benefits have to be perceived as worthwhile, and not fall into the other expensive traps which we will discuss below. Thus, the first company in any industry to introduce such a programme gets a distinct advantage as its rivals’ customers defect in order to get some rewards. However, if competitors then imitate the programme soon after, most of the advantage will have been lost. This is where the first frequent flyer and frequent guest programmes lay, but they soon lost the advantage, especially when their competitors started offering something fresh or innovative.

The third type of programme we will look at is the Club Marketing Programme that can be more effective in the long term than the other two, mainly because it creates a community of customers who are not only in it for the rewards, but who also seek the psychological and emotional benefits that “exclusive membership” offers.

It goes without saying that the best loyalty programmes are those which are primarily used to build a sophisticated database of customers and their needs, and then use this information to design and present convincing, powerful and relevant offers to specific customers, (and thus to squeeze additional value from them.)

Some examples of how the company and its customers benefit include…

  • An opportunity to build more trust and a better relationship with customers through relevant, timely, anticipated and personalised communication. This will not only include a standard generic e-mail once a month, but also personal letters, sharing useful information, occasional telephone calls on special celebrations, and so on. You need to have a consistent campaign for this – and don’t forget to say a simple “thank you” for their business.
  • A great way to collect important customer information so that you get to know them better and therefore offer them better customer experiences.
  • An opportunity to remind customers of your brands and company, and to share tips on making it easier to do business with you. The more familiar they are with your products, services or brands, the more likely they will be willing to purchase repeatedly.
  • An opportunity to cross-sell and up-sell other products or services that you offer, but which the customer does not yet purchase. This not only includes new products or services that you occasionally launch, but also current offers that the customer is not aware of or has never purchased. If my clothing chain knows that I only buy shirts and ties from them, then they can put together a really special offer for me to buy shoes or pants from them, and then ensure that it is a positive experience.
  • An opportunity to get more referrals or recommendations: if you call them out of the blue, they won’t be keen to expose you to their contacts. On the other hand, if they know you have put in the effort to get to know them, to add value for their lives, and to communicate meaningfully with them, they are far more likely to do so.
  • And possible opportunities to create better communication, idea-sharing and innovation.

Very few companies actually get this right, and while many collect and store important information, only a handful of businesses analyse and use the information in a proactive manner. In addition, in today’s “big brother is watching you” world there may also be resistance from customers to sharing information.

Typically, the first company to introduce a frequent buyer programme in their industry gets the most benefit, especially if competitors are slow to respond. After rivals respond, however, the programmes can in fact become quite a burden for the business.

So, while most consumers uniformly say a loyalty program’s overall features play an important role in their decision to participate, in every market surveyed around the world, customers’ satisfaction with delivery on those features fell below 50%. (Jim Tierney, Loyalty 360 Report on Global Loyalty Attitudes, 2013.) The majority of loyalty programs are not building true loyalty. Consumers worldwide are not satisfied with the quality of the program attributes they find most important. As a result, consumers’ satisfaction with their loyalty programs lags the importance that the companies and market places upon it. This means that there is an “expectations gap” that consumers are falling into, leaving a large part of the market disengaged. Two quick examples:

  • I used to have a loyalty card with South African Airways, but it was so burdensome and stressful trying to actually get the rewards that I eventually just gave up. Even worse, SAA changed the “rules” unilaterally, disadvantaging many Voyager members, and then did things like insisting you redeem you flights to popular destinations like Muaritius or London up to a year in advance – with no guarantee that your family could all actually fly together on the same ’plane.
  • On the other hand, my bank’s loyalty programme earned me a shopping voucher at Makro for more than R8000 – certainly not money to be scoffed at. Does this make me a more loyal customer at my bank? No. Apart from the fact that I believe I deserve that reward for all the hoops they make me jump through to deal with them, I also wonder who actually pays for these rewards. Are my bank service charges now too high? Probably. It kind of defeats the purpose of having these.

Customer Loyalty Programmes: Traps to avoid

Let’s look at some of the problems and difficulties that many companies experience with such programmes. The more aware you are of these traps, the easier it will be for you to avoid them, and the expensive negative consequences that may result. Some of the typical problems that companies experience with customer loyalty and frequent buyer programmes include the following:

1.
Most organisations need a vast and costly infrastructure – IT, people, office space, and so on – used to plan, implement and monitor/keep track of customers and their purchases. As a result, more expensive hardware and/or software must be bought or developed – and that’s before staff training, setting up a possible call centre to take care of queries, launching and promoting the programme to customers with beautiful brochures and a decently designed website, and then burdening the sales team with the problems of backlogs, bugs and queries. (One large SA bank spent R360m in 2009 on developing their programme before they even gave away one reward point. It was widely reported in 2013 that retailer Pick ‘n Pay invest more than R250m per annum to keep their Smart Shopper card going. More recently, they hired the CEO of Tescos in the UK – at considerable expense – to try and make the whole thing work.) Some companies are so desperate to recover this massive investment that they have to develop a funding programme. Somehow, it seems obscene and dishonest to charge your customers to join your company’s loyalty programme in order for you to market to them. Thus companies ask: Should we charge “Membership Fees?” Should we find co- sponsors? Or maybe sell our “member” lists with client details? Of course, selling advertising on the website, statements, magazines, or other places already occurs. In today’s social media world there is a minefield of traps you need to be careful to avoid.

2.
Customers have become wary of such programmes because they have come to realise that these programmes just make their purchases more expensive since your costs of development and administration have increased. Some resent your need to develop an effective, personal and frequent communication strategy to keep them informed. (The internet has helped to save some trouble – and some trees – here.) Also see problems with privacy issues below.

3.
The next problem is that it is not long before all competitors in your industry imitate, and mercenary customers join all of the loyalty programmes offered by the companies, and spend their money for this purchase at the company that currently has the better deal. (How many airlines’ cards do you keep in your wallet?) The “reward power” of the programme typically produces better results in the short term, but can be overrated because customers return only for the specific benefit, and not because they want to deal with the business itself. They take the reward for granted, and will feel “cheated” later if it is removed. This is a nightmare when customers go public about how they have been “cheated” out of their rewards. (Look at SAA Voyager Programme’s poor publicity.)

4.
Most reward programmes seem to work best with customers at LSM Levels 6 and below, (possibly the least profitable of small customers in large organisations.) Having said that, reward programmes often create the craziest of demands, and strangest behaviours and actions amongst even the top customers in companies. (We know of at least two executives who flew from Johannesburg to London and back in late December – for no other reason than to retain their “gold” status for the coming year!)

5.
Companies are forced to give away free products, services and upgrades – without any benefit of exclusivity. Your business needs to spend a fortune to buy attractive gifts and rewards, or give away upgrades, discounts and special deals to customers as incentives to buy your core offering – something they should be doing without an incentive or bribe anyway. Customers start having serious doubts about a company or brand that has to keep giving things away in order to make sales. This is enormously expensive – and can in fact backfire on the company. For example, there are many conditions attached to earning points that many customers don’t see it as worthwhile. Thus, banks will not now – or ever – allow customers to earn points on the two most expensive monthly transactions which they make: repayment of mortgages on their homes, and their car instalments. On the other end, claiming one’s rewards in most programmes is sometimes a nightmare. And what happens to all those rewards when they expire, when customers retire, emigrate, or somehow else exit the programme? The bad publicity surely must create problems for the company.

6.
Customers become resentful about “the small print”: On airlines, miles expire and are non-transferable. The airlines and other companies depend on the fact that most customers will lose their miles or points. Some companies depend on the attrition rate of points, or the give aways become a nightmare. For example, in excess of 40% of customers lose out due to expiry, forgetfulness, death, (not transferable to spouse,) emigration, or plain “I just haven’t got enough miles/points to buy anything”.) On airlines, there are so many flight restrictions, (e.g. 3 seats available per flight,) that they become a burden for the customer to obtain. Customers know this and become resentful. And they soon learn that the amount one needs to spend to earn points is not really worthwhile. For example, at one of the banks, for any credit card payment of R2500 per month, you earn a total of R4,96c worth of points. In two years you will earn enough points to get a cheap kettle. And on SAA you need to fly from Johannesburg to Durban and back 28½ times to earn one free flight to Durban. The resulting disappointment creates a very large group of unhappy customers who sometimes become very vociferous in their attacks in the traditional media and social media. Complaints and cynicism cost the company dearly in customer dissatisfaction and bad PR, and any real benefits are lost.

7.
Companies need to beware of the effect of personal privacy issues. More and more customers – both consumers and companies – are becoming resistant to sharing too much information. Many countries already have laws in place to support this right to privacy. Some recent scandals with personal and important customer information being “lost” on disks and DVDs, and the increase of identity theft, have been widely reported, and customers have become suspicious about the company’s motives for asking for the information. They don’t want their information accessed by other parties, (like the government, police, tax collectors, marketing companies, or large businesses); they don’t want to be bombarded by too much advertising and promotion, especially spamming; they don’t want their information sold to other parties for marketing purposes; and they don’t want the information to be used against them by the company. (For example, imagine if an insurance company knows that a customer is taking some kind of heart medication: Does this information justify the company loading the premiums, or even withdrawing benefits if it deems the risk too high? Even worse, does it justify the fact that insurance companies share such information with their competitors?) This resistance has even extended to companies tracking things like buying patterns and other customer behaviours, (e.g. TV programme watching, or internet use.) An increasing number of customers don’t want “Big Brother” – or Google for that matter – monitoring their every download, or knowing that they are currently on a diet.

8.
Another problem which has recently emerged with these reward schemes is that they are open to wholesale fraud by some customers. If the programme is rewarding enough, then there will always be someone who decides to take advantage of the company’s offer but without buying frequently. Thus companies need to employ an additional complex infrastructure, and possibly outside agencies, to avoid this fraud – and this makes everything not only more expensive, but also more unpleasant.

9.
Reward programmes may diminish company’s focus on delivering superior levels of quality and customer care, or on adding value for customers in other ways which lead to long-term and sustainable levels of customer loyalty. If your business uses a reward programme as a substitute for quality service, you are on a slippery slope to nowhere. In fact, as one cynical member put it: “What else do you get as a member? An automated message like an SMS on your birthday, with no live person involved, overcrowded lounges, a cup of coffee and a muffin, or some cheap scotch with a packet of chips. And what happens to your rewards if, (and when?) the programme collapses? Everyone said the bankruptcy of Swissair was impossible, and that Sabena would always fly to SA. Yeah, right!”

10.
Finally, many governments have now started to tax the benefits of the reward programmes for your customers. This has already happened with Outsurance and the Out-Bonus, and it’s a matter of time before the rest of those hard-earned rewards and awards are included.

We are therefore critical of such programmes when they diminish a company’s focus on delivering a superior level of customer care and quality to the customer’s total experience. If the company wants to “buy” customer loyalty and repeat business primarily through monetary incentives to customers, it must expect some backlash later. On the other hand, if companies get repeat business because of their superior levels of customer care, and then enhance this with a loyalty or frequent buyer programme, they may be unstoppable from a competitive perspective.

I am not suggesting that you don’t have a loyalty programme – but you should make it appropriate, plan it properly, keep it simple, and beware of falling into the traps mentioned. It may well be that you use your investment better in other areas which have a more lasting impact because they add a different kind of value for customers.

Is it Possible to Succeed with Your Customer Loyalty Programme?

What does it take for a company to design its own loyalty scheme from the ground up? Let’s begin with some examples first.

  • The Tesco Clubcard has in recent years become a byword for a successful and thriving loyalty scheme. Tescos uses the information to get a good insight into their customers. For example, they know that in the UK, the average diet lasts for less than three weeks. If you buying patterns indicate that you are on a diet, they can not only recommend healthier purchases, but also use the information to encourage you at the time when you are ready to fall off the bus. Its model has had such success that I have found myself in conversation with at least twenty non-retail businesses who have come to me with the express aim of ‘becoming the new Tesco’ or, at least, in mimicking its success. Nor is it solely a retail sector phenomenon; these companies range from international telecom companies to travel, media and financial services companies. They have two things in common: firstly, a need to derive insight from the data the business holds and secondly, a misunderstanding about just what is involved to achieve their goal.
  • We have also seen reports of Amex amongst others establishing capabilities to create loyalty programmes that rival Tesco’s. A friend of mine who uses his card exclusively for booking flights and paying for hotel accommodation on business trips, occasionally gets telephone calls from Amex asking him to confirm particular purchases that appear to be unusual for him, including the purchase of some clothing.

Where loyalty programmes seem to be most successful lies in your ability to engage with your customers on an emotional level, not only through financial or tangible rewards. As we move from commodity-driven purchases to a place where experiences matter more, loyalty programs need to leapfrog ahead, creating new benefits and social value that excite their customers and give them a reason to keep coming back.

Wesley Robison of PSFK Labs, a content marketing company, writes: “Social CRM systems are helping retailers and brands develop more meaningful relationships with their shoppers by linking individual engagement with a wider community. By encouraging and rewarding participation, these platforms can connect customers in new ways, creating more opportunities for them to share common experiences, interests and affinity, which provide value that grows over time. Scott Lachut, also of PSFK, notes that: “Status and recognition are worth more than points and discounts. Reward your community of shoppers for sharing and participating in the activities that are meaningful to them and make sense within the broader context of your store or brand.

An alternative to loyalty programmes – now commonly known as the Club Marketing Programme – can help you to avoid many of the expensive problems. Many companies have created “exclusive club” concepts around their brands and products. Club membership may be offered automatically upon the customer’s first purchase, or on a promised purchase, or, in some cases, by even paying a membership fee.

In South Africa, for example, we have a number of clubs for people with common interests, and they include hundreds of sports clubs and hobby clubs. Some companies have tried to create a similar context: the Exclusive Books Fanatics Club, and the Ster-Kinekor Movie Club.

Some business-linked clubs overseas have been spectacularly successful. Here are a few examples:

  • Shiseido, a Japanese cosmetic company, has enrolled over ten million members in its Shiseido Club, which provides a credit card, discounts at theatres, hotels, and retailers, and also “frequent buyer” points. Its members receive a free magazine, which contains interesting articles and hints on personal grooming. (The Edgars Club has gone one step further and donates a small portion of the membership fees to socially responsibility projects, as well as a monthly “lucky draw.”)
  • Nintendo, the video game company, has enrolled millions of global members in its Nintendo Club. For about $20 a year, they receive a monthly magazine, Nintendo Power, previewing and reviewing upcoming new games, providing tips on winning, as well as items like tog bags, and so on. They have also set up a game “counsellor” phone number that kids can call with questions or problems.
  • Waldenbooks sponsors a Preferred Reader Programme, which has attracted over four million members, each paying $10, who receive mailings about new books, a 10% discount on book purchases, toll-free ordering, and a number of other services.
  • Harley-Davidson motorcycles sponsors the Harley Owners Group – HOG.s – that numbers just under 500 000 members. The first-time buyer of a Harley Davidson motorbike gets a free one-year membership with annual renewals of around $45. HOG benefits include a magazine, Hog Tales, a touring handbook, and emergency pick-up service, a specially-designed insurance programme, theft reward service, discount hotel rates, and a Fly and Ride programme which offers members an opportunity to rent a Harley motorbike – while they’re on holiday. There are also at least three HOG coffee shop or pubs in SA where members can meet and socialise together.
  • Lladro, a maker of fine porcelain figurines, sponsors a Lladro Collectors Society, with an annual membership fee of $35. Members receive a free subscription to a quarterly magazine, a bisque plaque, free enrolment in the Lladro Museum of New York, and members-only tours to visit the company and Lladro family in Valencia, Spain.
  • Exclusive Books Fanatics Club does reward customers with quarterly vouchers worth 5% of purchases made, but goes beyond that with additional benefits. Members also receive communication about new books published, special offers and ways to double points, book signings and launches, and invitations to preview days for the Book Sale. In addition, selected customers also receive notification of new books that are linked to buying patterns that the company has analysed. If you always buy books on marketing strategy, then you will receive notification when the next one arrives. Sadly, it still isn’t enough to beat the power of Amazon.com with its completely different business model.

So, to make your programme succeeed, there are some additional questions you need to ask:

  • Why are we doing this? What are the specific and measurable objectives we want to achieve? What is the measurable long-term value for our customers and our brand? If you are using this as a silver bullet to solve your marketing or customer service deficiencies, you are on a slippery slope.
  • Have we avoided the traps that are rife in loyalty and reward programmes? More particularly, how much are you going to need to invest?
  • What if our competitors offer the same in the near future?
  • How will this affect the way our customers perceive us? (Are we “cheapening” our brand?)
  • What are you going to do with the information collected? Will it be proactively used to create better personal relationships, customise amazing experiences, and add more value – or will your customers be first seduced and then abandoned, never communicated with, nor acknowledged?
  • Should we create your own community, or is it better to leverage existing networks?
  • What unique opportunities exist to incorporate or reward existing customer behaviours?
  • In what emotional ways can our most engaged customers and supporters be tapped to support our larger community of customers? For example, what interactions or information can we use to help our customers get recognition and honour – especially from their peers?
  • How can we effectively use the social media to promote engagement?
  • And, of course, have we thought about the day when we withdraw the programme, or change the rules in our favour? What will be the consequences if customers don’t have a chance to earn something?

I’m not saying you shouldn’t have some kind of loyalty programme. What I am saying is that you need to think it through carefully and make sure that it works for you, and your customers, rather than the other way round.


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