The Role of Loyalty Programs Today

Earlier today I promised to write a little more on the role of loyalty programs today. This is not an exhaustive take on the matter, but should give you a little insight into the way things are moving.

It is commonly accepted that well-conceived and executed, formal customer loyalty programs can increase retention rates as well as revenue and profitability per customer. Despite the expectation that over $2 billion will be spent worldwide on customer loyalty programs in 2010, however, less than 15% of companies today are leveraging their customer loyalty programs to advantage.

In part this is because fewer and fewer programs are being well-managed, and in part because the way rewards-based loyalty programs are being perceived by customers is changing.

Although having a loyalty program is as de rigueur as having a website these days, customers are increasingly indicating that these programs do not necessarily make them loyal customers because so many companies with similar offerings have programs with similar rewards.

For this reason, my advice to companies today is this: Only join, or introduce, a formal rewards-based customer loyalty program if....

• Your primary reason for introducing the loyalty program is to capture data... and you ensure that your systems are designed to allow for easy analysis of the data, and that marketing initiatives are deployed accordingly; and

• You want to use the information to better understand your customers’ behaviour patterns and preferences in order to improve the product offering, customize service and create a more meaningful relationship with the customer, and

• You are prepared to invest sufficiently in the program to provide meaningful benefits to your customers – benefits that will actually enable you to shape customer behaviour; and

• You understand the benefits of customizing services and/or packages and/or communication to the specific needs of individual customer cluster groups; and

• You are willing to offer special benefits to your best customers – and think that it is okay to treat your top clients like VIPs (yes, excellent service to all, but kingly treatment for the top tier).

That’s a lot of ands – but you need to take this to heart if you want a loyalty program that reaps rewards for you.


Why? Two reasons.

1) Rewards alone don’t create loyal customers.

2) Customers expect that, in exchange for allowing marketers to track their purchases and other consumer behaviours that they will be rewarded with more personalized, customized service.


Point #1: Rewards

Despite nearly 70% of participants saying they are satisfied with the loyalty programs in which they participate, less than 25% say that the programs make them loyal to the company running the program.

In nearly 70% of cases, people have come to view these programs simply as a way to get a little extra perk when they patronize retailers and service providers they like for other reasons. They participate in all the programs offered by the types of retailers they frequent so as not to miss out.

The following comments from a few of the research respondents are representative of the broader picture:

About gasoline: “I play in the Esso, Shell and Petro-Canada games. That way, I can go to whatever gas station I find on the right hand side of the road when my gas light goes on. I don’t really care whose gas I buy because it’s all the same to me and it’s all the same price, too.”

What business travellers said about hotels: “When I book a hotel, I choose one that, in order of priority, is a) close to the conference or meeting, b) within my corporate allowance, c) known for being clean, safe and accommodating and d) has a points program. If the first things aren’t in place, it won’t matter what kind of rewards program the place offers; I simply won’t stay there.”

About grocery retailers: “If the program is free, I sign up. If not, I don’t. I always show my card when I’m in the store, but I don’t decide where I’m going to shop because of the card. If there are great specials or points on certain items, I may buy them, even if I hadn’t plan to when I entered the store, but as I said, things other than the loyalty card make me decide where I’m going to do my groceries.”

Given a choice between frequenting a retailer or service provider that was conveniently located but had no loyalty program – and one with a loyalty program that was not conveniently located, 90% chose convenience over loyalty program, as long as the companies’ reputation were similar and the price gap not too large.

Interesting observation: As a result of the glut of loyalty programs in the market, collectors are becoming loyal to the reward and points play, rather than to the company.

The only way to change this is to either have a loyalty program that is superior to anything else – and this includes almost unprecedented levels of customized service and communication

In terms of the rewards themselves, they need to be attainable. In many instances, respondents indicate that the rewards are becoming harder and harder to earn and that this is making the rewards program less of a motivating factor. This is supported by a recent CMO Study which finds that 38% of participants overall say there are too many conditions and restrictions on the programs and that 37% of people feel the rewards lack any real value.


Point #2: Recognition

For the top tier clients, the one who represent the highest revenue contribution per person – and are also usually the most profitable, too – recognition is more important than reward. Indeed, the most active participants in a program expect that the company reps should be able to recognize their value to the company and they should be given special treatment as a result. Fewer than 10% of companies surveyed, however, say they have special tools in place to a) recognize the best customers and b) provide them with special treatment in any case.

Many airlines and hotels are notable exceptions to this – and room and seat upgrades and other special treatment can cement relationships with the best clients. Said one senior exec: “I travel a lot and my airline knows me. When my meeting is done early, I just head to the airport. Even if I have a later reservation, I know they’ll get me on the next flight, even if they have to bump another passenger. I don’t care about free trips; I do care about getting home sooner.”


What Does All This Mean in Terms of The Role of Loyalty Programs Today?

In an age where is an increasing gap between customer satisfaction and loyalty, it is clear that true loyalty comes from having customers who feel like they are valued. It’s equally clear that the purpose of a customer loyalty program is to give marketers the insights that will help them treat special clients like VIPs. This will, in turn, lead to higher retention levels, large revenues per transaction, more referrals and better profitability overall.

If we look at the evolution of loyalty programs, we’ll see that this is not a new concept. For more on this, please read: The evolution of loyalty programs: http://bit.ly/cBW6dc


If you would like clarification on anything, please feel free to contact me: jmc@theQgroup.com.

Until next time, remember to have fun and be prepared to “go out on a limb because that is where the fruit is.”

Jane-Michèle Clark