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Why Don't Loyalty Programs Connect With Consumers?

January 21, 2013

A recent survey finds that retailer loyalty programs are still failing to emotionally engage customers.

The survey of 60+ retailers was part of Edgell Knowledge Network (EKN)'s State of the Industry Research Series: Customer Loyalty in Retail report. The report was sponsored by Tata Consultancy Services, NCR and SAP.

On the positive side, the report found retailers expect the revenue contribution from customers enrolled in loyalty programs to grow substantially over the next three years, from 40 percent in 2012 to 58 percent in 2015. Thirty-two percent of respondents are planning to launch a loyalty program in the next 12 months.

On the negative side:

  • Customers of retailers who offer a loyalty program are no more loyal than those of retailers who do not offer one. (The average consumer is enrolled in 18 programs with many structured similarly.)
  • Eighty-one percent of loyalty members don't know the benefits of their programs, or how and when they will receive rewards.
  • While the focus needs to shift to "the personal, local and emotional context" of customer engagement, most retailers rate personalized promotions, social media engagement and cross channel integration among the least-important factors supporting customer loyalty.

The report's recommendations were:

  • Shift from transactional frequency to engagement based. Programs should downplay discounts in favor of "building mutually rewarding, holistic relationships through transactional as well as emotional fulfillment." Shifts by frequent flier programs beyond miles redemption to check-in convenience, increased baggage allowance, etc. may point to the future of retail loyalty program.
  • Capitalize on analytics. Engagement begins with a better understanding of the shopper through multi-dimensional customer analytics. Although measuring advocacy, strength of relationship and the value of customers' emotional connection with the retailer "will be difficult to measure and track," measures of program effectiveness must also shift away from activity and frequency that are transactional in nature.
  • Cross-channel-driven realignment. While the survey identified cross-channel integration as one of the top three strategies to build customer loyalty, ENK found that because of "internal political equations" and other reasons cross-channel isn't being solved. Wrote ENK, "In the near future, we see the appointment of a strong role responsible for cross-channel experience. This can be a strong differentiator for retailers, especially those who move early."

 

Discussion Questions:

What are the largest ongoing hurdles of incorporating softer, intangible and emotional aspects into retail loyalty programs? What do think of the suggestions mentioned in the ENK study?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Of the three, which do you think holds the potential over the next few years to be the most critical driver of customer loyalty at retail?

Comments:

Seems everyone has a loyalty program so they are no longer unique. Loyalty programs are inconvenient, often requiring an extra step like swiping a card or providing a phone number. Most loyalty programs provide little in the way of rewards.

Yesterday at Panera they notified me I can get $1 off of soup until March. Seriously? No, I want free soup until March if you want to really reward me.

Several retailers with no loyalty program already provide reward benefits above and beyond companies that do. For example Walmart will match or sell items below the reward card price at those of their competitors. I had a hotel offer me a bottle of water because I was a member. An airline sent me a coupon for a free drink.

Target provides a 5% rebate for their REDcard users. To me once you get something equal to about 5% of your purchase, it then becomes worthwhile. For example instead of one free airline ticket at 25,000 miles, give me three. Instead of a bottle of water at a $200 per night hotel, throw in dinner for free. A loyalty program should reward customers, not annoy or insult them.

David Livingston, Principal, DJL Research

The biggest hurdle is the tendency on the part of many retailers to confuse price incentives for loyalty. These kinds of programs—the Target REDcard, for example—may drive more frequent store visits and even higher customer satisfaction.

But it takes an emotional leap to move the consumer from satisfaction to commitment. This requires the sort of long-term brand building that too many retailers are unwilling to do, especially on the brick-and-mortar side of the business.

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Dick Seesel, Principal, Retailing In Focus LLC

First of all there is the loyalty problem -- a customer with three "loyalty" cards for different drug chains, for example, can't be seen as "loyal." In fact, they -- like many customers -- are viewing the cards as price reduction tools which discount down to what they see as the "real" price.

Next, there is the problem of the tangibility of the reward. This is why Starbucks shifted from sending postcards for free drinks -- which customers forgot to redeem en masse -- to emails alerting you the next one was on them. Many "loyalty" programs make it hard to reap the benefits, other than by giving a price discount at the register from a price many customers see as inflated.

Finally -- although the list could go on and on -- there is the problem of confusing real people with transactional data. Until you see the customer as something more than the sum total of his or her purchases, it will be all but impossible to create any meaningful loyalty.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

It's retail. People want discounts as a result of their loyalty. Is this so hard to understand?

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

Changing loyalty programs requires a lot of work, something retailers for the most part are reluctant to do. It means taking a hard look at what motivates consumers and then creating a loyalty scheme that incorporates those features. It's much easier to have consumers collect points and get things for free.

The suggestions in the ENK study are valuable. It's easy to start a loyalty program, but difficult to successfully sustain one. Loyalty programs need to move towards experiences and providing emotional rewards, otherwise most programs are mind-numbingly opaque to consumers.

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Max Goldberg, President, Max Goldberg & Associates

This is the misnomer of all time. Call it an "Incentive," "Discount," "Savings," or even a "Bribery" program...but don't call it "Loyalty." As Ryan and several others have pointed out, it has nothing to do with loyalty. When someone will pay a little more or drive a little farther to keep shopping at your store—THEN you've got loyalty. Until then—quit pretending!

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Ian Percy, President, The Ian Percy Corporation

First, let's change the terminology from loyalty programs to continuity of purchase programs. The idea of a customer being loyal to a company has no rational basis. Be loyal to your family, school, church or nation. But loyalty to a retailer makes no sense unless you the definition of loyalty applies to the marketer. How? Marketers can demonstrate loyalty to their customers by delivering on their promises.

This brings me to my second point. Retailers and other marketers can enhance continuity of purchase by uniquely solving customer problems beyond price discounts. Identify all of the compromises customers need to make to do business with you. Modify or eliminate these compromises and customers will return early and often. In other words be loyal to your promises.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

Steven Needel gave me a chuckle this morning. But I must join the band and chime in that an expanding pool of sales created by customers who have "acquiesced" to the requirement to join the loyalty program to get the best prices is no great victory for retailers. And it most certainly is not proving to be either differentiating or to generate any "loyalty."

Of the suggestions made in the EKN report, using the loyalty program to create a seamless cross-channel experience for loyalty card users is the most intriguing. Maybe it will finally be a good thing to be "just a number"—if that number unlocks a uniform, and somehow more advantageous, venue for shopping at Walmart in-store, online and otherwise.

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Ben Ball, Senior Vice President, Dechert-Hampe

Everyone has a loyalty program these days and most are designed to transfer a company's higher prices into a guise of the grantor's goodness. That defers loyalty.

A sense of loyalty depends upon on admiration, and if you can't emotionally admire a company, it is difficult to be loyal to its loyalty program. And yet the game go on.

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Gene Hoffman, President/CEO, Corporate Strategies International

"Eighty-one percent of loyalty members don't know the benefits of their programs, or how and when they will receive rewards."

I think that says it all. Sounds incredibly basic but here we are—there is no loyalty because customers perceive no value.

Today's connected consumers, sensing technologies, and analytics present an unprecedented opportunity for retailers to efficiently and effectively connect with their customers.

Time to rethink retail loyalty.

Paul R. Schottmiller, Senior Vice President of Strategy, Retail and Consumer Goods, Merkle

Having a number of loyalty cards is not really the issue. The real issues are how many of those loyalty cards are used, how often are they used, and which ones does the customer prefer?

My favorite card is Ralph's because I receive individualized coupons, monthly rewards and, best of all, a discount on gas at Shell. This has been especially beneficial because of the high cost of gasoline. The day I showed up to get gas only to find I did not have enough reward points, made me more conscious of doing my shopping at Ralph's to get the discount at Shell.

If the reward is something of value to the consumer, the consumer will reward the retailer with loyalty.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Here's a real 'guy' comment: If I have to carry a loyalty card in my wallet, I'm not signing up! Five coffee shops within a 3 minute walk of my office, and only one has a 'card-less' program (Starbucks). Guess who gets my loyal business!

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Kevin Graff, President, Graff Retail

Loyalty means I commit to spending more of my hard earned dollars with you. In return, I expect more than thanks than a bottle of water or a chocolate chip cookie.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Like many grocery shoppers, I belong to several loyalty programs. All of them offer price discounts on certain products for being a member of the club. Surely I am getting more benefits, but I don't know what they are. Those stores that engage me with something other than price discounts would have a better chance of getting my business.

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John Karolefski, Editor in Chief, CPGmatters.com

Consumers do not think them as "Loyalty Programs" but more of a "sure, I will carry another card if it gives me a better price or maybe I will get something free at some point." However, do not expect consumers to change shopping behavior because they are carrying a retailer's "loyalty" card. The space is wide open for a brand to differentiate itself by creating a true loyalty program.

Brands can do that by truly rewarding loyalty, by providing perks that matter to consumers and thinking outside of the box. For example, Target provides a 5% price discount which is great, but after I reach a certain purchase level (i.e. silver, gold, platinum) how about giving me a free fountain drink or coffee while I shop? How about using customer analytics to determine products that others with my purchase patterns have bought that I have not and sending me a coupon to receive it free or a discount?

Kurt Seemar, President, Analytic Marketing Innovations

Here is the fantasy of a retailer.

"Dear Customer, We're issuing you this card so that you'll love us. You'll have to use this card so that we know what you purchase, but we won't use it—we promise. We're simply not smart enough to figure out how. You'll have to swipe this card to get the same price you got yesterday. We're sure you'll love it. We really don't know why we're doing this to you. Nevertheless, we've seen others do it and we're just sure you would expect the same from us. We're confident you'll love us more each time you swipe it."

Simply by beginning this type of an program in today's market, you are creating a negative with the customer. An emotional connection is never created between the customer and a retailer by a program, a card, or an offer. It is created by an experience.

If 81% don't know the value of their card, there is a hint there. They don't care.

Customers have an alternative choice for every purchase they make—every purchase. When they choose one retailer over all the other options, it is only the basis of the origin where loyalty can be created. There was a reason they did—learn it.

The three items shown as suggestions only further distance retailers from the opportunity to focus upon those aspects of retailing that create loyalty. They are a HUGE distraction of financial and people resources from what they really need to do. One certainly has to congratulate the consultants that have convinced them to neglect their business, their customers, and their real opportunity to improve their business by spending their money with them instead of on driving an experience that will thrill a customer and their return.

Customers own their loyalty. They make choices about it daily. Every retailer spending time away from their experience and spending it on these types of efforts is furthering themselves away from achieving it.

'Scanner'

The problem with many loyalty programs is that the customer is loyal to the program and not the company. The reason there might not emotional bond between the customer and the company is because the customer enjoys the perks over the company. In short, it's just another form of marketing and promotion. Done well, it gets the customer through the door. If the company took away the loyalty program, would the customer still come back?

First focus on creating an experience that make customers want to do business with you. Then reward these truly loyal customers with their perks and rewards.

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Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

Never had a loyalty program as I am one store, BUT the customers love my crazy deals, and I reward them by continually bringing in some door buster offers. I get customers coming in just to see what wild meat deals we have, and it costs me nothing to promote this kind of loyalty.

Coupons, and cards are a dime a dozen, and you really need to focus sharply on some sort of unique program so customers keep you at the top of their shopping list.

There is a better mousetrap out there, so go invent one, and reap the rewards. Let your imagination run wild, and who knows, you could be the next marketing guru.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Lots of great insights above. Loyalty (if anything) needs to go from RETAILER to SHOPPER—prove you have my best interests at heart, demonstrate you understand my wants and needs, provide with me an opportunity to improve my experience (convenience, education, ease, costs—whatever you choose to woo me with). I, as the shopper, am loyal to my own hopes, dreams, desires, aspirations and will seek to fulfill them how and where I can. If you, as a retailer, can help me meet those loyalties—we have a business relationship that is mutually satisfying.

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David Zahn, Owner, ZAHN Consulting, LLC

One major benefit of loyalty programs is the data they can generate. Unfortunately, many retailers are too busy to collect or use it. Much can be learned from the initial waves of data (and much less later). A key problem with loyalty programs is they are difficult to stop.

Ron Larson, Associate, WMU

As we consider the impact of loyalty programs, we should also reevaluate the central role they seem to play in marketing today.

Byron Sharp has done extensive statistical studies of loyalty programs and questions this core role. In fact, in his brand studies, he finds that attracting new consumers to your brand is far healthier for the short and long term than heavy focus on loyalty.

In part, today's loyal customer is tomorrow's loyal customer of someone else—because consumers naturally migrate in their purchase patterns.

Sharp's work also notes that applying the Pareto rule to marketing is incorrect. (The Pareto rule has been taken to suggest that 80% of sales come from 20% of customers.) As a result, heavy focus on the 20% of most loyal consumers focuses too much resource where it simply can't return a solid profit.

What should we do? Encourage loyalty and reward it. But marketers need to keep their eyes focused on the real prize—bringing new consumers to purchase from your brand or at your store.

Doug Garnett, Founder & CEO, Atomic Direct

I still think we're avoiding the 800-lb gorilla in the room by not mentioning the fact that 90%+ of retail loyalty programs are literally nothing more than mass, untargeted discount programs for frequent shoppers. My wife being a member of three supermarket companies' programs does not infer any loyalty. She simply realizes she must join the programs in order to receive the best prices.

True loyalty programs generate compelling reasons to pass by competitors for the differentiated perceived and/or realized benefits of the Brand/merchant/service provider. Think about hospitality and airline industry programs. You fly the same airline, you stay at the same hotel chain every chance you get. Think about the characteristics of those programs that are transferable to the CPG/retail industries, and you will begin to build brand value and lasting consumer loyalty.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

When we started with these programs, the ideas of knowing the customer and communicating directly with the customer were the keys. Neither of these ideas has been included in current day programs. Discounts only achieve some loyalty. Segmenting your target consumer base, and communicate directly is a start. Second create real rewards by segment.

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W. Frank Dell II, CMC, President, Dellmart & Company

True loyalty is based on customer needs being met by the product/service provided; optimizing the product/service offering is the best way to drive loyalty. Loyalty programs can increase perceived value, but they have a relatively small impact on customer decision making.

A more disruptive model for a loyalty program is one that provides value integrated in the standard customer experience—no "bordered" program. Bordered programs create a cognitive barrier between the core product experience and that which is part of the rewards program. Offering ALL customers integrated benefits sends a message that patronage is valued fairly and openly; it also does not require customers to experience an "engagement tax"; i.e. managing points, learning about what they must do to earn benefits, etc. It keeps it clean, and supplements a brand's value prop on a broader scale than what could be achieved via a bordered program.

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Martin Mehalchin, Partner, Lenati, LLC

The largest hurdles to incorporating relation-focused benefits into retail loyalty programs are the retailers themselves.

The focus on decision-making based exclusively on the short-term impact of loyalty program rewards leads to a discount-based approach, which is exactly what most retailers are doing for their mainstream audience. By constantly attempting to "buy" customer retention, those retailers are in fact chipping away at loyalty, making those consumers more and more hungry for the next deal. As a result, the retailers find themselves commoditized.

If I cannot tell you the benefits of the loyalty program you have, what makes you think that the program will actually lead to changing and reinforcing any behavior?

Building relationships means combining hard behavior-changing activities (which generate ROI and value) with personalization driven by analytics. The personalization (ideally across channels) tells consumers that the retailer knows who they are and genuinely is committed to meeting their individual needs, rather than simply force-feeding promotions and points offers down their throats until they are ready to explode.

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Mark Price, Managing Partner, LiftPoint Consulting, Inc.

The single greatest hurdle is the fact that it would require real work. The majority of the retailers with loyalty programs BOUGHT THEM from a company that sells promotional products. The suggestions aren't bad, but if a retailer has a lousy loyalty program now, that really isn't going to change much.

A good program takes commitment and thought. Good retailers don't need loyalty programs, especially ones that withhold benefits unless you have a card. The best, most successful retailers in my area don't have loyalty programs and they continue to grow. Most of the others struggle. The fact is, the best loyalty program a retailer can get have is to be a better operator—hire better, train better, buy better, clean better, check out quicker, provide better choices. It is all in the blocking and tackling and many retailers aren't even fielding a team.

Ed Dennis, Sales, Dennis Enterprises

Add a 4th recommendation: don't launch a program if you don't have a strong economic business case. One of the core reasons a program isn't influencing incremental behavior, let alone satisfaction/preference is that the value offered to the member is "weak." The "everyone has one" so what is the benefit to the consumer is false. Everyone can have one if they fund it enough to give the consumer value—in terms of hard (points or accumulated value/currency that yields a reward or more than just a promise of extra savings/discounts/preferred pricing) and soft (experience and service driven) benefits.

In the past 5 years "everyone" has been bringing programs to market because they want to identify customers and leverage the insight to lift key metrics. Unfortunately, many of these same late-to-the-party retailers have a poor value proposition (under 5% real/perceived value of hard/soft benefits) and an equally weak commitment to communications along with a lack of analytics to drive personalized/relevant communications.

Hire an expert to do an expert job. Don't hire a technology company to build strategy or the business case. Don't hire a point of sale company with a thin consulting practice to do the same. It starts with a strong foundation of business planning, strategic assessment, financial planning and communications/offer management planning to then build the right plan for the right segment in order to drive preference, satisfaction and ultimately lift ROI, EBITDA.

David Slavick, Director, Loyalty & Retention, FTD.com

Great question and post Tom. My personal understanding of what is happening today, is that as consumers get used to constant novelty and improved offers, loyalty too has changed. I don't believe brands or retailers can rely on loyalty long-term, as in the last step before advocacy on the old purchase funnel.

I believe that it has to be constantly won over-and-over again, gained as a consumer recognition of a job well done.

In other words, loyalty is like a vote of confidence for what YOU are doing today, rather than a promise of what THEY will do tomorrow. Comments anyone?

Denyse Drummond-Dunn, President & C3C Catalyst, C3Centricity

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