Photo: @zelmabrezinska via Twenty20
Are you feeling loyal?
Up until about March 2020, I was a typical software industry road warrior, possibly a bit of an overachiever — logging some 250,000 miles per year on American Airlines — and spending more time with Marriott than my family.
This past year, all my travel was, well … zooming around, with zero miles and nights used. While my kids traditionally did an admirable job of using up all my airline and hotel points, I still had around 750,000 banked miles, which I was recently notified were in danger of expiry due to no activity in my account.
Fortunately, American told me about a number of ways I could log some activity, including just buying stuff I barely needed through the American Airlines Mall. With 750,000 miles at stake, the cost benefit of doing a little shopping was overwhelmingly in favor of buying some stuff or, more to the point, enlisting my daughters’ expert shopping help in keeping my account active.
What transpired was a series of overlapping loyalty benefits that leaves me wondering if today’s loyalty offers are really on target and questioning if the unlucky retailer made even a few cents on the transactions.
Here’s a breakdown:
- $100 purchased, 200 miles awarded, value $4 = four percent discounted
- Paid by Visa, three percent cash back plus two percent extra special and loyal preferred customer = five percent discounted
- Free shipping — say, a $6 value = 6 percent discounted
- Bypassed the “get another 10 percent off” offer by not giving up my email = 10 percent discounted
- Skipped joining the retailer loyalty program = two percent discounted
- Total “loyalty discounts taken” = 15 percent; discounts bypassed = another 12 percent
In the end, I had a happy daughter who expertly saved my 750,000 airline miles. I probably could have financially stressed a local restaurant with this chain of events (and further applied a coupon to the equation) and had dinner with my wife instead.
And yes, the product I bought was on sale, so this wasn’t a margin-rich transaction to begin with. In the end, I didn’t feel any greater attachment to anyone in this elongated loyalty chain and really wondered if the retailer in play would have been better off sending me a check for $5.00 to stay away.
Discussion Questions
DISCUSSION QUESTIONS: Do you think the point of today’s loyalty programs has been lost in today’s elaborate chain of marketplaces, referrals and rewards? At the end of the purchase chain, who is really subsidizing the purchase and are retailers unfairly disadvantaged by picking up all the costs that precede the purchase?
Poll
BrainTrust
Di Di Chan
President of FutureProof Retail
Shep Hyken
Chief Amazement Officer, Shepard Presentations, LLC
Loyalty programs are now table stakes as many consumers gravitate to the retailers with the best deals based on what level of loyalty value they receive. When points are redeemed, there is an incremental hit on margin for retailers. Knowing this, retailers need to structure the loyalty program in a manner that delivers a profitable margin for the life of the customer.
As with all other elements of our world, the pandemic deeply impacted the loyalty business. Shifts in travel and work have devalued many popular loyalty programs. In the post-pandemic world, the math has changed; one dollar for one mile no longer equals a dollar in the minds of consumers. It’s ironic as many of the airlines were able to leverage the value of their loyalty programs for loans and other concessions to stay afloat last year. Those assets are no longer worth the same. At the end of the day, the model must shift and many consumers are in for a change to their reward earning.
Loyalty programs work, but it’s important to recognize that many loyalty programs are really marketing programs. There are perks, discounts, etc. That gets customers to come back again and again. It’s a marketing cost, built into the price of the product or service sold. But what happens if the perks and discounts go away? Would the customer still come back? If they do, then you know you have true loyalty.
The only problem, Shep, is that by the time you wait to see if the customers come back in order to verify their loyalty, it is likely too late. A friend once observed that we could avoid most disasters in our lives if we’d made a different decision two weeks prior. That insight may well apply to retailers too.
Most of the product in these labrynths are commodities so promos bring customers in and that trumps loyalty. These programs work because sometimes retailers just simply need to move product. If the question is, do clients feel loyal to the brand or marketplace for the service? My answer is no. It’s a means to an end for the consumer. And a means to an end that moves units for the retailer too.
I love the commentary, Peter. Who of us hasn’t been there?
It seems to me that many loyalty programs are really anti-loyalty programs. The complexity for participating is astounding. Or maybe I am too simple minded.
I buy, you give me points. You never take away my points. (I know the company auditors have problems with that.) You tell me when and if I can redeem and I choose how.
The more bells and whistles on these programs, the less likely I am to participate.
We are in the era of personalization; even loyalty is expected to be more convenient. The point of a loyalty program is to get customers coming back. Referrals and rewards are all nice. The winning loyalty platform will be personalized recommendations given at the right time- the moment of decision. More and more don’t want to constantly think about any retail store, even with extra coupon incentives. They want to get the right offer to appear when they are in the mood to shop.
Loyalty programs need to evolve. Travel loyalty has been hardest hit – my platinum status on Delta won’t be possible to maintain this year, so now I’m not as inclined to stick with Delta if the price point is better on another airline. The same goes for other retail segments — online shoppers are more price driven because they can clearly see similar choices side by side on search platforms. Do I really care about 20 percent off at Bed Bath & Beyond if I can get the same benefit just by paying less with another retailer? Loyalty now has to mean “relationship.” Loyalty will come from consistent quality of experience, values alignment, and personalization. Much harder for a retailer to achieve.
Loyalty programs in retail were started in order for retailers to collect contact information about the customer so they could market more effectively. Later we all discovered that rather than erode margins with a loyalty program, it would be great to make loyal customers feel “special” with special events and other perquisites. Memberships, on the other hand, are collecting money from the customers for them to feel special (clever, yes?) and the membership fees often represent the only profit the retailer will make. Retailers still want to know who their customers are and how to reach them so, loyalty or memberships are still the most effective way to obtain that information. Overlapping offers are not the customer’s fault, they are the offerer’s fault. Mileage programs are the one thing that airlines regret ever implementing and so they have devised ways to disappoint their loyal customers: let miles expire. Loyalty programs will stick around until retailers discover (no pun intended) a better way to collect data. They just have to be attractive enough.
First – an excellent article Peter, you speak for all of us ex-road warriors.
Well here we go again desperately trying to keep this loyalty myth alive. These are TRANSACTIONS! That is not loyalty. We shop for the best deal we can get from credit cards, retailers, everything. Customers play the “loyalty” game much better than retailers. The question raised so well in this piece is: “Who is getting the best of the transaction?” Apparently it’s not the retailer! This reminds me of what our colleague Bob Phibbs used to repeatedly warn retailers about Groupon with the admonition: “You can’t afford it!”
Companies confuse any customer interaction as engagement and keeping the brand and their value proposition top of mind. However the gymnastics they require for this engagement is deleterious to time and sanity and, for some, has the opposite effect. Loyalty marketing and customer engagement in 2020 and beyond needs a complete redo. Really!
Hotels, airlines, and credit cards are in a league of their own when it comes to loyalty programs. Most are profit centers with complex partner networks that are designed to make money directly with driving some extra customer loyalty as a side benefit – I would not recommend most retailers look to them as an example of how to “do it right.” In Peter’s example above AA is leveraging loss aversion to force an interaction. If he takes action, it signals future purchase intention (and therefore the “loyalty” aspect works). If he balks, AA just saved $7,500 (AA Miles are penny points) they can take off their liability. Retailers who participate within another company’s loyalty chain need to be cognizant that their own brand experience will largely be lost and may even take a hit because of customer mindset when they are interacting. That said, as long as they have a game plan and draw a line in the sand that they won’t move beyond, partner networks can be successful for both parties.
Loyalty programs are misnamed. They are marketing programs and some are good business drivers but most are not. Many retailers refer to them as margin reduction programs. If a retailer wants to truly build loyalty I recommend earning it through great products, great service and great shopping experiences.
Loyalty programs have historically been very popular with airlines and hotels—but oftentimes are “forced participation” more than customer-driven brand advocacy. However several brands have cracked the loyalty code by offering incentives that don’t necessarily cut profits and margin. One example is Madewell, which offers free shipping to participants of their Insider program. You submit your name and email and then you get first-hand access to promos and free shipping. They know that their consumers already want/expect free shipping, but they add an incentive for them to opt into their marketing to get it.
Overall, there’s a needed distinction for true “loyalty” programs that resonate and inspire consumers vs. programs that are just tallying historic behaviors and assigning redeemable no-cost-to-the-vendor points accordingly. Perhaps “participation” program is a more accurate term for the latter.
Loyalty programs work to keep customers coming back. Complexity is one of the few ways for retailers and airlines to keep customers on board. There is an inherent learning, time invested to understand the framework, and application of it to save $. That cost in time and effort by the consumer builds stickiness and lock-in. The best loyalty programs build the complexity over time – simple stuff first, maybe just the initial discount, and then builds on that – just like upgrades in an addictive video game. Someone as deeply invested as the example in airline miles is a perfect target. It compels the customer to purchase something that they didn’t have to buy at all. On the retailer side, it makes sense depending on the relationship the retailer has with the airline, Visa, etc. Retailers have to be smart about how they engage in contracts, alliances, and multi-path price differences to establish profitable outcomes. If done correctly, the costs of the loyalty programs are distributed across multiple parts of supply chain equitably.
In this particular instance, I wonder if American got more loyalty out of Peter than they already had. If his points had expired, they would have lost his loyalty completely. They could have as well just deducted the 200 miles and sent him a small replica of American plane with a “Thank you for being a loyal member” note. The set of transactions he went through reminds me of the Krazy Coupon Lady app — they figure out all sort of deal hacks that can sometimes get you a product for free.
Shep is correct. The design of loyalty is to keep them coming back. There is a twist today. The covid experience jerked customers all over the web looking at retailers whom they never darkened those floors or websites. And now as a result, they found new alternative retailers and businesses they feel comfortable with. Therefore, everyone has to get into the ring and re-earn, re-thrill and recapture customers. If that means shaving margin dollars, so be it. A business cannot rest with a bronze statue mentality. Flexible and aggressive is the playbook today.
Loyalty programs have been a very effective way to drive repeat engagement, interest, and most importantly, a long-term relationship between the brand and customer. While all businesses have been impacted by the pandemic and the associated digital acceleration, consumer behaviors and expectations have shifted as well. This also includes how consumers leverage and view loyalty programs in a world that has been disrupted.
Just as retailers and brands have had to adjust their operating models and brand value proposition, loyalty programs will need to be reviewed to adjust to the rapidly changing consumer landscape. There is a significant opportunity to extend loyalty programs across companies, apply an element of gamification, and provide even more personalized ways to drive brand engagement that extends throughout social media channels.
In the innovation imperative, static loyalty programs are doomed to fail and need to be evaluated continuously.
Problem is that most loyalty program isn’t designed to build loyalty, it is designed to reward increased consumption. For me loyalty is when you purchase without the need for discount because of the quality/attributes of the products. If all you do is points-based rewards, you are just offering a discount, no more no less.
Loyalty to a brand does not come from the points, but rather a customer’s cumulative experience with a brand and their perceived value. Points are just a tool to keep score and introduce a degree of gamification.
Every brand needs a loyalty strategy — but build affinity with customers based on real value. Some loyalty programs do this well, but the majority are convoluted and create customer confusion.
Loyalty marketing is not going away, in part because customers now largely expect such programs, even if they never really benefit.
In any case, to answer the question posed, every stakeholder benefited in the described transaction, but the benefit depends on their perspective. Was money made by anyone? Probably not.