By Rick Ferguson
[Editor's note: this article is Part II of a multi-part series. To read Part I, click here.]
Like many industries, the loyalty industry is built on the concept of exploiting friction. This industry grew up around the idea of making it easier for customers to be loyal - first to airlines, then to the broader travel sector, then to retail, and then to financial services and payment cards. Today, loyalty programs are ubiquitous. They’re massive, with millions of members. They’re incredibly complex for marketers to operate, and for consumers to understand. In many instances, today’s loyalty programs have become Rube Goldberg machines - complex structures over-designed to deliver a relatively simple outcome.
It’s no wonder, then, that large brand loyalty programs have millions of members in their databases, but that only a fraction of those members are active. It’s no wonder that members quickly disengage with programs that make them jump through so many hoops to participate. It’s no wonder that program rolls are filled with members who gave up after not earning enough currency to receive a meaningful reward, or with high value members who are bored with currency and frustrated with their increasing inability to receive compelling soft benefits. We’ve built a system of recognition and reward that is filled with friction. And if we don’t ourselves, as practitioners, actively work to eliminate this friction on behalf of our customers and our clients, then the marketplace will remove that friction for us.
The author Rachel Botsman has identified the four inherent problems of industries ripe for disruption:
We might agree that the modern loyalty industry suffers from all four of these maladies: programs are too complex; lack of personalization, relevance, and real value results in rewards that fall far short of promises; programs are often under-funded to maintain quarterly financial results; and best customers are often disappointed by their inability to access upgrades and other soft benefits. Given this reality, Botsman would no doubt recognize a loyalty industry moving along the same trajectory as other legacy industries disrupted by technology.
Meanwhile, there are forces at work that are already removing friction from the loyalty marketing industry. The most existential and disruptive threat to the loyalty industry is the rise of digital targeting. Through modern cloud-based analytics, data aggregation services, and programmatic ad buying platforms, it is now possible to get a targeted offer to a consumer chosen on the basis of demographic, behavioral, or psychographic segmentation, in near real time, on the device of that consumer’s choice.
Segmentation practices that used to belong exclusively to the realm of loyalty and CRM analysts are now moving into the cloud. Targeting segmentation is moving beyond simple demographic or lifestage data to target consumers based on sophisticated behavioral profiles. Past purchases are used to predict future purchases. Web browsing activity is combined with search history to build detailed shopper personas; Contextual retargeting allows complementary sites to share audiences, whether known or unknown. Facebook and Google are building massive and powerful behavioral targeting engines. Text analysis and natural language processing allow marketers to incorporate unstructured data and the social graph into their segmentations.
None of this has anything to do with loyalty programs, and CMOs that might once have relied solely on loyalty to gather insight on consumers and target them with relevant offers now have many more choices on where to direct their marketing budgets. Behavioral targeting still has a ways to go before reaching maturity - a recent Razorfish study of c-suite executives revealed that 76 percent of marketers don’t make use of behavioral data - but the promise is there.
We’ve always argued that the loyalty identifier - the membership card or license plate, if you will - is a necessary component of one-to-one marketing. But unless we ourselves remove the friction from the loyalty industry, then as loyalty practitioners we risk becoming one of those “redundant intermediaries” that Botsman talks about.
On the provider side of the loyalty industry, the potential rise of blockchain technology threatens the legacy business model of providing software platforms for brands to operate loyalty programs. Blockchain allows for the creation and real-time movement of digital assets with embedded trust rules inside transactions, time-stamping and identity ownership. Self-executed business rules, and embedded privacy safeguards. Blockchain startups are even now planning the creation of frictionless and fungible virtual currencies that could completely decentralize the loyalty industry, with consumers able to earn and redeem currency anywhere within the network – or even trade it on a secondary market.
If one or more of these blockchain platforms gains critical mass, what room is there for a legacy third party-operated loyalty coalition such as AIR MILES or Nectar? And where does that leave an industry built largely on offering complex software platforms that enable proprietary loyalty programs? If a brand can stand up a blockchain-enabled loyalty program with a simple point-of-sale software update or a mobile payment app with lower start-up costs and zero program liability, then where’s the downside?
In my next article, I’ll offer a counterpoint to the forces threatening to disrupt the legacy loyalty industry. Stay tuned to this space.