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Insight: Does experience design render loyalty marketing obsolete?

At Mobile Payments Today, contributor Michelle Thomas explores a question with which those of us who have been around the block a few times are intimately familiar: Are loyalty programs passe'? Today, the prevailing wisdom around the marketing campfire is that customer experience design has replaced loyalty marketing as the best way to build loyal customer relationships. Is customer experience the sole driver of customer-centric marketing? Or does a focus on customer relationships require more than a frictionless digital experience? Let's explore.
 
By Rick Ferguson
 
In her article, Thomas evinces a deep understanding of the original purpose and evolution of loyalty programs. Money quote #1:
 
"Loyalty programs were built to differentiate brands from one another, largely focused on delivering functional benefits like rewards or members-only discounts. These programs were managed as another marketing channel, creating new levers that could be pulled to increase short-term revenue and profit amongst the customers that were identified as having the highest value. As loyalty programs have expanded to include more emotional benefits, they have seen the value associated with meeting a consumer's needs. Now companies are competing for customer relationships rather than customer memberships."
This is right on. Thomas loses the narrative, however, when she describes the place of loyalty programs in the new world of experience design:
 
"The winners are not the ones with the best loyalty programs, but those that are providing the best experiences. A study by Wunderman found that the majority (79 percent) of consumers said brands have to actually demonstrate that they understand and care about them before they are going to consider purchasing. For many companies, loyalty is still a points program or a discount program, not something that is embedded in a customer's overall experience with the brand."
The idea that "for many companies, loyalty is still a points program or a discount program" is one that loyalty program naysayers have been using for decades. The history of the argument goes like this:
 
20 years ago: "For many companies, loyalty is still a points program or a discount program. True loyalty is built through everyday low pricing and treating every customer the same."
 
15 years ago: "For many companies, loyalty is still a points program or a discount program. True loyalty is built through a focus on customer relationship management."
 
10 years ago: "For many companies, loyalty is still a points program or a discount program. True loyalty is built through a focus on engagement tactics such as gamification."
 
Today: "For many companies, loyalty is still a points program or a discount program. True loyalty is built through a focus on customer experience design."
 
That's right, you youngs out there: One of the few pleasures of middle age is hearing young adults making the same arguments you heard 20 years ago, and thinking they're new. The problem with focusing solely on customer experience design is that you're spreading your customer investment across your entire customer base: from your most valuable customers to your least valuable; from customers willing to pay a price premium for your products and services to your opportunistic showroomers and cherry-pickers; from your brand advocates to your brand detractors. Focusing solely on experience design is therefore an inefficient investment of marketing capital.
 
Loyalty marketing, on the other hand, allocates your investment of marketing capital exactly where it can do the most good: to your best customers. The simple truth is that no company operating a successful loyalty program thinks that loyalty is "still a points program or a discount program." If they did, their loyalty program wouldn't be successful. Brands like Sephora, CVS, and, yes, Amazon operate loyalty programs because they help the brand focus on the customers who matter most: customers who want a deeper relationship, who are willing to consolidate their spend, and are willing to advocate for the brand. These programs help the brand accomplish the three most essential components of successful relationships with best customers:
 
Deliver reward and recognition: To engage best customers, you must deliver benefits beyond your core product and service offering. Best customers are already loyal to you because they love your products and your experience delivery; to demonstrate loyalty to them, provide rewards and recognition that your garden-variety customers don't receive. 
 
Demonstrate trust and commitment: By leveraging data to, yes, provide a differientated experience through personalization and marketing relevance to these best customers, you'll demonstrate commitment to them that establishes and builds trust. Once established in the minds of your best customers, these feelings create "brand insulation" that helps you overcome inevitable service breakdowns, and leaves your best customers resistant to competitive offers focused on price and discounts.
 
Provide mutual value: Successful relationships are symbiotic, rather than parasitic; there has to be something in it for both of you, or it won't work. By delivering reward and recognition, your best customers will respond with profitable behavior changes: They'll buy more, they'll buy more often, and they'll tell their friends about you. This exchange of mutual value is the foundation of all successful loyalty marketing.
 
You can accomplish all of this without a points-based loyalty program, of course; arguing that points programs are the sum total of loyalty marketing is like arguing that a mobile app is the sum total of customer experience design. Thomas is correct in arguing that customer experience design driven by data, technology, and personalization is essential to business success. What marketers must realize however, is that experience design is a sub-discipline of loyalty marketing - not the other way around.
 
Fortunately, Thomas finishes her piece with an insight that should resonate with loyalty marketers: 
 
"Loyalty from a customer's perspective reflects their dedication to a brand in which they trust and advocate for. Take a step back and look at what loyalty means to your company. Are you defining loyalty by the program itself, or as a way to enhance your overall customer experience? Strive to become a loyalty brand, not a brand with a loyalty program."
In other words: successful loyalty programs don't make customers more loyal; they demonstrate a brand's loyalty to their best customers. That's an important lesson to remember - and Thomas is wise to remind us of it.
 
Rick Ferguson is CMO and Editor in Chief of the Wise Marketer Group.
 
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