A historical perspective on the ever-changing role of rewards in a loyalty value proposition.
By Mike Capizzi, CLMP
Consumers join loyalty marketing programs for one simple reason – to be rewarded and recognized for their patronage, advocacy and brand support. Basic tenets in human psychology suggest that without the reward and recognition a member will be unlikely to join a program, resistant to behavior tracking and potentially a threat to churn.
Rewards can take on many different shapes and sizes. In the earliest days of true loyalty marketing, the airline frequent flyer and hotel frequent guest programs found that unused capacity could be offered as a “free” reward in exchange for prior transactional value. Travel was both expensive and aspirational to the consumer, so the promise of a future reward strongly resonated with the membership, especially the highest value members who spent a lot of money on business travel. The reward equation was very simple and financially attractive to the travel program sponsor. The seats and/or the rooms were perishable inventory – so why not give them away as a reward? Few incremental variable costs were involved. The hotel room did need to be cleaned following a redemption stay and the plane may need extra fuel the more passengers and baggage it carried. But the rest of the cost structure was fixed, and it would likely be incurred whether capacities were full or partial. Plus, accounting treatments and breakage policies meant the financial implications were even more attractive. This reward equation easily led to the creation of soft benefits – special privileges and recognition elements targeted at only the most valuable membership segments. Upgrades to better seats or better rooms were easy to do when that capacity was unsold and the recognition benefit to the consumer was very powerful.
When the credit card industry jumped on the loyalty marketing bandwagon, a new problem emerged. The “in-kind” reward equation of the travel industry simply did not apply. Most cards were already free and many underlying banking products like checking and savings accounts were also free. There was nothing to give away. So, they bought rewards on the open market – travel, merchandise, eventually something experiential like a concert ticket, and became overly consumed with the cost per point which underpinned their rewards equation. Hence, the value prop for the consumer had to be diluted; interchange revenues devoted to funding rewards were modest and it took a lot of spending to earn something of tangible value. Plus, the soft side evaporated.
The telecom industry also had the same problem but neglected to recognize it. Thinking travel, they knew they had unused capacity which could be given away for free. The consumer did not see it this way. As bundling plans and pricing wars disrupted the early days of telecom loyalty, the consumer saw much less appeal in free minutes. They wanted tangible rewards, and this forced the telecom programs to either adapt to the credit card model or abandon the program altogether.
For the retailers, regardless of merchant class and goods sold, in-kind was clearly the way to go. The cost of goods was much lower than the perceived value of the reward and all other associated costs were largely fixed. Since frequency of visit and share of wallet were parallel objectives, they often chose to offer in-kind via a “bounce-back” certificate or voucher which was only good for a discount on a subsequent visit within a defined period. Going out to the market for rewards procurement seemed ridiculous to the merchants and since the discount was already a soft benefit (economic, but not free), other privileges were often ignored. To make matters worse, the early days of retail loyalty had POS tracking challenges and merchants often gravitated to using the private label credit card as the unique loyalty identifier. Of course, it didn’t hurt that the issuer was willing to throw in some of the rewards funding in the hope of higher returns from interest (18% APR or higher) and fees.
As the loyalty marketing technique became ubiquitous by the early 21st century, every other vertical and global geographic market wrestled with the rewards equation. The casino, gaming, hospitality and entertainment industries followed the hotel model and had more attractive offerings than just free rooms to put into their rewards portfolio. The restaurant industry largely followed the in-kind rewards strategy of the retailers, though they often displaced discount coupons with free goods that carried little incremental cost. The gasoline and petrol retailers stuck to in kind rewards with a price/discount model. And cash back burst upon the scene, especially during times of economic woe, to offer a simpler, more transparent and presumably higher value mechanism to reward loyalty program members.
I can’t write a historical perspective on rewards without recalling an incident long ago while participating in a loyalty and rewards panel at a prestigious university event. One of the panelists who shared the podium with me blasted my loyalty rewards strategy presentation which was based on the principles and best practices in the industry. This extremely distinguished professor (PhD) of economics at an Ivy League university insisted that cash back was the ultimate reward because of its True Value (known, quantifiable, standardized) and the “utilitarian” value associated with real currency vs. loyalty currencies like points or miles. He referenced academic research which calculated the utilitarian value of a dollar as $1.05 because it could be used anywhere.
“Doc,” I replied (not meaning to be disrespectful in any way – just a guy with an inner-city edge), “I don’t know where you come from, but where I come from, a buck off is still worth a buck.”
The reason I re-tell the story from far ago down memory lane is that today’s loyalty industry seems to be headed down a future path that is largely aligned with cash back thinking.
Best practices have always correlated with rewards that carried higher perceived value than their true cost. The spread between cost and perceived value may have shrunk over the years, and it is still highly variable depending upon the reward, the procurement process and the fulfillment source, but the spread enables reward acceleration vis-à-vis the required member behavior to earn that reward. Some elect to take the spread, or a portion thereof, as a revenue source, although the best practice would suggest passing it on to the member.
Removing friction is the future, new enablers are here to advance our profession, but fundamental reward principles will always remain.
Cash does not meet this criterion. There is no spread. Despite the professor’s convincing mathematics, utilitarian value is not perceived value in the hearts and minds of loyalty program members. Maybe it’s changing, I don’t yet know.
The cash back thinking currently in vogue centers around friction in the redemption process. This is a good discussion, as anything our industry can do to remove friction will be good for loyalty marketing program results. By dumping the redemption hurdles of points, miles, catalogs, websites, vouchers, certificates, expiration periods, rewards breakage, etc. and replacing them with an instantaneous receipt of cash-like benefits at any point-of-sale – digital or physical – seems too logical to ignore. And make those redemption events universal, combining loyalty currencies from multiple program sources to be used at any merchant’s POS via a currency exchange formula enabled by blockchain and you have the most sought-after rewards equation being discussed today. Don’t forget the crypto craze, where Bitcoin or some other cryptocurrency becomes the cash back mechanism!
Ask a consumer what they want, especially a Millennial consumer, and the number one answer is cash back. Monitor thousands, if not millions of redemptions in loyalty marketing land and you’ll find that cash back is almost always NOT the preferred redemption option (typically 20-25% where choice is offered in most cultures/demographic groups). Familiarity and standardization play back strongly in rewards surveys. The professor was right. But aspiration and behavior are very different. Removing friction is the future, new enablers are here to advance our profession, but fundamental reward principles will always remain.
Be careful what you wish for. Technology enables but imagination wins.
And don’t forget – rewards without recognition is like picking a thoroughbred to win a horse race and not betting it!
Mike Capizzi is the Dean of The Loyalty Academy and a Certified Loyalty Marketing Professional™ (CLMP).