There is a problem of definition that underlies the challenges faced by companies involved in loyalty programmes, according to a white paper by Thad Peterson of Market Platform Dynamics. The word 'loyalty' usually defines an emotional relationship but, in the world of marketing, it has been transformed - or even hijacked - into the process of offering customers value (e.g. points) to be redeemed later on for more products or services.
Additional functionality can be added to a loyalty programme - such as value-added services provided for higher value customers - but the core of the programme is nearly always providing the customer with some form of currency in exchange for their continued patronage.
Of course, this is not loyalty. It's actually incentivising (i.e. bribing) customers to change their purchasing habits in order to increase customer profitability. According to Peterson there's nothing wrong with that goal as such, but real loyalty is emotional and it has more to do with faithfulness and mutual obligation between two parties. For example, customers are fiercely loyal to Apple to the point where they will pay whatever it takes to get Apple products. Apple rewards that faithfulness with the continuing delivery of products and services that delight customers and work really well. That's real loyalty.
But, unfortunately, the term 'loyalty' has been hijacked by the marketing industry to define a business relationship that has very little to do with the emotional connection between a loyal customer and a faithful enterprise, and this clouds thinking and creates a degree of strategic confusion.
To be fair, it's not anyone's fault that loyalty has turned into a commoditized points management business. The concept of "do this now to get this later", which is embedded in the very core of traditional loyalty schemes, is the result of the technological limitations inherent in processing systems that were prevalent when loyalty programmes were developed.
For example, loyalty schemes had to be supported by batching transactions and recording value over a periodic cycle. There was no way to track points without direct linkage to a processing cycle, and the customer's progress and status was included in a monthly statement. Over time, batch processing became institutionalised as the expected process by which repeat purchase and visit behaviour was rewarded.
Loyalty programmes proliferated, moving from airlines (where they began) into payment cards and ultimately into all forms of consumption from retail through to hospitality. In fact, according to Colloquy's 2011 Loyalty Census, the number of loyalty memberships in the US had more than doubled from 973 million in 2000 to 2.09 billion in 2011, and the number of programmes in which the average household participated rose by more than 50% from 12 in 2006 to 18 in 2011 (although customers are active in only 8 or 9 of those programmes).
The white paper concludes that, although there is nothing wrong with traditional points programmes, the loyalty market is changing very quickly, and the concept of customer loyalty now needs to be redefined to focus more on changing customer behaviour through rewards and incentives.
The paper examines the issues and challenges related to traditional loyalty programmes, explains what choices are currently available to customers and merchants alike, and identifies not only three vital objectives for customer reward and incentive programmes but also suggests questions that should be asked when considering building or re-vamping a loyalty programme.
A copy of the paper can be requested by emailing Thad Peterson at firstname.lastname@example.org.