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Is Customer Loyalty Still Worth the Investment?

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By: Wise Marketer Staff |

Posted on December 31, 2015

Marketers continue to pour more and more time and money into their loyalty programmes, but are they getting the kind of payoff they expect in long-term relationships, customer engagement and impact on sales and profitability? There's no doubt that loyalty programmes are still popular, but are they still effective, asks the loyalty education publication, Colloquy.

Loyalty is about much more than a programme; it's a way of thinking about customers' entire experience and creating an environment where they want to forge deep and long-lasting relationships. It's based on a sense of trust, on the expectation that companies will be responsible stewards of their personal data and use it to create personalised, meaningful and rewarding experiences.

But loyalty marketers aren't doing enough to drive engagement and value for programme members. And misalignment between programme investment and business objectives is leaving money on the table, diluting retailers' investment and failing to provide the experiences that create real long-term emotional loyalty.

Colloquy conducted a major survey of more than 2,000 loyalty-programme members and found that many programmes lack clarity and ignore - or simply fail to discover - what customers truly value. They often fall short of meeting consumers' needs for utility and reasonable time to reward, lack any true differentiation and struggle to keep pace with technologies that are emerging at a staggering pace.

The good news is that consumers still love to join loyalty programmes and show no sign of slowing down. In the 2015 Colloquy Loyalty Census it was revealed that memberships jumped by 26% to 3.3 billion, from 2012 to 2014. The bad news: Active participation in those programmes continues to decline. Our Census revealed a stagnant market in which more than half of members - 58% - don't even bother to participate, much less become engaged and enthusiastic members.

Playing follow-the-leader by creating a lookalike programme that doesn't differentiate itself isn't going to help. In fact, such "blah" efforts that don't stand out from competitors can actually do more damage than good by syphoning money into copycat value propositions and helping a competing programme that offers a more meaningful experience. In other words: The exact opposite of loyalty, and potentially a nudge right into the arms of the other guy.

So, what can be done? Luckily, a great deal. This report examines three areas in particular where marketers should rethink the loyalty equation to create better, more long-lasting and profitable relationships with consumers, as well as better aligning programme goals and investments with consumer expectations.

It's time for a loyalty shakeup; here's how to start:

  1. Stop acquiring members
    You have enough, probably millions upon millions, and chances are good you're not creating meaningful realtionships with them. Driving long-term retention of loyal members will lower your overall investment. And, surprise, you'll naturally acquire new members through reputation, not costly incentives.
  2. Partner up to create power
    The lone wolf routine is getting old. You just can't do it alone these days; partnerships - whether co-branded credit cards, teaming up with complementary companies, or joining a formal coalition programme - are the only way to create long-term, differentiated and meaningful value for customers. When it comes to loyalty, there truly is strength in numbers.
  3. Don't misunderstand millennials
    Yes, you were once their age, but millennials aren't simply you in a time warp. It's crucial that marketers understand the needs of millennials - those born roughly between 1981 and 1997. They're a unique breed with dramatically different ideas about consumerism and loyalty than other demographics. Ignore that fact at your programme's peril.

The lure of something new is a pretty much universal appeal, whether it's a new car, a new outfit or a new friend. It's no surprise, then, that loyalty programmes spend a lot of time and money trying to attract new members. There's nothing inherently wrong with that; the problem arises when companies fail to distinguish between the two groups - the shiny new object (a new member) and the tried-and-true standby (the longtime member). This can be a costly mistake. What the two groups want out of a programme, how messages should be communicated to them and the probability of selling to them are all quite different.

Many marketers split their investment almost evenly between member acquisition and member retention efforts. In fact, according to a 2014 Econsultancy survey, 47% of respondents indicated they would spend equally on both groups; 34% would invest more in acquisition, while only 18% would spend more on retention. Some programmes, in fact, spend up to 75% of their time and money on acquisition.

Yet existing loyalty members are far more likely to spend more money, spend more frequently, try new products, refer potential new customers and contribute to profitability than are new members. Invesp Consulting says existing customers are 50% more likely to try new products and spend 31% more, compared to new customers. As programmes let the customer's life cycle guide communications (retention vs. acquisition), customer lifetime value increases as loyalty marketers take them further down the path of spend frequency, lift, redemption and loyalty.

The irony is that, for many years, loyalty programmes were hyper-focused on retention, but the pendulum has swung the other way in some cases, with companies aggressively pursuing new members. Spending half the budget, or more, to acquire new members - many of whom will get their free sign-up dessert and be gone - is a misalignment between investment and business objectives. Once acquisition efforts land new members, they still have to be persuaded to develop new behaviors. A successful programme strategy entails introducing motivators and stimuli to enhance and accelerate customer behavior and amplify sales (basket size, frequency).

And marketing the programme and its benefits the same way for existing loyalty members and potential ones is a misfire, since those consumers define value differently. Acquisition efforts should focus on transactional value, emphasizing discounts, points and sign-up bonuses, for example. Retention efforts, meanwhile, should focus on emotional value, with an emphasis on topics such as the time to earn rewards, programme simplicity and alignment with consumers' values and interests.

This contrast in transactional value vs. emotional value is illustrated in several of the questions we asked in the Colloquy Customer Loyalty in 2015 & Beyond survey. When asked which benefits motivated them to join a programme in the past 12 months, the two top answers were "earning points/miles on purchases to redeem for rewards (56% of respondents chose this) and "product or service offer/discount" (55% chose this).

At this new point in the consumer-programme relationship, rationality rules and the customer is weighing the value of a relationship with the company. These top two answers are good news, because the new members expressed an interest in engaging with the loyalty programme instead of just signing up for a one-time bonus.

Once consumers have realised the rational value of joining a loyalty programme, their focus moves away from a strictly transactional one. Survey participants who were asked why they continue to participate in a programme, for example, cited these top two answers: "The programme is easy to understand" (81%) and "I get rewards and offers that are relevant to me" (75%). The responses reflect a more personal and emotional outlook.

And when programme members were asked the reverse - why did they stop being active in a programme - the answers likewise reflect this emotional value. The top two reasons were "too hard to earn points" and "does not provide rewards/offers that I'm interested in."

Loyalty programmes must communicate differently with members at different stages of their life cycle, from new members to existing members with different lengths of time in the programme. One company leading the pack in terms of understanding its loyalty members is Starbucks, whose My Starbucks Rewards grew 28% to 10.4 million active users in the third quarter of 2015, according to Marketing magazine. The programme has continued to grow its appeal across its three levels of membership, each with increasing rewards. In addition to the new memberships, for example, My Starbucks Rewards also saw a big jump in members rising into the top, gold level: That group now includes 6.2 million members, a 32% increase from the same quarter in 2014, according to Marketing magazine. Starbucks' loyalty success includes both transactional appeal - its famously sophisticated and easy-to-use mobile app and integrated payments, for example - and emotional appeal - with rewards that feel personal to users and the cach of gold membership.

So, as loyalty programmes work to map their communications and offers to customers' loyalty life cycle, there are several key things to remember. Just as a point of entry, programmes must get the basics right, including the following:

  1. Keep benefits simple and clear-cut.
  2. Choose an earnings structure and stick with it.
  3. Provide easy guidelines about programme requirements and how to reach the next tier.
  4. Personalise rewards based on what motivates them.
  5. Set short goals within tiers so members can remain excited, have something to look forward to and hit new thresholds in a reasonable time.

But that's just a start. Loyalty programmes that aren't doing the following four things now - or at least within the next 18 months - will be left behind:

  1. Fire your worst customers. They're not delivering value back to you? Strip all value away from them, because they're wasting your time and your money - which could be better spent on members with whom real long-term relationships have or can develop.
  2. Integrate all marketing efforts into the loyalty programme, including points, discounts, promotions, brand marketing, pricing and inventory management. If you want your loyalty programme to soar, don't isolate it from other corporate marketing.
  3. Integrate intent data with behavior data from your programme. Over-invest in your best customers. Mass appeal is overrated; don't allow your thirst for appealing to everyone to dilute your attention and value for the best members. Many programmes allow their best customers to subsidise their worst. Why?
  4. Spend 75% of your loyalty investment on retention, vs. the 75% that many programmes currently spend on member acquisition. By recognizing the differences in customer acquisition and customer retention, loyalty programmes can tailor their communications and rewards in ways that encourage members to join through rewards and stay through their emotional attachment. By working toward this relevance, programmes can also ensure that programme tactics and investments support overall business objectives - thereby avoiding leaving money on the table.

It's a pretty simple, and brutal, reality of running a loyalty programme: If it takes too long for members to earn rewards, they will bail - or simply stop participating. Members are constantly weighing the monetary value of what they receive from a programme against what they need to spend - in dollars, time and aggravation - to get those rewards. Half of respondents in the survey said they continue to participate in programmes that give them lots of ways to earn rewards faster. Moving customers toward a reward quickly keeps them engaged and loyal to the business: For example, more than 90% of those who redeem rewards with a business in Belly, a loyalty programme with member businesses in more than 15 major cities, return to that business within a month. And the time it takes to be rewarded is consistently one of the most significant pain points for consumers; getting to rewards faster, on the other hand, consistently persuades consumers to stay and spend. The Air Miles Reward Program in Canada has found, for example, that members spend three to five times more as they cross-shop with coalition partners.

Programme marketers, likewise, must constantly balance consumers' desire to reach rewards faster with sustaining the programme's economics. The resolution to this seemingly at-odds situation lies in partnership models. The idea of strength in numbers is certainly true in the loyalty world. By joining forces - whether through partnerships with complementary programmes, co-branded credit cards or full-fledged coalition programmes, where members can earn and redeem rewards among a variety of partner companies - loyalty programmes can create more value for consumers than standalone programmes.

If partnerships are thoughtfully chosen and executed, everybody wins. Consumers often become more engaged, enjoy the ease of consolidating much of their loyalty effort and can earn rewards much faster - the ultimate win in the loyalty game. As for programme administrators, there are also several big payoffs to taking a partnership approach: They have a better chance of prompting behavioral changes in consumers, gain access to a more data-rich CRM platform and win a sustainable competitive advantage by creating an offering that stands out from the crowd.

Creating a partnership loyalty opportunity - whether by aligning with compatible retail partners, offering a co-branded credit card or joining a coalition model - is likely to please members and potential members. In our survey, 27% of respondents ranked the ability to earn points from multiple retailers as one of their top three appealing programme feature.

The  coalition 'multiplier effect'
Among the loyalty programmes with the highest percentage of survey respondents saying they are currently members, most of them have some partnership aspect. This is less surprising among the Canadian respondents: Coalition programmes are popular in Canada, Europe and many other countries. A full 79% of survey respondents in Canada indicated they are members of the Air Miles coalition programme.

Consumers benefit from coalition membership by enjoying a common currency and achieving reward status more quickly; they can earn and spend their programme currency any way they want within the partner network, perhaps choosing to shop mostly at a drugstore and several favorite retailers but spending all accrued points on a plane ticket from a participating airline. For coalition partner companies, they model has clear benefits, as well: They raise their visibility and brand footprint, gain access to a richer and wider pool of consumer data, gain efficiencies from the pooled resources and efforts, and enjoy higher open and read rates on coalition communications than on single-source programmes, according to LoyaltyOne's research.

And, importantly, coalition partner companies enjoy what LoyaltyOne calls the multiplier or "network" effect. The more coalition partners a consumer patronises, the more money she will spend at the "originating sponsor" - the company that first brought her into the coalition programme. If, for example, she typically spends $100 at a favored drugstore chain, for example, she is likely to increase her spending there to $125 once she has become a shopper at two other stores in the coalition. As she becomes a patron at more partner companies, she likewise will often continue to increase spending at the originating sponsor.

The multiplier effect isn't just about spending, though. It's about changing behavior and consolidating shopping habits. Overall, consumers who are members of coalitions are not spending more money, but they are consolidating more of their spending to companies in the coalition. By doing so, the consumer increases her rewards-earning power, becomes more entrenched and forges an emotional connection to the coalition and its partner companies.

Doing something right
In the United States, formal coalition loyalty has not previously taken root - primarily because of the challenge of market regionality - but it is just gaining traction this year with the new American Express-backed Plenti programme. Nonetheless, several loyalty programmes that have some partnership aspect were among the most popular among respondents. For example, 24% of respondents said they are current members of the Costco Wholesale Club, which offers a co-branded credit card. Likewise the Fred Meyer Rewards programme, part of supermarket giant Kroger Co., was cited by 59% of respondents; it, too, features a co-branded credit card.

Fred Meyer Rewards, which offers a Visa card through a partnership with U.S. Bank, demonstrates how partnership models can create value for all parties. The grocer's customers earn programme currency on purchases, the financial institution gains value through consolidated consumer spending through the card, and the retailer finds value as consumers consolidate their spending to maximize programme investment.

Starbucks, too, has recently created partnership opportunities for members of its wildly popular My Starbucks Rewards, offering shareable rewards with car-service company Lyft, music-streaming firm Spotify and The New York Times. The partnership allows Lyft riders, for example, to collect Starbucks loyalty programme stars and gives all Lyft drivers gold status. When using Spotify, the coffee lovers earn Starbucks stars and have input on in-store playlists. And they can read a selection of free Times stories via the Starbucks mobile app, as well as earning stars through paid digital and print newspaper subscriptions.

As for Plenti, the first large-scale, formal coalition-loyalty programme in the United States, time will tell whether it will have the engagement depth and staying power of Air Miles, UK-based Nectar and other long-running programmes in other parts of the world. The results so far are promising: CEO Abeer Bhatia said Plenti has enrolled nearly 30 million members since its May launch and, at current growth rates is approaching $1 billion in value awarded annually.

Creating some kind of partnership is a viable way to help loyalty members earn rewards faster while still balancing the economic realities of the programme operators. While partnerships can be a great approach, the fundamental principles of loyalty still must be delivered. Partnerships that don't deliver on the utility customers expect will soon find themselves flailing. Those that get it right, however, can create effective and interesting new approaches for their customers, their partners and their programmes.

People Still Love Loyalty
The conclusion drawn by Colloquy is that the loyalty programme appears to be here to stay, with membership continuing to climb. The survey revealed that 42% of respondents participate in at least one programme weekly, and 92% of them describe their participation as either "fun" or "economical". Furthermore, 55% said they had joined a loyalty programme in the past year, with a full 63% of millennial respondents having done so.

But there's a big gap between engagement and simply signing up. With members' active rate continuing to slip and the loyalty landscape becoming ever more competitive, retailers must step up their game. If they fail to meet customer expectations on value, benefits and usefulness, they risk being ditched for being relevant.

True loyalty kicks in when programmes offer simplicity, alignment on brand values and meaningful recognition for customers' commitment. How each company achieves the right mix depends on its products, services, brand identity, competitive market and target customers.

Customers know how valuable their data is, but marketers often miss the mark on using it to create relevant communications and personal experiences. Retailers must use the knowledge of their customers to resolve their pain points and make their journey valuable.

There's a narrowing window of opportunity to make the loyalty landscape better, to build more trust, create an emotional connection and create customer-centric strategies that deliver on expectations.

Loyalty marketers must determine what success looks like for their programme and choose from the right models, technologies and motivators to get there. They must resolve misalignment between investment and objectives in order to stop leaving money on the table. They must double down on their efforts to resolve the three key areas we've examined: acquisition vs. retention efforts, partnership models and the importance of the millennial market. Only then can they truly share the journey with consumers and create real, long-term emotional loyalty. Marketers that fail to shake up loyalty programmes and make them matter could find their investment going down the drain.

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