Loyalty programmes: what works and what doesn't

Loyalty programmes are thought by many to be the least costly method of trying to get customers to come back - but the least costly methods are sometimes the least effective. Here, Blaine Becker of the Hartman Group explains what works and what doesn't in today's loyalty programmes.

Wikipedia's entry for 'Loyalty Marketing' defines it as "the practice of providing discounts, prizes, or other incentives to encourage continued patronage of a business. Generally, these programmes are considered less expensive to maintain than allowing customer defection or 'churn'."

But recent research by Hartman Group found that 74% of consumers either somewhat or strongly agreed that "retailers need new and better ways of rewarding loyal customers".

Perhaps, then, something needs to change in the loyalty marketing equation. But what should change, and how? From Becker's perspective, consumer loyalty strategies in the retail arena should be defined as: "a unilateral and selfless acknowledgement of the organisation's appreciation for the customer's continued patronage and support with a gift or service of substantial or meaningful value" and, ideally, these gifts should be usable or consumable immediately or in the near-term future (which helps to build more immediate engagement).

The gifts or rewards offered need not be obviously monetary in nature - for example offering customers access to quicker security lines at airports - but real loyalty will be increasingly driven by something beyond discounts and reward points. True loyalty is all about making the customer's life a little bit better or easier in a meaningful way, however small or large that gesture may be.

Becker believes that today's loyalty programmes can be sorted into three approximate categories:

1. Routine rewards
   These are the expected discounts based on commonly held consumer beliefs regarding the nature of economic transactions. Consumers view this loyalty as an inducement or a "tit for tat" relationship not dissimilar from volume discounts. The rewards here tend to be viewed by consumers as almost meaningless.

   As one consumer observed: "What is the point of the loyalty club card savings when every single wine in the wine department is always on the 'club card savings price', not to mention half of the entire frozen food aisles? It becomes some stupid hassle to go through just to ensure I get the real price. Besides, whenever I forget my card the cashier just swipes her own".

   This category is the least successful at driving both loyalty perceptions as well as continued patronage. Examples include: grocery store loyalty cards, automatic cash back savings, and savings when using the retailer's own credit card.
    

2. Incremental or deferred rewards
   While somewhat effective at driving continued patronage, these programmes do not necessarily drive true loyalty. These programmes are typically structured around the idea that repeated visits result in gradual accrual of ownership of a meaningful reward of monetary value.

   The term "gradual accrual of ownership" may sound awkward, but it was not so very long ago that frequent flyers would be rewarded with actual tickets that could be traded in the open marketplace. Yet, while these programmes might encourage continued patronage over time, they do not drive permanent patronage, as evidenced by the fact that while consumers do collect airline miles - often from a variety of airlines - the majority still buy tickets based on which airline offers the best prices or the most convenient scheduling.

   Collecting miles is meaningful and fun, but it rarely reminds the consumer of the passion the brand maintains for its customers. Likewise, what does it mean for consumers when nearly every single airline - as well as most credit cards - award loyalty points? Examples include airline miles programmes, travel rewards programmes, 'every 6th meal free' cards, and so on.
    

3. Substantive rewards
   These rewards can drive loyalty via 'surprise and delight', as well as through more general methods of making customers' lives noticeably better. While airline elite status programmes share common elements with deferred rewards programmes, the rewards here are different because they improve customers' quality of life on a regular basis.

   In the case of an airline, access to preferred security lines, free upgrades, better customer service, and access to private lounges all encourage more permanent loyalty behaviour, and most seasoned flyers will pick one or two airlines and stick with them wherever possible. But true loyalty programmes will channel the basic human desire for surprise and delight by providing gifts and benefits of greater personal meaning and significance.

   The best-in-class examples of this are not really classifiable because of their unique, customised nature. Consider the following scenario: You have become acquainted with the manager of the wine department at your local grocery store. He has helped you pick out wines on numerous occasions. One day he walks up and says, "Hey I've got a great new wine I'd like you to try. It's one of the best Italian wines we've had in ages." While telling you this you watch as he scratches the US$40 price tag off and replaces it with one that reads US$4. Then he ends the interaction with a well-timed, "Let me know what you think". After such a display of generosity, the closing remark almost requires the customer to continue the relationship.

In conclusion, the human desire to demonstrate loyalty via the ritual of continued patronage is a nearly universal feature of all modern economies. Customers are always hoping to find a supplier worthy of their loyalty, even if only because it reduces the effort spent in having to make new choices.