The evolution of loyalty and customer retention programs has been similar to the evolution of a butterfly.
Loyalty Strategy

The Continuing Evolution of Points-based Loyalty: What Does the Future Hold?

Photo by Suzanne D. Williams on Unsplash

Loyalty professionals are customer retention zealots. This comes with the territory and the numbers are hard to dispute. Study after study demonstrates these axioms on the value of retaining customers:

  • Acquiring a new customer costs five times more than retaining an existing customer

These are numbers every loyalty pro has quoted to either defend or expand their program. Organizations invest heavily in customer retention and sophisticated, enduring points-based programs are a core part of many retention strategies. The challenge is keeping a point system fresh and inspiring to customers who are constantly barraged with other tempting offers.

By: Ric Neeley, Hinda

Like any marketing approach, points-based systems must grow and evolve or face extinction. Since the launch of what we could call the first modern consumer loyalty programs some 40 years ago, points-based programs have gone from simple volume discount tracking systems to comprehensive global award forums offering a staggering number of redemption options. Advanced technologies allow points to be redeemed in ways that would have seemed beyond belief just a few years ago. This brave new world offers revolutionary ways to help retain customers but requires loyalty marketers to completely change the way they perceive award systems.

Loyalty started in the clouds

Let’s take just a moment to look back at how we got here and then where we might be going. In May 1981, both American Airlines and United Airlines launched their frequent flyer programs only one week apart. These major airlines had watched and learned as smaller, innovate competitors tested the waters with the very first mileage programs. Texas International Airlines debuted their program in 1979 with Western Airlines launching their own “Travel Bank” less than a year later. All these programs had one thing in common. Travelers could earn “free” tickets in the future based on the miles they flew with the sponsor. The value proposition was simple and appealing … Fly 20,000 miles get a free round-trip ticket. Travelers simply had to enroll in the program and the airline would track their mileage. 

These were some of the first consumer point-based retention programs and the reward was nothing more than a volume discount predicated on the “Baker’s Dozen”, something bread-makers had been practicing for 1,000 years. I can already hear some of you shouting that trading stamps were the real pioneers of customer loyalty. But remember trading stamps were early coalition marketing programs and operated by third parties like Sperry & Hutchison (S&H) with their Green Stamps, Carlson Company’s Gold Bond Stamps or the Top Value Trading Stamp Company. The primary benefits to those giving out the stamps was to leverage loyalty between brands and to prevent customer defections to competitors who might offer stamps for purchases. This makes them reactive rather than proactive customer retention strategies.

The first airlines programs, on the other hand, were rewarding only their customers for buying seats on their flights.  But they soon discovered competitors could easily duplicate their frequent flyer programs. In a short time, nearly every major airline on the planet had some type of mileage program. This is when the loyalty awards race began in earnest. Airlines looked for new and more innovative ways to engage customers. This led to status levels allowing elite members special perks including preferred seating, advanced boarding and even club access that required memberships. The engagement race would continue as airlines added travel partners like car rental companies and eventually awards catalogs.

Loyalty programs hit the ground running

Hoteliers and credit card issuers soon followed suit. Marriott introduced their first guest loyalty program in 1983. Club Rewards was launched in 1984, offering one point for every dollar purchased on their Diner’s Club card. Discover’s Cashback Bonus was unveiled in 1986, and American Express introduced Membership Rewards in 1991. Credit and charge cards vying for a greater share of the consumer’s purchases rapidly expanded their redemption options as they clamored to gain attention and become the first card pulled from the wallet. 

Today, loyalty programs are ubiquitous. Grocery store and pharmacy programs provide discounts at checkout. Airlines teamed up with credit cards letting members accumulate frequent flyer mileage faster. And every major credit card issuer offers a variety of award products to engage cardholders. So, it isn’t surprising that the average US household is enrolled in 18 different loyalty programs. But enrolled and active are two different things. Consumers actively participate in only 6 – 8 of the loyalty programs they are enrolled in and 1/3 of all points issued in these programs will go unredeemed. If your loyalty members are the customers you need to retain and less than half of your members actively participate, you might need to focus your efforts on engagement rather than enrollment.

Points systems are about activity.

Reward systems are about engagement.

Customers are active. Loyal customers are engaged. That may seem a very subtle difference but, considering the average US business will lose over 15% of their customers annually, it’s a subtle difference worth serious consideration. Programs are often measured in activity rather than engagement. When a member makes an eligible purchase, it triggers a point issuance. For the customer, this is a passive program engagement. It is simply a purchase resulting in points.

A point redemption, on the other hand, is an active engagement with the program. It requires the customer to view the rewards and make choices. Receiving something desirable for their points actively demonstrates the value of the program to the customer, and the more actively engaged your customers are the less likely they are to abandon the business. 

Sponsors are quick to adjust point issuance to align with the organization’s objectives. Bonus promotions are created to help change the company product mix and introduce new offerings. Yet, expanding redemption options or making technology changes are often slow and painful processes. Managing a reward system is time-consuming. It means paying attention to new up-and-coming brands and looking at the audience demographics to anticipate their wants and desires. But this isn’t as simple as looking for the newest and coolest awards, it’s also understanding technology changes that will impact how people receive or redeem their awards. 

New entrants into the loyalty rewards space began expanding redemption options, separating themselves from earlier programs with a more attractive value proposition for prospective members. This led those early adopters to add new redemption options to face the competitive threat as well. Soon, programs included retail gift certificates, travel experiences, hotel certificates and merchandise awards. As retailers shifted from paper certificates to plastic gift cards and ultimately eCards, there were incorporated into the programs.

Partnering up to tackle loyalty

Loyalty rewards became a brand management exercise. Retail brands were added as redemption options to align with the quality and reputation of the sponsoring company. Merchandise award categories like electronics, home and garden and leisure were filled with nationally known brands like Sony TVs, Weber Grills and Ping Golf Clubs to evoke quality. Concert and event tickets were later added to further expand redemption options as were charitable donations. But each new addition added to the complexity and resources needed to manage the program.

Rather than creating vast warehouse and distribution centers to manage their programs, loyalty marketers began identifying partners to help fulfill the rewards in their programs. Technologies like APIs, application programming interfaces, eventually allowed program sponsors to connect with suppliers to update their rewards offerings more quickly and to easily transfer reward redemption orders from their systems directly to suppliers. They also looked for partners with dedicated customer service centers to answer questions and concerns much more efficiently and increase member satisfaction. These evolutionary changes offered members more options and helped improve reward processes.

But the pandemic may have us on the brink of even more loyalty reward changes. Global supply chain issues confounded loyalty marketers and upset their members as production facilities around the globe slowed or shut-down to mitigate the spread of COVID-19. As production began to ramp up again, supplies were limited, and demand was high leaving members perplexed and frustrated as they waited for their awards. Demand for leisure travel, fine dining, concerts and other events virtually disappeared for well over a year. While demand for these options is slowing returning, suppliers are now in the process of rebuilding after being forced to downsize during the worst days of the pandemic.  

This market turbulence has only accelerated some upcoming changes to loyalty rewards. Today, loyalty market suppliers are looking at adding new technology and online award experiences to further expand offerings. The first pay-with-points approaches for gasoline purchases and some retail purchases were really a modified version of credit statements. As technology improves, loyalty points are being integrated into point-of-sale systems becoming a currency used for making purchases. Online retail malls could become part of the redemption experience allowing members to shop the online offerings of retailers viewed in points. Even tapping into the electronic gaming industry could become an engagement approach allowing loyalty marketers to engage members with more instant savings. We could even see members using points at online casinos. Philanthropic gifts using points could expand with members receiving impact statements detailing  what their donation provided. We could see redemptions for investments into cybercurrency or retirement funds. We could even see points used for tuition reimbursement. The possibilities are simply endless but will require an extraordinary shift in the way we view rewards systems moving from a brand-managed distribution mindset to a portfolio management approach.

Looking to the next evolution of loyalty

Brand management is akin to managing a department at a local grocery store. Let’s say you manage the beverage aisle. You decide how much of the aisle will be dedicated to categories like soft drinks, water, energy drinks and fruit juices. You choose which brands to stock, how much you’ll carry, what sizes you will offer and exactly where on the shelves you’ll put these brands. Naturally, your best-selling categories will be allocated the prime space and your best-selling brands will get the most shelf space in each category. This brand management approach means you need to understand your customers. You need to have a good idea of what beverages they normally purchase, and which brands they will choose. This lets you manage your beverage aisle efficiently and effectively.

Portfolio management is more like managing a large holding company who owns many different companies across different industries. Think Warren Buffet and Berkshire-Hathaway. GEICO insurance, Duracell batteries, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, Pampered Chef and a huge carpet company call Shaw Industries are just some of wholly owned subsidiaries of Berkshire-Hathaway. This doesn’t even count their major stock holdings in American Express, Coca-Cola, and Kraft-Heinz. A portfolio manager like Berkshire-Hathaway must understand each market where they own a company. They need to know the advantages their company has in the industry compared to competitors. But they also must be looking forward to new potential expansion industries. They must find new companies to acquire offering high-growth opportunities while simultaneously imagining what customers will need in the future. Portfolio management is about anticipating future needs to stay ahead of the competition.

Progressive loyalty rewards offerings will incorporate both brand and portfolio management. This combination will change the mindset of simply adding new offerings when they become available, to actively looking for awards to engage and inspire members. Your reward system is critical to the value proposition of your program. Don’t be reactive in the race for rewards. Take the next step in rewards evolution and incorporate portfolio thinking to open your mind to a new world of possibilities. It will keep you ahead of the competition and engage the customers you want to retain.

Ric Neeley is a Director of Marketing for Hinda Loyalty Group, a US-based loyalty solutions provider that helps engage, inspire, and reward the people most important to your business.

The Continuing Evolution of Points-based Loyalty: What Does the Future Hold?
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