So, You Want To Do A Loyalty Program – Why?

Let’s do a little role play.

You’re the CMO of a major retailer trying to make some decisions about a new customer retention (aka loyalty) strategy that the CEO has been on your case about for the last couple of months. There are all sorts of sales pitches being tossed your direction – third parties that leverage mobile devices and apps and offer compelling data-driven campaigns. Some even come wrapped around payment options and include spiffy stuff like Beacon technologies and other location-based targeting triggers.

Your team has been vetting these programs and has come into your office this morning armed with a Powerpoint deck that you expect will narrow the field to a few relevant choices.  Slide one contains the following four data points.

• 52 percent of monthly browsers and 54 percent of sporadic browsers weren’t predisposed to a particular brand before they actually went out shopping (eMarketer)
• Only 25 percent of US consumers say that brand loyalty affects how they shop (Ernst & Young)
• 41 percent of US consumers say that getting a better price would encourage them to switch brands (Nielsen)
• Companies that spend more on loyalty programs are roughly 10 percent less profitable than companies in the same sector that spent less on loyalty programs and didn’t grow any faster.  (McKinsey)

As you take note of the far right column and observe that the retailers with the most loyal customers are also those that have never won awards for best-in-class loyalty programs and many don’t even have such things, you reach for the Advil and wonder why your team can’t ever do exactly what you ask them to do.

Then, you suddenly realize that they’ve actually done you a huge favor by presenting you with data that will help you cut thru the clutter of the loyalty and customer retention noise and perhaps come up with a very different approach to the customer retention dilemma you’ve been asked to resolve.

A couple of important insights about the impact of loyalty programs on customer retention begin to emerge.

First, consumers are really efficient about getting, processing and taking action on information presented to them, especially information that relates to the stuff that they buy. A cynical person might say that consumers have been trained – and now have many more tools and many more options available to them – to game the system – and to do it  in real time. That includes joining many loyalty programs to get a one-time, opportunistic benefit only to then ditch that brand and revert to the 3 or 4 places that they use regularly.  The bait that gets them to take that one-time action is generally a discount, enough of one to matter at that particular point in time. And since data shows that the majority of consumers are not actually committed to any particular brand, and would gladly switch than fight, the siren song of the discount works pretty well. Well, at least once.   So, score one for the consumer, but heap lots of minus points on the retailer who’s making an investment in a consumer who’ll not likely return ever – or at least anytime soon.

The second is that most customer retention programs are really blunt instrument discount programs wrapped around the word “loyalty.” True enough, loyalty program members get better prices on the products they buy in stores. But there’s one big flaw with these types of programs: all loyalty program members are pretty much treated the same way and given the same discount. So, it’s a real question as to whether these programs reward actual loyalty – the consumer who drives incremental spend to that retailer or simply allows a consumer with a loyalty card to do what my Mom does – use 3 different loyalty cards at three different grocery stores to get different discounts each week. Now, granted, at 79, she has the time to research and then visit those stores to accumulate her savings, and it’s a way to fill her day, but she isn’t loyal to one store, she’s loyal to three in the same category because they offer her a discount. If one or all eliminated the price discounts, she’d dump them in a heartbeat. They’re certainly not incenting her incremental spend or her loyalty.

The third is that the retailers to whom consumers are most loyal as well as those considered “most innovative” really don’t organize around or promote loyalty programs, per se. Walmart’s EDLP (every day low pricing) proposition is a promise to its customers that they will never be undersold – and that makes customers trust them and loyal to their brand. Their use of mobile apps is reported to provide sales lift by as much as 40 percent but not because it offers them discounts, but because it makes it easier for consumers to find their way around the store (and to the items that Walmart wants them to know about).

J. Crew and Burberry use social media and merchandising and clever curation as a hook to lure its customers; neither of whom have a specific loyalty program to which its customers could belong, even if they wanted to.

Dick’s Sporting Goods store, which has been around since 1948, hooks its customers thru its branded specialty stores (e.g. Golf Galaxy) which curate all of the relevant merchandise inside its stores – all of the brands and the experiences that sports aficionados want and need to stay at the top of their game of choice.

Dunkin’ Donuts has only just recently launched its DD Rewards platform as it makes a big push for expansion – its hard core loyalists were loyal to the coffee plus donut experience, even in the face of competition from Starbucks. They just liked the quality, the selection, the value and the brand proposition and didn’t need points to keep them coming back.

Fourth, Amazon and Sam’s Club are both really interesting examples of retailers that have loyal members and strong global brands but have taken a different approach to creating programs designed to retain customers.  Amazon doesn’t report how many of its ~200 million registered users are Prime members, but Morningstar reported at the end of 2013 that it believes that about 10 million are, and that those members spend twice as much as other Amazon members and contribute a third of its operating income. Prime members pay $79 (soon to be $99) and have “skin in the game” to be loyal to a shopping platform that also offers a lot of other value (price/value/selection plus free and reliable delivery). Sam’s Club is paid membership club; members can pay $45 or $100 to shop at Sam’s Club and different benefits accrue based on the level of membership spend. There, too, consumers have “skin in the game” to concentrate as much of their spend there as possible to maximize the return on their membership investment.  Now, obviously, Sam’s Club, to continue to have loyal members, has to also deliver on the price/value/selection but it certainly helps that its loyal members have made an investment to belong and prioritize Sam’s over other choices.

Then, there’s of course the loyalty programs that the airlines and hotels have. The bait to being a member isn’t discounts on flights, although the promise of being able to redeem points for free tickets is an incentive and so technically a discount,  the primary driver is the privileges of status. People maintain their maniacal loyalty to an airline for one pretty simple reason – they want to board first (and thus lay claim to the sacred overhead space) and get upgraded more often.  This loyalty is, ironically, in spite of increasingly lousy airline food, increasingly poor levels of service and increasingly higher fares. Delta made waves earlier in the year when it announced that it was going to allocate points on the basis of how much people spent on tickets, not the number of miles flown on any given flight – tilting the loyalty deck towards business travelers who often book last minute and are, therefore, usually paying more, and who, therefore,  represent the types of customers that the airline really wants to be loyal  since they aren’t chasing price but schedule and status.

This sort of tiering is used successfully in other retail environments as well and where discount isn’t so much of a driver of loyalty. Neiman Marcus’ InCircle program awards points for every dollar spent on a Neiman’s card, and the more dollars spent the more points accrued per dollar. They run special promotions throughout  the year with double or triple points on items purchased, not on sale, mind you, but as an inducement for getting its well-heeled consumers to consolidate and organize their shopping around those dates, and accumulate as many points as possible. Those points are converted into cash balances that can be spent at the retailer that year.  The 144,000 InCircle customers drive 40 percent of Neiman’s sales in any given year. This tiering also underpins the campaigns that LevelUp merchants use as part of its mobile payments app. Consumers are given a $5.00 or $10.00 “credit” on the next purchase made at merchant after accruing a $50 or $100 level of spend. It is a way for merchants to reward frequency and track incremental spend, and in the QSR space in which LevelUp operates, frequency builds loyalty. And, they say it seems to work pretty well since it  takes only 4 to 8 weeks for LevelUp to drive 20 percent of a merchant’s volume.

So when all of this is taken together, it isn’t all that surprising that retailers that spend a ton on loyalty programs, on average, are less profitable. Now, it could be that those who spend a ton on loyalty programs have a problem retaining customers in the first place and throw everything and the kitchen sink around loyalty programs in the hopes of stemming the tide. But maybe it’s because they’re plying consumers with loyalty programs that look more like the blunt instrument price discount programs that don’t reward consumers for driving more of their business their way. When asked about the meaning of loyalty programs, Sir Terry Leahy, the former CEO of Tesco who is credited with launching the concept of loyalty cards before loyalty was a mainstream retail concept said that its  1 percent discount was nothing more than a “thank you” to customers for taking the time to hand over their data for them to, in turn, use to deliver more relevant and targeted offers. Leahy describes today’s “loyalty” situation as a series of discounts that tempt consumers to play the field, creating a “promiscuous consumer”  that knows another discount is only an email or push notification away.

So, how should this CMO decide who and how to deliver on the promise of loyalty and mobile and payments – which have become the commerce trifecta  today?

The  starting point is understanding what adds value to the consumer shopping  experience – and it isn’t always getting a discount. Sometimes, it’s getting information that makes the shopping process easier. Increasingly, it’s about being able to move across shopping channels with the consumer so that the retailer knows its Karen regardless of whether Karen is on her tablet shopping at 11 PM, on her mobile at 830 AM walking to the office or on her laptop at 2:30 during a boring conference call.  It’s about offering status and privileges  that mean actually something to a person – first notice of a sale, information when your favorite designer has a new shipment of stuff at your favorite retailer, push notifications that remind you that you have clothes at the cleaners when you are in the vicinity, a new recipe and a shopping list of ingredients, and, yes, points for spend that accrue as a “cash back” savings to be spent later at the store.  Kroger likes to describe its loyalty program as “snowflakes” where no two customer programs are alike but instead provide tailored promotions and information related to what they have bought and might like to buy – and that program has created a massively loyal consumer base for them.

Sometimes the best loyalty program is about making it easy, just convenient  to shop, buy and pay – no discounts,  just simple.  In an increasingly time challenged, connected world, consumers  say that the value of their time is more important than anything. As invisible as we talk about making the payments process going forward,  the payments experience can actually make or break a “loyalty” experience, not to mention being a pretty critical part of closing the loop and capturing data that helps enrich the data set about  a customer about their preferences. That’s why consumers got pretty excited about Amazon’s magic wand for zapping the bar codes of food and having that automatically link to an ordering system that then delivered food charged, of course, to the Amazon account and why competitors turned pale. Will people ditch their beloved grocery store loyalty programs for the convenience of being able to order groceries in this way and not have to go to the store?  And, be totally non-plused about third party apps that enable self-checkout in those stores and lots of coupons and promotions?  It depends on whether the shoppers of the future look more like digital versions of my Mom or are willing to trade off the convenience of not having to set foot in a store for a truly digital (and disruptive) shopping experience to replenish the stuff that’s in the fridge. . That sounds like heaven to me.

So, what’s a CMO to do? Recognize that data, mobile/connected devices and technology now make it possible to provide the foundation for the delivery of  programs that go well beyond one size fits all propositions and a number of really clever third party providers who can help. The name of the game isn’t making customers loyal to the brand, it’s using these platforms to help reinforce the message that the brand is loyal to them.