Why are so many customer loyalty programmes under-performing?

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How many customer loyalty cards do you have in your wallet? How many loyalty fobs on your keychain? And what about loyalty points apps your phone – perhaps you even have some of those.

Loyalty programmes that reward shoppers for using their brand have become commonplace, with statistics by McKinsey indicating that between 2008 and 2012 memberships increased by 10% per year, averaging 23 loyalty programme memberships per household.

For every type of business – department stores, grocers, pharmaceutical stores, hotels, airlines – there are loyalty programmes. And in the modern business climate, the idea of driving customer loyalty has never been so appealing.

“It’s so easy for customers to be disloyal these days,” says Richard Madden, chief strategy officer of Kitcatt Nohr. “Probably even as recently as five or ten years ago there was much more friction in the market, holding customers and stopping them moving between brands quite so easily. But now you have price comparison websites, and a very active customer culture of comparing reviews and sharing reviews with each other. And you also have emerging technologies like [mobile shopping and scanning app] RedLaser and its successors, which obviously make point-of-purchase comparison possible. So it’s a battle between the technology that’s enabling disloyalty and the technology that’s enabling loyalty.”

For that reason alone, the proliferation of loyalty programmes is understandable. However, evidence suggests that these kinds of programmes are not always the silver bullet solution that common wisdom would suggest.

Indeed, in a McKinsey study of 55 companies, the consultant concluded that in general loyalty programmes did not appear to drive stronger revenue growth, although results were highly dependent on industry. Businesses that had loyalty programmes in the drug retail and hospitality sectors, for instance, did demonstrate better revenue growth compared to competitors without loyalty programmes, but the likes of coffee shops, discount stores and food retailers experienced no such benefit.

Programme problems

So why are these loyalty programmes failing?

For a start, these programmes can be expensive to run, with McKinsey research suggesting that companies that spend more on loyalty also have EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins that are about 10% lower than companies in the same sectors that spend less on loyalty.

Another problems is that too many businesses use ‘forced discount’ programmes that do little or nothing to generate loyalty and repeat purchasing.

“The primary loyalty programmes in the US are the forced discount programmes, and customers are not really getting any other benefit,” says Tim Keiningham, global chief strategy officer and EVP at Ipsos Loyalty, and author of Why Loyalty Matters. “These programmes are basically saying ‘would you like the price that it is listed at with the card, or would you like to pay more money?’ And nobody ever wants to pay more money. So they force card usage. The problem with this is that it doesn’t actually increase their frequency to spend with you because you have forced this usage on them.”

Even those that are most sophisticated can be flawed, with a lack of understanding about which customers are the most valuable meaning that there is a focus on the wrong people.

“Challenges really arise in the loyalty arena when brands haven’t really understood the objectives that a loyalty programme is meant to be adhering to,” notes Susan Binda, head of loyalty marketing at The Logic Group. “Objectives are important, as is real understanding of current customer behaviours and how they can influence those behaviours through connected relationship marketing and the right amount of investment and the right management. If you don’t have a single version of truth of your customer, that could easily lead you away from the path of being entirely relevant and ruin the connection they have with that brand.”

Equally common is a fundamental failure to balance customer interests against the company’s pursuits.

“In their haste to collect as much data as possible, they neglect to come up with a clear, structured and relevant plan of what to do with their program platform,” suggests  Dennis Armbruster, editor-at-large at COLLOQUY and LoyaltyOne Consulting managing partner. Or, they more often than not neglect to use the data to enhance the entire customer experience and therefore sub-optimise their loyalty investment.

“According to a recent LoyaltyOne consumer survey, three out of four respondents feel they are not receiving a benefit for sharing their personal information, and 89% of consumers feel the value exchange is one-sided and not in their favour. Consumers will engage in your strategy and will generally provide their data - as long as the value proposition is commensurate to their value to you as an organisation and you're clear on why you're asking for it.”

But customer trust in loyalty programmes appears to be eroding, with one in three consumers suggesting that loyalty programmes haven’t saved them a penny, according to a study by payment provider WorldPay, which also found that eight million consumers say they are now using their cards less than a year ago.

Indeed, research by Epsilon International further indicates that loyalty programmes are in danger of losing their impact. “The loyalty scheme marketplace appears to have reached saturation point and it is not unusual for the average consumer to be signed up to as many as 20 loyalty cards,” says Phillip Singh, VP of sales EMEA at Epsilon International. “Many of these loyalty programmes are morphing into a commodity for consumers when there is no significant added value to differentiate between the schemes. In fact, only 28% of respondents to the study said they viewed rewards programmes as an incentive to secure their loyalty.”

Partnerships, pain points and targeting

So why are many brands doing loyalty programmes at all?

“They think they have to,” says Keiningham. “Business don’t want to be caught behind. But they are frequently not part of an integrated strategy and that is a problem. These programmes are great for collecting consumer behaviour information, and if you do some good modelling on that so you can really target customers and try to five them what they really want, they are fantastic. But if you are doing it because you think that just by having the programme itself you are going to increase your earnings… it is not going to happen. Because your competitor has the same programme you do. There are just so many programmes and they are all basically selling the same merchandise.”

But while some of this evidence paints a pretty bleak picture for loyalty programmes, there are clear indications that these mechanisms can still be extremely effective provided that they have clear objectives, are data-intensive and can cut through the loyalty programme ‘noise’.

In their paper ‘Making Loyalty Pay: Six Lessons From The Innovators’, McKinsey’s Lowell Doppelt, Marie-Claude Nadeau and Marc Singer identified a number of ways that loyalty programmes can make a mark.

  • Ensure you use the data for targeting. Target has transcended the traditional flat discount only model with its REDcard, by building advanced data capabilities that enables it to use the data gathered to target highest value consumers.
  • Solve customer pain points. Slow delivery is a major inconvenience for online shoppers, so Amazon Prime resolves this for customers, by providing a more reliable service.
  • Maximise the difference between perceived value and real cost. Offerings such as upgrades, flexible check-in and free internet access are highly valuable to top customers of hotels, but bear little marginal cost to the provider. Furthermore, free nights accrued as part of hotel loyalty programmes tend to be redeemed at weekends, when hotels have lower occupancy.
  • Allocate loyalty reinvestments to the most profitable customers. While most airlines attach rewards to miles flown, Southwest Airlines rewards are proportional to ticket price. Their loyalty spend remains similar to that of other loyalty-focused airlines but it directly targets more profitable customers.
  • Integrate the loyalty programme into the full experience. For instance, Starbucks has integrated payments and mobile technology with their famous coffee shop experience to make the transaction more memorable and enjoyable.
  • Build partnerships. For example, the Nectar coalition enables customers to collect rewards across a number of retailers. This allows the coalition retailers, including the anchor brand, Sainsbury, to offer a broader value proposition to its clientele while also capturing data from the other member partners.

Keiningham adds: “Kroger and Tesco do great work with their loyalty programmes. It is the hallmark of their strategy for increasing share on category spending. And to do that they really use their data. Two people walking out of the supermarket can pay very different prices because they will look at their data and see that you’re not buying a particular product and therefore must be buying it somewhere else, so they then incent you to buy it at their store so that you don’t have a reason to go to the other store. And that is really working for them. A lot of good can come from a programme provided that you actually use the data in a meaningful way.”

“Brands must have emotional connections with their customers in order to foster real loyalty,” emphasises Binda. “Where we’ve seen successful loyalty initiatives is with brands that have really been able to understand the desired customer behaviour they’re looking for, and then they’ve understood how that behaviour can be influenced and then tailored their loyalty offering around that to ensure they are getting the desirable behaviour out of it.

“Providing relevancy to customers is absolutely paramount because if the brand is showing that they understand a customer’s needs, their history, their profile, their demographics and the things that they like, and then they meet those needs, that’s where the success will come.”

A fickle game

Indeed, despite the fact that many loyalty programmes have been under-performing in recent years, there is still plenty of evidence that they can drive long-term value. McKinsey, for instance, has highlighted that despite programmes having had shortcomings in terms of profitability and revenue growth in the past five years, market capitalisation for companies that greatly emphasise loyalty programmes has still outpaced that of companies that don’t.

Keiningham believes that the data collected via these programmes alone could pay dividends in the longer term.

“It’s an interesting time for these programmes,” he says. “They have the advantage that everyone is wanting to get into the Big Data world and if you’re going to be in the Big Data world, you probably have to have a frequency card programme, because you’re not going to collect enough customer information otherwise.”

Rachelle Headland, MD of Saatchi & Saatchi X, has the following advice: “If you are going to embark on a loyalty programme, make sure it is built on a deep understanding of what matters to your customers and that it differentiates your brand in the market. Equally important is to have the infrastructure necessary to get under the skin of the data. This intelligence really is the key to being able to create meaningful emotional connections and deliver real loyalty. If you feel you are ready, test, learn, and adapt according to feedback before you roll it out.”

She concludes: “Loyalty is a fickle game and jumping in too soon with a programme that doesn’t suit your customer base, and provides no perceivable value for them, can be detrimental.”

Over the coming weeks, MyCustomer will examine how to organise, design and build a robust customer loyalty programme as part of an ongoing series. 

About Neil Davey

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Neil Davey is the managing editor of MyCustomer. An experienced business journalist and editor, Neil has worked on a variety of newspapers, magazines and websites over the past 15 years, including Internet Works, CXO magazine and Business Management. He joined Sift Media in 2007.

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