Although I’ve spent 20 years designing and managing loyalty programs, I’ll be the first to admit such programs are just one aspect of customer loyalty—and often not the most important one.
Most loyalty programs are, to be blunt, attempts to drive “loyal” behavior with a Pavlovian reward-and-response mechanism. As we often point out in our practice, real customer loyalty has both a material and an emotional component. An effective approach to customer loyalty should answer two questions for the consumer:
- What do I get when I do business with you?
- How do I feel about doing business with you?
Conventional reward programs address only the rational; and even then, such programs are losing their effectiveness.
‘UPS successfully offered its ‘preferred customers’ enhanced services, beta access to new technologies and interesting newsletters.’
Over time, as reward programs have proliferated, they have ceased to differentiate one marketer from another, because they are so easily matched. In 1981, American Airlines introduced AAdvantage, the first frequent-flier program, after more than a year of careful planning. Famously, American’s chief competitor, United Airlines, rushed its Mileage Plus program to market over the following weekend. The history of loyalty programs has followed that pattern: A program is introduced; competitors match; players up the ante; and others match, until by now, conventional reward programs have lost much of their power to differentiate or motivate.
Increasingly, the companies that truly earn customer loyalty are those that add value to the customer experience. One can find a number of examples across a broad range of industries:
- Mobile telecom, Internet and cable/satellite TV providers add value through bundled service offers. When the same company provides my household with several different vital services, it is harder and harder to switch. Customers appreciate the discounts offered for bundled services. And it’s more effective and brand-enhancing to give customers a better value rather than trapping them in punitive contracts.
- In the world of travel, the most frequent travelers appreciate value-added services, such as early boarding, hotel room upgrades, private lounges and access to business services more than they care about the miles and points they earn from airline, hotel and car rental companies.
- In the business-to-business world, UPS successfully offered its “preferred customers” enhanced services, beta access to new technologies and interesting newsletters, building the kind of value that helps shipping managers succeed in their jobs. And when labor issues disrupted shipping, those customers who received the “preferred” services remained significantly more loyal to UPS, defecting to competitors at a significantly lower rate than those of other shippers.
- Retailers like Staples, with its Easy Tech support services, and Best Buy’s Geek Squad are leading the way in showing that customers value support more than rewards alone.
Consider Best Buy. It has a loyalty program, Reward Zone, which is a conventional program that awards every member points for purchases and issues reward certificates members can redeem for discounts on future purchases. Best Buy also uses several other standard loyalty tools: a branded credit card and a branded credit card that links to the Reward Zone program and allows cardholders to earn rewards at accelerated rates when they use the card.
But the most effective loyalty driver the retailer has may be the most unconventional: Geek Squad.
Geek Squad is the aptly-named and very cleverly marketed service subsidiary of Best Buy, offering in-store service and in-home computer installation, home theater setup, repairs and support for the high-tech products Best Buy sells. Most of us have times in our interactions with technology when we wish we had that geeky, techy younger brother or neighbor around to make our gadgets run the way they’re supposed to. Geek Squad has done a great job of making that nerdy neighbor into a high-value product—and many customers are glad to pay for the service.
Recent advertising has increasingly featured Geek Squad support as a key part of the value of shopping at Best Buy; in some ads, the Geek Squad rep shares equal screen time and space with the cheerful Best Buy salesperson. The Best Buy customer experience now includes both sales and support.
How does Geek Squad compare to Reward Zone and credit card loyalty tools? As we and other analysts have pointed out, many retail reward programs only dilute profit without necessarily driving incremental purchases, hurting the bottom line by rewarding purchases that probably would have happened, anyway. No wonder many retailers dismiss conventional loyalty schemes as merely added markdowns rather than added value. And many customers regard them the same way: as simply an additional discount.
Geek Squad actually adds to the chain’s profits, rather than reducing them, by driving the purchase of service as well as products. And a service relationship builds true customer loyalty and incremental business, adding another consumer touch-point and increasing lifetime customer value.
(Note: It was reported recently by INTERNET PATROL that a sting operation set up by Consumerist.com uncovered a Geek Squad tech who ripped off porn files from a customer’s computer. This may be an issue Best Buy needs to address, as the assurance of privacy is crucial to an operation like Geek Squad. Still, one has to wonder about a customer who would bring a computer with porn files to a retail store.)
As Reward Zone has matured, Best Buy has begun to add more attractive, experiential benefits to the reward menu. One promotion allows RZ members an exclusive presale opportunity to get coveted tickets for the Police reunion tour (sponsored by Best Buy) before the general public.
Traditional reward programs, now in the market for more than 25 years, have reached a stage of maturity and ubiquity that limits their effectiveness. Today’s best practice in customer loyalty, broadly speaking, is to add value to the customer experience, not simply to offer the opportunity to earn discounts.
Savvy companies in a broad range of industries are building loyalty by bundling services, providing tech support, making customers’ lives easier and providing unique experiences. The combination of adding value and offering material rewards, where appropriate, fulfills both the rational and emotional needs that drive true customer loyalty.