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Loyalty Programs in the Real World: Are They Enhancing, or Undermining, Customer Behavior? 

The classic objective of these initiatives is to leverage loyal behavior among the customer base, in and of themselves, and reduce the use or consideration of competitive products and services. It’s fair to say that, to meet this objective, the program, its multiple channels of access, and its array of components and perception of personal value, and positive informal communication by members on its behalf, need to be optimal.

At this critical point in the loyalty program effectiveness life-cycle, it may be useful to address several key questions

1. First, on a macro level, are loyalty programs achieving their financial goals?

In 2010, the CMO Council conducted a study, “The Leaders in Loyalty: Feeling the Love From The Loyalty Club”, in which, among the key findings was that this objective was not being met. The study concluded that companies sponsoring loyalty programs were just using them to deliver general discounts and perks to the mass of member-customers, ignoring the profiles within the database which would help provide more targeted and relevant communication and stronger value perception among program members. Among the marketers in the study, only 13% felt that they had been highly effective in leveraging loyalty and brand preference among club members, and nearly 20% had no strategy in place for doing this. Further, nearly 30% of marketers reported that customers see little or no added value to becoming a loyalty program member, though they admitted that most program components have discounts, free products or premiums, rather than better service or improved customer handling.

Very significantly, over half (54%) of loyalty program members surveyed in the CMO Council study were demonstrating negative behavior, considering leaving the programs or defecting from the brands and companies sponsoring them, principally due to the onslaught of irrelevant and off-target messages, low or non-meaningful program benefits, and the impersonal treatment they receive as members. At the same time, it has been well-established in multiple studies (such as by loyalty program reporting, research, and development consulting company, Colloquy) that customers participating in loyalty or reward programs are much more likely to be positively communicating their experiences and recommending the product or service of the sponsoring organization than the remainder of the customer base. So, on an overall level, loyalty programs represent opportunity converging with challenge.

2. How are access channels impacting loyalty program member behavior?

Consumers have become increasingly more connected, to institutions and each other. The fact that many of these loyalty programs have omni-channel, or at least multi-channel, member access can, potentially, create either further value or detract from it. Clarity, ease of program use, greater accessibility, credibility, and superior experiences – anywhere, anytime, in a 24/7 digital world – play a critical role in building stronger, more personal and deeply felt relationships and driving customer loyalty.

Companies need to be able to understand what every purchase and program interaction means to individual members (not all calls, clicks, visits, posts, or purchases are created equal) so that both communication and rewards can be customized, personally beneficial on an emotional basis. Research has shown that the more relevant the benefit, and the easier a customer can access it, the more likely a member will be to engage, and continue, with the program and brand. And, while companies want to build relationships and loyalty by rewarding customers who are true brand advocates, they also need to guard against the growing trend toward gaming, which, like negative reputation and image, can bring down a program because of its impact on other members as well as the general public.

Cross-channel usage can represent real opportunity. There is potential for loyalty program members to be rewarded for interacting with brands in multiple ways. This includes:
- engaging with other members, and sharing or creating content
- connecting with the brand (and other members) across social sites such as Twitter, Facebook, and even LinkedIn
- utilizing foursquare to identify location
- making purchases or obtaining benefits
- visiting stores, using services, etc.

When this is accomplished, brand engagement and advocacy (through online social postings and offline informal communication) increases, appetite for loyalty program involvement is enhanced; and, not unimportantly, sales are higher.

3. How effective are loyalty programs as cross-channel marketing and communication/influence tools?

As noted, many loyalty program members are active both online and offline. Programs need not only to understand why and how brand-related informal communication is taking place, they need to actively consider incentivizing members to engage in this kind of dialogue. What’s the rationale? When members interact through their various connections, this generates a tremendous amount of data (see next section) from within their social sphere; and these valuable insights can be leveraged to drive both marketing and loyalty program efforts. Building such incentives into the loyalty program, the most influential and engaged customers help drive program awareness, interest, and new member acquisition.

Ideally, the cross-channel loyalty member’s individual trail can tell a company how socially engaged that customer is within the brand, also identifying and quantifying each member’s level of influence (offline and online). So, cross-channel tracking enables connecting the member to other program members, to other brands and programs (both positive and negative behavior), and identification of their social activity on the program’s, and the brand’s, bottom line.

4. What kinds of customer data are being generated through loyalty programs?

Another key loyalty program objective, often not applied to greatest effect, is to be an important method of generating customer profile data which can be used for targeted, even micro-segmented, marketing, promotion and communication initiatives. Rewards programs are opt-in, and companies need to be more integrated across all brand access channels, mobile applications, and point-of-sale systems, as well as social networks.

The days of generating narrow, channel-specific data are behind us. Brand engagement and social influence data should be captured online and offline. Having such a multi-channel platform enables companies to identify, and understand, the behavior of every individual and determine what channels and elements of the loyalty program are having the greatest impact on behavior. They need to be able to identify what triggers brand-related actions, what moves a customer to go beyond thinking and browsing to purchase, and, on a micro-segmented basis, which customers are the strongest, and most valuable, brand advocates.

For all marketers, if they hope to build profitable purchase and positive offline and online behavior from loyalty program members, the tools for doing so exist within the program database, the customer profile dataset, software for site and social media navigation, and the elements of attraction of the program itself. First, companies should identify the strongest supporters (purchase, brand affinity, and downstream voluntary word-of-mouth) of program components embedded within their membership ranks, and there are actionable research segmentation tools to accomplish this goal. Then, they should build relationships that reward these members for their positive buying and word-of-mouth activity. Loyalty programs, used effectively, can be an excellent engagement mechanism for creating and extending customer brand-bonding behavior

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4 Responses to Loyalty Programs in the Real World: Are They Enhancing, or Undermining, Customer Behavior?

  1. Guest April 9, 2013 at 12:06 am #

    great article, thank you! one other side of the coin is also customer acquisition programs offering great discounts etc. to new customers. If misaligned with loyalty programs I believe they can cause substantial damage too. What are your thoughts on this?

  2. Michael Lowenstein April 9, 2013 at 11:35 am #

    …especially in industries like cable, retail, telecom, hospitality, etc., where newly arriving customers are receiving benefits with more perceived value than the goods and services current customers get.

    Aspects of customer life cycle programs were addressed by my colleague, Professor Peter Fader of The Wharton School at Penn a couple of years ago (http://www.customerthink.com/article/customer_development_skinny_on_fattening_up_customers) In my response (see his blog), I spoke to the challenges of overemphasis on customer acquisition. You’ll see a piece of an article I’d written, with some content by Professor Adrian Payne, also a colleague, while he was at Cranfield Institute in the U.K. He’s now in Australia, so you might want to make contact with him.

  3. Guest April 10, 2013 at 12:53 am #

    Many thanks, I’ll take a look and follow up!

  4. Michael Lowenstein April 10, 2013 at 11:59 am #

    He heads up the Masters program at the University of New South Wales. Like me, he’s a staunch supporter of customer advocacy as both an enterprise management concept and a behavioral/performance metric.

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