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Loyalty Programs Don’t Drive Loyalty; Customer Experience Does

| Oct 18, 2013 No Comments

Loyalty Program Warning Road SignLast month I kicked-off a conference with a customer experience management masterclass workshop in which I said that customer loyalty is not the result of a loyalty programs but of great customer experiences. Given it was a loyalty conference attended mainly by loyalty program managers, the statement raised some eyebrows but participants were eager for some recent data by which to compare loyalty programs with their peers’ across industries.

Since then, Forrester published “The State of Loyalty Programs 2013″. I thought the new findings would provide a good occasion to share an updated comparison between loyalty programs and customer experience as drivers of customer loyalty.

In an effort to understand the focus and strategies of loyalty programs, Forrester surveyed 50 loyalty program marketers from multiple industries including retail, travel, financial services and media and entertainment. Not a large sample size but the results, even taken broadly, definitely call into question the effectiveness of loyalty programs and also identified a potential lack of clarity in direction or purpose for many of them.

First, in order to measure their effectiveness, we have to understand what the objectives of loyalty programs are.

In the Forrester study, loyalty marketers stated the top three business objectives for customer loyalty programs are customer retention (70%); customer engagement (64%); and revenue (34%).

These are sensible objectives but they should be those of the entire organization, not of a loyalty program. But let’s assume that they are the goals of the overall organization and that the loyalty program is a strategy to achieve them: is it an effective one at that?

Forrester’s study found that on average, only 45% of customers enroll in loyalty programs and only 35% of them redeem awards. This means about only 16% of the customer base is actually using the loyalty programs. That’s a small uptake. But do they create loyalty? Other research suggests not. Another recent study by Deloitte on travel loyalty programs suggests these are not very effective at all at building loyalty and that customers frequently do business with competitors. This is consistent with an earlier 2011 COLLOQUY Cross-Cultural Loyalty Study across industries in which only 17% of U.S. respondents and 12% of Canadian respondents say that loyalty programs are “very influential” in their purchase decisions.

From these recent findings, it appears loyalty programs are struggling to achieve the stated goals of retention, engagement and revenue. On the other hand these are all benefits that companies who focus on the customer experience enjoy.

Numerous studies by Forrester and others consistently show that customer experience strongly correlates to loyalty. Customer experience leaders see a clear advantage over customer experience laggards in customers’ willingness to buy more, reluctance to take their business elsewhere and their likeliness to recommend the organization. Research has also shown that better customer experience drives millions in annual revenue across industries by increased purchases, lower churn and new sales driven by word of mouth. Not only that, but other studies have shown that customers are even willing to pay more for a better customer experience.

Clearly a focus on customer experience improvements is more effective at accomplishing customer behavior and financial goals than loyalty programs in and of themselves are.

How important was customer experience to the loyalty marketers in the Forrester study? Only 14% cited customer experience as an objective. And in spite of this, 50% of respondents saw their loyalty budgets rise in the past 2 years.

Interestingly, according to Forrester, for nearly 60% of firms loyalty is considered a top three strategic priority and 56% of marketers agreed that loyalty has support from all parts of the organization.

Looking at it another way, that means that for almost half of the companies, loyalty is not a priority. That makes you wonder why they keep a loyalty program at all, considering loyalty programs can be costly to manage and increase liability and accounting complexity. Often organizations will cite differentiation from competition, but in many industries (take airlines and banks as examples), loyalty programs are the norm and are almost identical between competitors.

But for those firms who place loyalty high in their priorities, the question is whether a loyalty program is the best way to achieve it.

In the next article, I’ll explain the main issues with loyalty programs and, if they must have one, what companies can do to improve their loyalty program ROI. Much of it has to do with their integration in the overall organization’s customer experience. After all, loyalty programs, as all other touch-points with organizations, are part of the overall customer experience and as such should be integrated in organizations’ overall customer experience management framework.

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Republished with author's permission from original post.

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