McKinsey Thinks Bland, Generic Loyalty Programs Are Killing Business – And They May Be Right!

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A recent Forbes article by McKinsey (“Making Loyalty Pay: Six Lessons From The Innovators”), showed that, based on the consulting organization’s recent study, loyalty program participation has steadily increased over the past five years (a 10% annual rate of growth), with the average household now having almost 25 memberships (http://www.forbes.com/sites/mckinsey/2014/02/03/making-loyalty-pay-six-lessons-from-the-innovators/) For all of that growing popularity, there are huge questions for marketers: Are the programs contributing to increased sales? Are, beyond customers who would be loyal anyway, are they driving more purchase activity and narrowed consideration sets? And, what is the impact of loyalty programs on enterprise profitability?

Overall, companies with loyalty programs have grown at about the same rate as companies without them; but there is variance in performance value among industries. These programs produce positive sales increases for hotels, for example, but negative sales impact on car rental, airlines and food retail. And, companies with higher loyalty program spend had lower margins than companies in the same sector which do not spend on high visibility loyalty programs.

McKinsey has noted that, “Despite relative underperformance in terms of revenue growth and profitability, over the past five years, market capitalization for companies that greatly emphasize loyalty programs has outpaced that of companies that don’t.” This, as they see it, may be indicative of hope among companies with programs that long-term customer value can be generated.

Within the McKinsey report, several strategies are offered for helping businesses overcome the negatives often associated with loyalty programs. Key among these are:

• Integrate Loyalty Into the Full Experience

Companies can link the loyalty program into the overall purchase and use experience. An example cited in the article is Starbucks, which has created its program to reflect the uniqueness of its café experience. Loyalty is built into the program by integrating payments and mobile technology, which appeals to its target audience.

• Use the Data

This may be the most important opportunity represented by loyalty programs. Data collected from the programs can offer competitive opportunities. Tesco, the largest supermarket chain on the planet, has been doing loyalty program member number-crunching for years through DunnHumby. Similarly, Caesars Entertainment has rich databases on its high-rolling program members. One retailer has combined its loyalty program with a 5% point of sale discount, building volume from its highest value customers. In another well-documented example, a retailer has used its loyalty program data to identify future mothers before other chains, thus targeting offers to capture both their regular spend and new category purchases as buying habits evolve.

• Build Partnerships

As stated on so many occasions, organizations that build trust generate stronger, more bonded, customer behavior. This applies to loyalty programs as well, where there is ample opportunity to build cross-promotion for customers with non-competing products and services. In the U.K., Sainsbury, the major supermarket competitor of Tesco, has partnered with Nectar, a major loyalty coalition. Nectar has more members than Tesco, and participants can collect rewards across a large number of non-competing retailers. Through partnership, Sainsbury’s offers customers a broader and deeper value proposition; and Nectar also generates data from coalition partners which it uses to better target promotions to customers.

• Solve Customer and Industry Pain Points

Numerous customer behavior studies have shown that people will gravitate to, and pay more for, better service. A perfect example of this is Amazon Prime, where additional payment gets customers faster delivery and digital tracking. This is good for Amazon (estimates are that members spend more than four times more with Amazon than non-members), its customers, and its suppliers, who also get access to Prime customers and the positive rub-off of affiliating with a trusted brand.

• Maximize Difference Between Perceivd Value and Real Cost

Often, program elements can represent high perceived value without adding much in the way of bottom-line cost to the sponsor. The example cited is Starwood Hotels and Resorts where, through its Starwood Preferred Guest (SPG) program, there is a focus on personal leisure travel rewards for high-spending frequent guests.

• Allocate Loyalty Reinvestment to the Most Valuable Customers

Many companies have only recently come to the realization that some customers are more valuable than others; and, to be successful, loyalty programs need to target the higher, and potentially higher, revenue customers. In 2010, Southwest Airlines revamped its loyalty program to make rewards more proportional to ticket price; and this has better targeted the most profitable customers as well as enabled the airline to adopt a loyalty behavior metric that is closely tied to actual revenue generation.

Loyalty programs continue to grow, but they are also tending to become more closely integrated with brand-building and multi-channel customer experience optimization. That said, there is also lots of commoditization and passivity where these programs are concerned – sort of the “If You Build It, They Will Come” syndrome at work. And, of course, there’s a mini contra movement among some retail chains, where they have removed established loyalty programs – or never initiated them in the first place – in favor of everyday low prices and more efficient performance: http://customerthink.com/loyalty-programs-we-don-t-need-no-stinkin-loyalty-programs/

Michael Lowenstein, PhD CMC
Michael Lowenstein, PhD CMC, specializes in customer and employee experience research/strategy consulting, and brand, customer, and employee commitment and advocacy behavior research, consulting, and training. He has authored seven stakeholder-centric strategy books and 400+ articles, white papers and blogs. In 2018, he was named to CustomerThink's Hall of Fame.

4 COMMENTS

  1. While I read columns like this one because I teach a management class, I post most often as a customer who fights hard to get the best value for his money. Last year, I was not at all pleased with the Choice Hotels’ loyalty program award because the rules required a two night stay at their lower priced options. I often take vacations where I spend only one night in each town. I would have easily accepted a rule that stated that one night in a lower cost property only counted as 1/2 credit since I did stay two nights during the period in qualifying low cost hotels but not at the same one. Instead of good will, this reward program made me angry at the company.

    I’m pleased that I got called to give feedback on the reward program and did have one of the best sessions ever with the person on the other end of the line. He knew what the company wanted to learn and did more than go through the questions by rote. He also seemed willing to record my nuanced answers when simple yes or no didn’t describe the situation. I hope that Choice Hotels will pay some attention to my feedback.

  2. Thanks for your comment. If Choice Hotels had an online guest community – which they don’t – they could use this forum to obtain the kind of feedback and insights that you offer on their loyalty program. The reality, however, is that, as a population of one customer, your perspectives, and your dissatisfaction with their short-sighted program rules, no matter how reasonable, will go unheeded and unnoticed. Were your reactions to come up as a negative behavior lever in advocacy-based research, Choice might determine that their program could use a bit of customer-centric refreshing.

  3. When meeting retailers or presenting at retail seminars I often ask the question why using Amazon is such a great experience. I get quite a lot of feedback on this question and many times the answer “they know me and what I like” is ranked high. My second question is; “so how well do you know your customers when they enter your store and/or when you interact with them?”. The answer is often, “…well we don’t really”. And then the final question is, “Why do you only get me to use my loyalty card when I check out and not when I check in?”….To my surprise many retailers haven’t even begun thinking in this way in regards to the physical store. Thus, using technology as iBeacons to identify a customer using a retailer’s app when they enter the store or a self-service kiosk where they swipe their card to get access to service will allow the retailer to provide a much better and personalized service to the customer – sort of an “Amazon experience” in real Life. And knowing who you have in front of you is a key success factor in any type of sales job.

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