Ongoing Loyalty Program Value Challenges – And How to Fix Them

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Loyalty, or reward, programs classically have two basic intentions and objectives. One 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. The other objective 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 both of these objectives, the program, and its array of components and perception of personal value, need to be optimal. Are they?

The CMO Council recently conducted a study, The Leaders in Loyalty: Feeling the Love From The Loyalty Club, in which the key findings were that neither of these objectives were being met. The study concluded that companies sponsoring loyalty programs were just using them to deliver general discounts and perks to the mass of members, ignoring the customer 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 have been highly effective in leveraging loyalty and brand preference among club members, and nearly 20% have 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 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 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.

For instance, Colloquy has found that loyalty program members are 70% more likely to be engaged in advocacy-type activity (positive word of mouth, etc.) compared to the general population. Over two-thirds of program’s strongest advocates will recommend the program’s brand within a year; and those who are most active, i.e. using benefits on a regular basis, are over three times more likely to engage in recommendation and word-of-mouth communication than other members. Finally, those program members who have redeemed for experiential rewards, and thus deepening the relationship between them and the sponsor, are 30% more likely to be advocates than those members who used the program for discounts and bounce-back offers.

As powerful a positive marketing tool as loyalty programs can be, today, there are also multiple challenges faced by these programs as customer advocacy builders and sustainers. In many ways, these challenges are almost identical to those which must be overcome by traditional advertising. Namely, customers often don’t understand the program components nor do they see any particular value to them. Recent research by ACI Worldwide reported the following troubling results for retail loyalty programs:

– Almost half (44%) of consumers said they have had a negative experience from a loyalty program
– Only 27% of Americans who have received a loyalty program reward or promotion said that it made them feel valued as a customer
– Over three-quarters (81%) said they are enrolled in a loyalty program that they don’t completely understand
– Over three-quarters (85%) of loyalty program members said that they haven’t heard a single word from a loyalty program since they day they signed up

Further, once engaged with, or enrolled in a loyalty program, any change in message, positioning, or content is often viewed with suspicion rather than acceptance or positive anticipation. Loyalty programs, already seen by many as minimally valuable, must be especially careful with this. For instance, Southwest Airlines, which for years had a very simple, trips-based frequent flyer program, recently went to a more classic points program based on miles in an effort to generate more revenue from business travelers. Though the jury is still out, substituting complex for straightforward has rarely created more loyalty behavior.

Loyalty programs are considered by many to be inexpensive methods of getting customers to come back and buy more; but, though inexpensive, they may also be ineffective, even damaging. So, there is a potential disconnect, at least in terms of loyalty program design, or redesign. Loyalty program members can, and ideally should, actively represent their membership through advocacy-type activity. As proven by studies such as Colloquy’s, they are often far more likely to communicate with others about their experiences with the programs; and, the more active their program participation, the more likely they are to spread the word.

Yet, if they are disengaged with the loyalty program, or don’t see the value represented by membership, these customers will become passive about both the program and the products and services it represents; and they may become negative communicators or defect. We have applied targeted advocacy research among loyalty program members to help reconfigure and redesign them so that only the most useful components are offered and only the most reinforcing, and value-producing, messages are communicated.

Too many companies belong to the Field of Dreams “if you build it, they will come”, or conventional wisdom, school of loyalty program development. Namely, if they create what they believe, or what they are told, is a compelling program, with attractive customer benefits, the company will be rewarded with both more customers and more sales as evidence of loyalty behavior. Once built, customers may come, or they may not. And, they may spend more and say positive things about their experiences; or they may not. Recent research by The Hartman Group, a marketing consultancy, has determined that 74% of consumers agree that companies need new and better ways of rewarding loyal customers. So, many loyalty programs are suboptimal in effectiveness.

For marketers, if they hope to build profitable word-of-mouth behavior from loyalty program members, the tools for doing so exist within the program database. They should identify the advocates embedded within their membership base. Then, they should build relationships that reward these members for their positive word-of-mouth activity. Noted marketing Professor Philip Kotler, at Northwestern University, believes that stand-out organizations are those which can most effectively optimize stakeholder trust, engagement and perceived personal value. In a Financial Times interview article, Dr. Kotler said, “They use the word-of-mouth effect of unpaid advocates – truly loyal customers – to boost their reputation. Advocates will do your marketing for you if you mobilize them, listen to them and engage them.” Loyalty programs, used effectively, can be an excellent vehicle for creating and extending customer advocacy behavior.

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