Saturday, July 14, 2007

Unnatural Loyalty - rewards

As I have discussed in previous blogs, one of the components of customer loyalty is the rewards component. I refer to this component as unnatural because the loyalty has little to do with the actual performance of the company. The reward is most likely independent of the quality of the product or service provided by the company and hence is most vulnerable to competitive offers or rewards.

Colloquy recently published a white paper that seems to document the state of loyalty marketing programs in the US. They note that the number of memberships into loyalty programs has increased 35.5% since their first survey in 2000. The number of memberships in 2006 has reached 1.319 billion in 2006. One interesting point they make is that across all industries only 39.5% of that total have active participation. In fact, they note that some industries have only 25% active memberships. When this is broken down by household the statistics indicate about 12 programs per household with about 4.7 with active participation.

I have a problem with reward-based loyalty. These programs seem to be very short-sighted in terms of customer loyalty. They are only as good as the perceived value of the reward. Based on the survey work of Colloquy, these reward programs do not seem to have lasting value and yet companies continue to pursue them. When a competitor can offer a reward with higher perceived value and effectively nullify the reward of the first company the reward program gets into a pricing game which can get out-of-hand. They are reducing profit margin to get some customer for the short term and those customers have less than a 50% chance of staying with the program (Colloquy says about 40% stay active).

In other words, I do not see reward programs as a way to build long-term customer loyalty. As I have noted in previous blogs, the company with great products (e.g. Lexus) or great service (e.g. Fed Ex) or who work at building customer relationships (e.g. Nordstroms) tends to build customer loyalty that is more lasting and less susceptible to competitive pressures.

The BOTTOM LINE for me is that companies should spend more time in building processes, products and relationships than offering rewards if they want to build customer loyalty that really means loyal.

1 comment:

Don Peppers said...

I agree wholeheartedly with your conclusion that the way most companies use loyalty programs today simply does not build loyalty (at least not “natural” loyalty). When you try to reward someone for buying from you more often, all you’re really doing is engaging in a sophisticated form of price competition, and the more successful you are at it, the faster your competitors will try to match it.

Rather, we’ve always advocated that loyalty programs should be viewed as a means to an end – they provide customers with the incentive to identify themselves at every point of contact or interaction, allowing a business to use customer insight to improve the customer’s experience later. This might take the form of a tailored offer or benefit based on a customer’s buying preferences (that’s the way a good grocery store frequent buyer program would work), or it might be an improved level of service for a higher-volume customer (such as priority check-in for a gold-level flyer).

The problem is that loyalty programs have become so “fashionable” that a lot of businesses just don’t take that next step – using the data to improve or personalize the customer experience. Instead, they stop at the reward step, thinking that if they just continue to buy a customer’s loyalty then they’ve accomplished something. But that’s not a long-term strategy for improving customer loyalty at all. It’s just a short-term tactic for buying more business with a discount.


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