Loyalty - NOT

There is an article dated July 30th by Stuart Evans of ICLP, a marketing agency in the UK, that suggests that the word "loyalty" is a misnomer. Stuart makes the point by using some statistics from frequent flyer programs (ffp). He notes some recent research by his company and another firm, Priority Pass, indicated the most important factors among airline travellers are 'price' (62%), 'schedule' (54%), 'ffp' (21%), and 'brand loyalty' (13%). Although the percentages don't add up, they do indicate some ranking that does make sense. He makes the point that companies should move away from the mindset of loyalty and shift towards factors that reward customers purchasing behavior.

However, he has some counter data that certainly clouds the issue he has proposed. He points out that research (not specified when or by whom) indicates that 'ffp' is a key factor in determining choice of hotel or airline. A whopping 70% believe it is fairly or extremely important in deciding their choice while only 30% said it was unimportant.

Stuart believes that many loyalty programs have failed to radically change customer behavior over time or deliver bottom line contribution to profit.

I love this guy! He is shouting what I have been saying in my recent blogs that loyalty in a single dimension is a problem. This is consistent with my previous definition that loyalty has four dimensions and that reward loyalty is probably one of the weakest because it is not based on company performance - only a reward. The problem with using a reward to create customer loyalty is that it is just a reward and can be exceeded by another company at any time; hence, the loyalty may persist only as long as there is no better reward in the market. The other dimensions of loyalty are product loyalty, process loyalty and relationship loyalty (previously described in recent blogs).

Stuart also makes the following statement: "an emotional attachment to a brand only via its loyalty program is illogical and does not happen." In this case he seems to be identifying loyalty only with reward programs. I would strongly agree with his statement as long as he continues to define loyalty only in terms of reward programs.

The bottom line for me was that once again when someone defines loyalty simplistically, it doesn't make sense. This is particularly true when the single dimension is a rewards program. Customer loyalty should (and I believe it does) come from company performance not a give-away.

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.