Loyalty card programs are now a way of life. So many businesses in every vertical has a loyalty program based on dollars spent. The programs range from miles in airlines, to how many stamps does a customer have on their stamp card before they get a free yogurt. The belief is these programs will drive loyalty and incremental purchases because of the benefits offered for the spend. But do they really drive incremental spend? Or should the true purpose of the program not focus on the incremental spend, but something entirely different?
Airlines are the standard bearer for loyalty programs. Frequent travelers swear by the loyalty programs and can tell you how many miles they have in their account. With so many travelers being able to quote their miles, this must work correct? In reality very few of the people traveling through the air really care about the loyalty programs. Most will actually look for price or non-stops when making a decision on who to fly with. So who are these travelers who care about the program? They are the 2% that drive most of the revenue. Well that's a good thing right? The funny part about this model is most of these travelers are not actually paying for their flights. They are frequent business travelers who are not paying out of their own pocket, their work or customers are paying for it. The irony of these loyal customers is they would never spend that kind of money with the airline if it was their own. They are loyal to the program because they would like the free travel when they want to go somewhere on personal time, with the family.
So what happens with the remainder of the travelers? Is the program enough to drive loyalty? The answer is no. But that is ok. They shouldn't be designed to drive loyalty from these customers. If they actually did, they would more than likely be too rich of a program. So what happens to the 98%? Should companies just not push their loyalty cards on the rest of this market?
Loyalty program should only be rich enough for customers to want to be tracked. Now this means many different things for each industry. For airlines it might mean a free amenity if the customer is a member of the loyalty program. For a yogurt shop it could be a free topping for a member. For a casino it is the ability to receive a comp. Grocery stores are masters, you don't get the sale price unless you are a member. Of course I want to join for that $10 off of my grocery bill.
Loyalty programs are an opt-in for tracking behavior. For the majority of your customers, the loyalty rewards in your program will either be out of reach or not worth any incremental spend. But, what you are getting is behavioral data. How often is the customer engaging, how much is the customer spending, what are the customers patterns. Do they only come for sales? Do they come only when they have an incentive? Do they come a certain day of the week?
This is the gold that comes from the loyalty program. Mining that gold has unlimited opportunity. Loyalty programs have 3 major flaws.
- They are not targeted
- They are not proactive
- They are easily copied
Loyalty programs treat customers differently based on 1 metric, a total amount of something. Whether that's miles flown, purchases made or points that equate to dollars spent, the one metric is dollars spent. Well that is a good start for measuring a customer, but what if a Customer A spent $500 3 times and Customer B spent $10 150 times? They will both be in the same loyalty tier because they spent a total of $1,500, but they are entirely different customers. If the company can get Customer A to spend 1 more time, it is worth a lot more than if they can get Customer B to spend 1 more time. So the loyalty program doesn't incentivize customers equally.
Loyalty programs rely on customers to want to interact. They are reactive mechanisms, waiting for customers to spend enough to get whatever reward the customer may be wanting. Of course good database marketers can send out reminders that someone is close to a reward or they might move up a tier, but the reward has to be enough of a carrot for that customer to change their behavior.
All the great innovations a company can make in their program can be copied by anyone, because it is a documented program. If the strategy is to own loyalty by having the best program, any competitor could easily come over the top and have a richer program. This leads a race to the bottom mentality. The company could always come back over the top, but the programs start becoming too rich, remember only be rich enough to track behavior. If a competitor can negate your best selling points (loyalty program), then the program can never be a competitive advantage, nor do you want it to be.
This all leads to the true reason to have a loyalty program, tracking behavior. With targeted direct marketing, companies can inventive the behavior they are looking for. A company can give Customer A a much different communication and offer because they know that the customer will spend $500 the next time they can get the customer to engage. The direct marketing can be proactive. Direct marketing can take a customer from someone that rarely comes in, to someone that engages with the business on a regular basis. Last, but certainly not least, companies can innovate without being copied. Because direct marketing is not a published benefit, there can be many different tactics for a range of different customers and the competition is blind to the strategies.
There is so much more opportunity in direct marketing compared to the loyalty program. By keeping expenses as small as possible in the loyalty program, it leaves much more money for direct marketing to drive the business. When allowed to drive the business, direct marketing can target customers in many different ways, based on the customers individual behaviors, with incentives that will truly drive that particular customer. A loyalty program will never be able to do that as effectively.