Loyalty programs are big business. From the local coffee shop to the leading banks and retailers, everyone seems to want a piece of the ‘customer engagement’ action leading to wallets full of loyalty cards and inboxes full of VIP offers. But are the majority of businesses wasting their investment by chasing hearts and minds when they need to be chasing hands and feet as well? Too much love and not enough action?
Importance of customer loyalty programs
On paper, investment in customer loyalty programs makes sense. According to Rob Bauder, a loyal customer is up to twenty times more valuable to a business than an uncommitted customer.
Further, your customers probably think they should be rewarded for their loyalty. An Ernst and Young survey of 9000 finance sector customers reported that almost nine out of ten insurance customers believed that loyalty was important, but 41% felt their insurer did not recognise their loyalty.
No wonder MYOB reported that more than one third of Australian small and medium businesses were set to increase their activity around customer attention and loyalty in 2012, with 39% stating their top priority was to ‘Focus on customer retention strategies’.
But loyalty programs are expensive, and my concern is that marketers are not getting adequate return on investment because they are concentrating on getting people to feel engaged with their brand rather than on habituation of brand purchase. Winning hearts and minds is nice, but hands and feet are what make the cash registers chime.
Customer loyalty behavioural model
Consider the following model that looks at the emotional and intellectual dimension of loyalty programs as well as the behavioural outcome. To maximise ROI from loyalty, there needs to be a combination of both.
Buyer ‘stickiness’ is what I refer to as attitudinal loyalty. It means on a like for like basis, your customer will choose you over your competitor because they have more of an emotional relationship with you. This is the battleground for the ‘hearts and minds’ of your market.
Buyer activity is how often the customer does business with you. It’s the battleground for the ‘hands and feet’ of your market.
Affective loyalty programs
High stickiness but low activity is what I call an ‘affective’ loyalty program. You have encouraged your customer to like you but not actively spend money with you. You’ve left yourself open to carrying a relationship without any real benefits. In romantic relationship terms, it’s like you’re stuck being platonic friends when you want more.
If you are running an affective loyalty program, you need to focus on driving more activity from your customers. Researchers at Curtin University in fact found that for small businesses to derive positive value from loyalty programs, they needed to concentrate on moving light customers to heavy or it could drive their business into the ground.
Transactional loyalty programs
High activity but low stickiness and you have a ‘transactional’ loyalty program. Here your customer might do business with you quite frequently but you have not managed to engage them, leaving you open to substitution. Now we’re in ‘booty call’ territory.
I place Woolworths and Coles in the transactional category because the core of their services are broadly interchangeable. As professor of marketing science at the University of South Australia, Byron Sharp, stated in an interview with ABC News, “shopping decisions remain far more influenced by store location and availability of parking.”
Transactional programs need to do more to engage their customers emotionally by drawing connections between the program and the customer’s identity.
Depleted loyalty programs
Low activity and low stickiness is a ‘depleted’ loyalty program. It’s one that needs radical overhaul because it’s not engaging your market and not stimulating purchase. Sorry to say, but spending money on someone who doesn’t like you or share themselves with you is well, not a relationship.
Local cafes tend to fall into the ‘depleted’ trap particularly when they use stored value rather than ‘punch’ cards. These cards might be great data sources to link the customer to the purchase but they fails the behavioural test of vividness; if you can’t see the outcome (i.e. how many coffees I need to buy to get one free) you are less likely to work towards it.
Habitual loyalty programs
What you should be driving for with your loyalty program is high stickiness and high activity, in other words, a ‘habitual’ loyalty program. Sure your customers like your brand, but they are also actively putting their money where their mouths are. Importantly your loyalty program is driving habituation rather than just attitudinal regard, meaning your customers will be extremely difficult to dislodge from the relationship because you’ve moved beyond intellectual and emotional engagement, and created a habit of buying your brand. Let’s not kid around, this is the real-deal. Warning to commitment-phobes, this is a marriage!
Retailer Myer is trying to habituate behaviour through its Myer One program. Rewards are geared towards in-store use, connecting the value of the reward with revenue generation and customers receive personalised invitations and benefits, for instance a birthday voucher to enhance stickiness. The rewards are presented in stored-value card format, which is important behaviourally in two ways. First, it is a tangible representation of value that separates it from other mental bank accounts the customer will have, increasing it’s likelihood of use as a guilt-free purchase currency and second, the customer has the freedom to choose how to spend the reward, maximising their sense of personal control.
In the past I would have also placed Qantas in the habitual box. Qantas works hard to remind customers where their points can take them (vividness), partners extensively to make points generation easy, and uses membership tiers to motivate customers to increase activity. However, expiring unused but earned points, and restrictions on use of points reduces the ‘stickiness’ dimension and leaves Qantas close to transactional. Increasingly out of sight, out of mind.
Loyalty programs can be an important source of marketing for businesses but they come with a big, fat caution: love won’t pay the bills and action can be empty. Strike a balance of both and you will successfully drive habituation and through that, healthy ROI.