November 16, 2018
The state of loyalty marketing today
Loyalty marketing seems to be having a resurgence and it’s all being driven by an increased focus on customer lifetime value and data-driven business decisions. As a result, we’re seeing overhauls of long-standing loyalty programs to be geared more toward high-LTV customers (e.g. Starbucks and American Airlines) and we’re seeing first-time entrants into the loyalty game (e.g. Chipotle and Chick-Fil-A) seeking to either recover lost customers or lock-down existing loyalists.
At the same time, loyalty marketing for offline businesses still has a long way to go. Long-term customer engagement across the industry remains poor with nearly 60% of loyalty membership inactive. Led by millennials, modern consumers expect more for less — e.g. more value from a loyalty program with less effort. The age-old models of loyalty are failing and being replaced — Apple Pay is offering an important innovation on this front by tying loyalty to the payment (e.g. Kohl’s), effectively eliminating those added steps at checkout. Expect to see much more attention making loyalty more effortless.
Successes and challenges
Brands seem to have finally caught on to the 80/20 rule — just in time too, as customers are becoming more “promiscuous” across brands. Identifying and building deeper relationships with top revenue-contributors is fundamental for long-term growth.
The challenges are twofold:
1) loyalty programs are still too expensive and time-intensive to launch for brands. As a result, it takes too long to achieve a measurable return on investment. This barrier — a frequent crutch of the anti-loyalty CFO — prevents many businesses from launching a program until its too late. Brands need to find technology partners that can launch sophisticated programs in weeks not years and iterate in real-time as opposed to waiting for an annual review.
2) loyalty programs are still too painful for consumers — it’s 2016 and Buffalo Wild Wings just launched a program where the customer has to write down his or her phone number on the bottom of the receipt and the server has to take that number and enter it in at the POS. This is clunky, invasive, and time-intensive. It’s no wonder so many (~60%) of consumers churn out of loyalty programs after signing up — we have to stop asking them to jump through such massive hoops. Brands need to find methods to drastically simplify the loyalty experience for consumers with every purchase. Read all about it.
The future of customer loyalty
- More focus on lifetime value and less on visit frequency (e.g. Starbucks)
- The declining value of email — click-through rates are down 25% over last two years. It’s increasingly easy to ignore emails from brands, even ones you’re loyal to (e.g. Google sorting promotional emails out of subscribers inboxes, the sheer volume of promo emails and inability to unsubscribe, etc)
- Mobile, mobile, mobile enabling real-time personalization for increased relevance
- ROI — movement toward conversion to revenue metrics for campaigns (e.g. % overspend on reward redemption and % who made follow-on transaction) and away from non-revenue metrics (e.g. likes, follows, opens, clicks, etc)
Do brands have to have a loyalty program to differentiate, to acquire new customers, and to retain them?
Do you have to have a program? I’d say no — there are other ways to build loyalty without a formal program. But you have to be best-in-class at those for it to work — if you have the absolute best quality and service levels consistently, you can do without loyalty. But most brands are overly confident in their performance on these dimensions and thats a big risk. Because when things go wrong, not having data about customers makes for very painful “catch up” time — Chipotle, for instance, following their food safety news, relied on blanket discounts to find and winback loyalists because they didn’t have sufficient data to segment and target more specifically.
Mobile: the heart of customer relationship management
Mobile is absolutely mission critical to success in loyalty going forward. There are more smartphones in the US than people. Millennials are — as of 2016 — the largest spending demographic in the US and they are on their phones 24/7. Email and traditional communication channels and atemporal — despite best efforts to send a targeted promo for lunch today, many customers won’t actually read the email for hours if not days when it will be too late. Mobile changes this — done right, communications can be highly personalized and exceedingly relevant resulting in as much as 10x greater engagement.
But a word of caution on mobile — this is not “check the box” functionality. Just having a mobile app, for instance, does not make you a winner in mobile. Two fallacies are causing brands to make grave mistakes in this space: 1) a bad mobile app experience is far worse than no mobile presence at all. Millennials in particular see App Store ratings often before they see Yelp ratings or hear word of mouth referrals. No self-respecting brand would settle for less than 3 out of 5 star reviews on Yelp — yet the average restaurant app in the App Store averages 2.9 stars. Brands are rushing their mobile strategy, launching apps that are fraught with consumer friction and often break along the way. Apps should give the consumer reason to download and deliver value to the consumer as effortlessly as possible; 2) not every brand needs their own custom mobile presence. No consumers are actually going to have an app for every brand. Most brands do not have the loyalty and frequency of Starbucks — instead, they should embrace mobile web and “networks” that offer the desired functionality without asking consumers to signup merchant-by-merchant.
What it means to build “true customer loyalty”
A common misconception about loyalty is that it’s synonymous with “rewards.” Rewards can be one element of a thoughtful loyalty strategy, but they are not enough in and of themselves. For instance, a great loyalty program enables one-to-one conversations via powerful feedback channels such as Net Promoter Score and supplements that feedback with relevant lifetime value data so a merchant can respond with appropriate context. We’ve found that just asking a customer about their experience after a purchase increases their likelihood to return by 7%. Receiving a reply from the business doubles that increase to 14%. That has nothing to do with “rewards” or “discounts”. In fact, discounts aren’t even the only type of reward either — some of the best programs have seen massive engagement VIP experiences with high perceived value at very low actual cost. The discount-heavy misconception about loyalty is very wrong.