Loyalty Programs Don’t Drive Loyalty (Part 2): Why?

The previous article showed that most loyalty programs are not very effective at creating loyalty but that on the other hand, improvements in customer experience are highly correlated to loyalty and revenue. This article explains that their inability to deliver a good customer experience consistently is the reason many companies implement loyalty programs, and also the reason why they don’t work.

But first, let’s try to understand why do companies have loyalty programs?

As mentioned in the previous article, many companies will cite differentiation from the competition as the reason for implementing them. That point is moot, since in most industries in which they are used, loyalty programs are the norm and are almost identical between competitors. But there is something interesting in this.

Loyalty programs seem to be the norm especially in industries that rank amongst the lowest in the Customer Satisfaction Index; banks and airlines for example. With a few exceptions aside, companies in these industries are not known for an exceptionally good customer experience.  On the other hand, many companies at the top of the satisfaction index enjoy high customer loyalty yet do not even have a loyalty program per se.

Looking at it in a certain way, loyalty programs for many companies are not as much a way to differentiate as they are a desperate attempt to prevent high customer defection. But without fixing the customer experience issues at the root, loyalty programs are like using a Band-Aid on the customer hemorrhage.

Some people will argue that loyalty programs are not intended to create customer loyalty directly, but to gather customer data.  The idea is that with that data companies would provide better, more personalized service and enhance the customer experience. But in reality we know that in most cases that data is used if at all, mainly for tactical marketing campaign purposes, and not strategically to enhance the overall customer experience. Even then, many companies gather data but do nothing with it, not unlike their own customers who accumulate reward points and never redeem.

While more targeted marketing campaigns can increase sales in the short term, they do not create customer loyalty. On the other hand using that data to enhance the experience at every interaction throughout the experience lifecycle could.

Coincidentally, some of the industries that use customer data only for marketing purposes are the same as those mentioned earlier being at the bottom of the satisfaction index. This includes airlines, financial services and telcos.

And in any case, since the enrollment rate is very low (at about half) and usage rate even lower, companies in fact don’t have data on the vast majority of their customers. In other words, companies who rely mainly on loyalty programs for customer data are not able to provide a better, more personalized service to most of their customer base. Gathering customer data is something that should be done within the normal course of business, through every interaction seamlessly instead of having customers go through registration ploys. And that data should be used across departments to provide a more relevant and personalized offer consistently at every channel. That is better achieved by putting in place the systems and processes to build a single customer view than through loyalty programs.

It is disturbing to see entire industries relying on loyalty program enrollments to gather customer information, especially when they already have a wealth of information on each customer. Airlines for example have unique identifiers on every customer (they wouldn’t be able to fly them otherwise) and a wealth of information in terms of purchase history and preferences yet will only recognize customers who are enrolled in their loyalty program scheme.

Regardless of the goals of loyalty programs, whether to differentiate, gather customer data or as an earnest desire to reward loyal customers (now that would be novel), the fact is that most loyalty programs are difficult to use and result in incoherent customer experiences.  And not only does that work against uptake of the loyalty program, but can actually lead to customers attrition for the organization they are supposed to create loyalty for.

Take the airline industry again, which provides examples of the some worse customer experiences throughout their loyalty program interactions. The enrollment process is often convoluted, requiring filling out forms and submitting them through different channels than the one at which you buy tickets. To accumulate miles, the onus is on you to remember your membership number at the time of booking or check-in. Claiming missing miles post-flight is not made easy, with some airlines even requiring you to submit your boarding pass stubs, and awarding can take weeks. And ultimately the redemption of free flights or upgrades has many limitations and is getting increasingly difficult with demand exceeding allocated seats. Not to mention that points expire if not used within a certain period of time…

The main reason organizations struggle to manage the customer experience with their loyalty programs is that these are poorly integrated in the business and operating models.

Many loyalty program models introduce new touch-points that are completely outside of the organization’ main business. From registration processes and catalogues to third-party product value propositions and redemption centers, these touch-points add overhead to the business and require completely different domain knowledge.

Rewards themselves are often completely outside of the company’s core customer value proposition and domain. A financial services company for example ends up having to manage everything from the value proposition to delivery and even usage experience of anything from toaster ovens to car rentals.

Some loyalty programs can be so complex that the number of touch-points they involve can be greater than that of the organization’s main business. And if they can’t manage the customer experience consistently throughout all touch-points in their core business, how do they think they will fare with yet even more touch-points, and in domains that are completely foreign to them?

To manage this complexity, loyalty programs are often are run internally as a separate business with separate customer databases and their own channels from marketing and website and customer service.  The problem with this is that it can lead to customer disconnect. Because they are operated in complete isolation to the rest of the organization, interacting with loyalty programs can feel to customers like dealing with a different company altogether. And sometimes they actually are…

While some companies outsource operational parts of the loyalty program like customer service and the redemption, some outsource the management of their loyalty program in its entirety. Because creating a seamless customer experience is difficult enough even between internally-managed channels, it is no surprise that when they are entirely outsourced, loyalty program experiences provide little sense of cohesion with the organization.

Some companies may think that precisely because their loyalty programs are outside of their core business, they are not responsible for the customer experience it delivers. But that is delusion or denial, because from the customers’ perspective, it the organization that provided the loyalty program in the first place who is responsible. Every interaction, direct or indirect, a customer has with a company affects the sentiment towards the organization. Failure to recognize this and to manage the customer experience loyalty programs create is the reason why so many of them are unsuccessful.

Great brands have a clear value proposition and are consistent in communicating and delivering that value through every interaction. Apple for example is consistent in its brand message, product design and, store and service experience. Rewarding loyal customers with points to buy a toaster oven would not be consistent with their branded experience. Maybe a free extended warranty or priority customer service could, but Apple doesn’t have a loyalty program. And it doesn’t need one to have loyal customers. Apple, like other much admired companies, earns customer loyalty through a great customer experience. The customer experience is the promise and the reward.

The same could be said about Amazon. It already has a large loyal customer base. It is already very adept at capturing customer data on an ongoing basis from customers and potential customers alike to provide a more relevant offering. It provides memorable service people talk about. You could you say Amazon doesn’t need a loyalty program. But it does have one, and it is very successful and profitable. Amazon Prime subscribers buy more products, more types of products and more frequently. Why does it work so well? Apart from not looking like a loyalty program at all, the main reason is because it provides a value proposition that is right in line with its core business; free fast shipping, simply.

Not only is Amazon Prime right in line with Amazon’s core customer value proposition, but because it integrates in their existing operating model it makes it cost-efficient and easier to manage in terms of logistics and customer experience; little additional overhead is required to run it and it doesn’t involve new touch-points and channels outside of its core business.

Many companies at the top of the customer satisfaction index have, like Amazon, a predisposition that results in loyal customers regardless of a loyalty program; they are unequivocally customer-centered. This makes managing the customer experience at every interaction, every time, something that comes more naturally. And it is a this customer-centered culture that is missing in most companies at the other end of the satisfaction scale. Lack of a customer centricity makes the customer experience difficult to manage consistently even at basic channels, and is the reason these companies have low satisfaction and high customer churn. Creating more complexity with a loyalty program only makes the customer experience management more difficult and results in even more dissatisfaction.

While a complete transformation into customer-centricity is a long-term endeavor, in the meantime companies who struggle with customer loyalty should focus on getting the basics right and fixing the root cause of customer defection in their normal customer lifecycle instead of on loyalty programs.

Those who already have a loyalty program should at the very least in the short to medium term fix the broken interactions these cause. As we saw from the airline loyalty program experience example, there are countless improvement opportunities for both quick wins and complete innovation.

Loyalty programs don’t create loyalty; a good customer experience at every channel, every time does.

That said, once a company has its basic customer experience under control, there are things it can do to enhance the experience and further encourage customers to return. This may be the focus of a later article, but the idea is about making interactions with brands more compelling, even fun; it is engagement. And engagement is not only to incentivize repeat purchases, but is also to encourage customers to interact with the brand beyond the traditional customer lifecycle, and at new channels. Some companies for example reward customers for sharing promotions with friends, for writing reviews or simply for “checking-in” on location-based social networks.

Why make an effort to reward customers for anything else than spending or to engage them for anything else than marketing? Because it gives more visibility to the relationship. Rewarding customers only for spending gives customers nothing to write home about. But give them a great experience, and make it easy for them to tell others, and you’ve effectively created active promoters.

And this may be where loyalty programs are heading.

Whatever method a company uses to encourage loyalty beyond an excellent base customer experience, the same basic principles apply. The interactions must be simple, fit seamlessly in the overall customer experience and be aligned with the organizations’ brand and core customer value proposition.

Tagged: | Customer Experience, Engagement, Loyalty, Loyalty Programs

ABOUT THE AUTHOR:

David Jacques is Founder and Principal Consultant of Customer input Ltd and a pioneer in the field of Customer Experience Management. He has created the first Framework that brings together cohesively every aspect of Customer Experience Management. He is also passionate about having an in-depth understanding customer values to create emotionally-engaging customer experiences not only at individual interactions but also seamlessly between them.

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