If there is one truism that can be taken from every gangster film ever made, it’s that you can’t buy loyalty in the business world.
In a nutshell
- The underlying rationale of loyalty programmes has always been founded on the principles of relationship marketing; the idea that developing strong bonds with the best customers leads to far greater long-term success and profitability.
- However there is very little evidence to suggest that loyalty programmes actually work in practice. People are rarely loyal to one particular brand. They instead like to operate small repertoires of acceptable brands in pretty much all categories, because this makes decision-making easy.
- Most loyalty schemes operating right now don’t work to provide any real gains for their businesses. The reason for this is that they are simply trying to buy a behaviour change that customers don’t desire to make.
- If we want to improve customer loyalty, we have to focus on creating a stronger emotional relationship by demonstrating that we know and value our customers.
- This means using the data we are collecting on customers to improve the value inherent in the product or experience we provide, whether by customising communication and offers, streamlining experiences and conferring status on those who deserve it.
Sure, you can get people deep in your pocket, doing favours for you. But you’ll never really own their soul this way. And given half a chance, they’ll sell you out over lunch one day in a slow motion hail of gunfire and sweeping orchestral music.
But recognition of this immutable law doesn’t stop business trying to achieve just that. Loyalty initiatives and programmes are big business globally, and the idea that customer loyalty can be nurtured through the provision of incentives and rewards is a cornerstone of modern marketing practice.
In the US alone, $50bn is spent annually by businesses on loyalty programmes and half the top 100 retailers in the US National Retail Federation have one in place. According to a recent BCG review of this space, the typical US consumer has 29 loyalty memberships, using 12 actively. And the space continues to grow. Membership in programmes jumped 26 percent from 2012 to 2014 alone. Such is the ubiquity of these programmes that even as far back as 1993, the average membership of airline schemes alone was 3.1 per traveller.
And it’s not just a US phenomenon either. In New Zealand, 2.4 million Kiwis, across 74 percent of the country’s households, belong to Fly Buys alone.
And Air New Zealand’s Airpoints programme has grown by more than a quarter of a million members over the past 12 months to 1.8 million. The switch from earning points with BNZ to Westpac made significant press coverage, as more than 20 percent of all credit card spend in New Zealand is on Airpoints earning credit cards. It will be a real test of the power of this programme if it is sufficient to trigger changing banks.
Indeed, so entrenched is the idea of incentivisation and rewards for behaviour that it has become a very established part of consumer expectations as to how business will be done in many markets. A huge amount of survey data exists showing that consumers around the world now expect to see this as part of their transactions with the business world, and claim it to be a big influence on their decision-making behaviour.
Of course, in the real world of marketing, we are entering into these programmes with far loftier goals than simply ‘buying’ customer loyalty in the mode of Don Corleone.
The underlying rationale has always been founded on the principles of relationship marketing; the idea that developing strong bonds with the best customers leads to far greater long-term success and profitability. Loyalty programmes have, at best, always been intended as a facilitator of this, seeking to provide a platform from which the right behaviours can be recognised and more powerful emotional connections can be forged.
All promise, no delivery?
"The evidence suggests that loyalty programmes are, for most businesses, simply adding costs with little tangible long-term benefit."
While loyalty programmes might intuitively feel like a good idea, and while the US alone might invest more than the GDP of half the world’s countries in utilising them, the fascinating truth is that there is very little evidence at all to suggest they actually work in practice.
Indeed, in the vast majority of cases, the real world evidence suggests that companies that focus heavily on developing loyalty programmes end up worse off.
A 2013 McKinsey study of 55 publicly traded companies across North America and Europe showed that those with more prominent loyalty programmes grew at the same rate, or slightly slower, over the past ten years than those with no or low investment in loyalty programmes. And far more significantly, those with prominent loyalty programmes had earnings margins that were around ten percent lower than comparable companies within their sectors with less significant programmes.
The evidence suggests that loyalty programmes are, for most businesses, simply adding costs with little tangible long-term benefit.
Similar results are seen when the lens is flipped from business performance to look at how consumer behaviour is actually impacted over time by loyalty programmes. A Deloitte review of the hotel market concluded that at best the loyalty programmes in place had little or no impact on purchase decisions, and at worst were actually driving undesirable switching behaviours. A review of the Fly Buys programme in Australia by marketing academic Byron Sharp, author of How Brands Grow, showed a similar lack of benefit for member companies, failing to identify any across-the-board advantages for them in terms of repeat loyalty behaviours beyond the “disappointingly small”.
But perhaps most compelling in this space is a 20-year longitudinal study of consumer purchasing behaviour, conducted by marketing and communication guru Andrew Ehrenberg. The study, which covered a huge range of FMCG and services categories in Europe, Japan and the US, showed that the truly ‘loyal’ behaviour (i.e. buying only one brand) that programmes desire from us simply didn’t exist in any category beyond a small niche of light buyers, typically less than ten percent of customers.
In all categories, people tended to display a polygamous loyalty to two or three brands, and that the chance of using these brands was more or less directly correlated to their market share. And over this 20-year period, there exists no evidence that loyalty programmes had any long-term impact on the share of purchasing a brand achieved. The only way brands in the study achieved a greater share of loyal buyers was by improving their marketing mix and growing.
Put simply, the study suggests that incentives alone are not enough to change behaviour. To get loyalty improvements, you had to get better at what you offered the market and grow.
These insights into actual behaviour are startling not only because they question the efficacy of what is a very established marketing practice, but also because they run contrary to what consumers themselves are telling us about how they make decisions. People claim these programmes to be important to their decision-making, but the truth is they really don’t seem to actually impact their behaviour over the long run.
Part of this can probably be attributed to the ubiquity of loyalty offers and the idea that you can shop at any grocery store, petrol station, coffee shop, airline or bank and still take advantage of a loyalty offer. But part of this also needs to be attributed to the simple fact that we don’t know our own behaviour as well as we think we do, that a huge amount of our decision-making happens subconsciously according to a set of arbitrary rules we may not completely understand. Our conscious brain can look to rationalise these behaviours, but we should be wary of taking what people say about what they want at face value.
“They always ask you when you pay if you’ve got a card and half the time I don’t know if I have but you look an idiot if you don’t look for it."
And let’s face it, if you ask someone if they would like the company they buy from to give them a reward, be it a discount or points towards a gift, who wouldn’t say yes? Qualitative work in New Zealand has shown us that when offered the opportunity to join a scheme people say yes, but afterwards consign the card to the deep recesses of their wallet or even that handy-for-shopping place, ‘the shelf in the kitchen’, and never give it another thought.
When the evidence on performance is taken together, it’s hard to get excited about the efficacy of these programmes. But we do. Indeed, one imagines there are a huge amount of readers right now thinking something like, “yeah, but what about Tesco or Starbucks? What about Air New Zealand? What about Countdown?” And you’d be right. There are examples where loyalty programmes have helped fuel significant success for their brands. From 1991 to 2010, Tesco achieved a 675 percent growth in its bottom line, as it aggressively pursued one of the world’s best examples of a loyalty programme.
But, it is important to see these examples as outliers in the marketing world. Most of the $50bn plus being spent in the loyalty category is achieving little, and inherent in this fact must be the acknowledgement that we are typically getting things wrong in this space. So why is that? Where are marketers going astray, and what can the truly great programmes tell us about how we can more effectively spend our marketing budgets to achieve loyalty gains?