Featured Insight

Four key trends are converging to reshape the loyalty marketing world in 2014. Today’s consumers are demanding a variety of choices via fast and seamless global, online and in-store experiences. The rise of the peer-to-peer economy threatens to bypass traditional businesses. Shoppers increasingly recognize that sharing their data should earn them something valuable in return, but loyalty marketers are still fixated on discounts. The resulting commoditization of the value exchange demands an increased emphasis on surprise and delight for program differentiation.

These four trends are driving rapid change, and the loyalty programs that will win big in 2014 are those who mobilize now. Those that don’t respond will fall far behind.

Download this whitepaper to discover the converging trends that could potentially threaten your business this year and beyond.

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A recent McKinsey study of 55 North American and European companies with loyalty programs looked at the ways those programs pay off — or don’t. The study found that companies with a high focus on loyalty, measured either through loyalty spend or visibility of the program, were underperforming in revenue growth and weighted average EBITDA margin, compared to companies that placed a lower priority on loyalty programs.

Naturally, we took notice, especially when the study was highlighted in a McKinsey article that dramatically stated that loyalty programs “may in fact destroy value for program owners.”

But while some of the statistics, in isolation, do not sound like the best news for loyalty practitioners, they don’t tell the whole story of the McKinsey study. We found a few issues to challenge:

  • The study doesn’t detail the age of the loyalty programs. Just because the companies studied are established businesses, that doesn’t necessarily mean they have established loyalty programs. Many well-known companies still have nascent programs; Walgreens, for instance, just recently launched its loyalty program.
  • There is no recognition of the fact that for many new programs, success takes time. The newer the program, the less time loyalty practitioners have had to collect data, analyze it, strategize, and execute impactful changes. The time horizon simply has not been long enough for many newer programs to realize their latent potential. 
  • As a nod to loyalty success, the study points out that that companies with a high priority on loyalty actually outperform their low-priority peers from a market capitalization perspective.

Why is the market confident about the future profitability of companies that are more focused on their loyalty programs? In a word, data.

Loyalty programs are some of the best means to collect and act on customer data. In fact, customer visibility and opt-in for retail in particular would be challenging if not for loyalty programs. And when it comes to smart use of data, McKinsey’s recommendations align with ours:

Use loyalty data to differentiate between customers. Too often, loyalty programs treat every member the same. Instead, companies can and should allocate loyalty reinvestment towards customers with the most potential. Customer data generated by a loyalty program, especially when complimented with external data sources or proxies, can identify these high potential customers and customize their experience. Armed with this insight, companies can nurture these most valuable of relationships accordingly.

Apply customer insight beyond marketing campaigns. McKinsey’s exhortation to “Use the data” focuses specifically on data’s applications to marketing and messaging communications, but that data gives a company the power to think of loyalty as part of the overall business strategy. In fact, this is where the underperforming companies in McKinsey’s study can reach their full potential – in mining customer data to find value beyond the marketing department. Enterprise-wide decision-making based on customer insight has the capability to be the driver for company value (and help justify superior marketing caps).

Focus on customer engagement over acquisition. Despite the growing popularity of loyalty programs among U.S. consumers, we agree with McKinsey’s critique that many programs today are not generating the business impact that they could. Too many programs are just relying on discounts instead of finding innovative ways to engage customers. Recent COLLOQUY research indicates that from 2008 to 2012 the number of loyalty program memberships grew by 10%, but activation rates have simultaneously declined. Member acquisition is a wasted effort unless an equal or greater effort is placed on driving membership engagement. The true value of a loyalty program grows from making sure members understand a program and its benefits, leveraging the program to drive relevant communications, and focusing on increasing share of wallet by analyzing loyalty program data.

Customer data should underpin not only a company’s loyalty solutions but also its Merchandising and Customer Experience strategies. These three elements — Loyalty, Merchandising, and Customer Experience— are the three pillars of a solid customer engagement strategy. McKinsey has pointed out the pitfalls of considering loyalty programs in isolation, but loyalty is not just a program —  it is a platform from which all other decisions can and should be made.

If the history of loyalty marketing should teach us one thing, it is that ubiquity does not breed affinity.

This lesson was amplified in a recent story in Entrepreneur, which points out that despite the prevalence of loyalty program membership (2.65 billion in the U.S. alone, according to COLLOQUY), few are managing to accomplish what they set out to do. Seventy-seven percent of loyalty programs that focus on awards alone fail within the first two years, Pete Maulik, managing partner at the consultancy firm Fahrenheit 212, wrote in the piece.

The root of this problem, according to Maulik, is too many operators overlook the difference between human and corporate loyalty: “… the corporate interpretation of loyalty bears almost no resemblance to the well understood – and highly aspirational – feeling that people everywhere have for their friends, family, God, country, football team and dog.”

Until a brand introduces elements of human loyalty into the corporate loyalty model, he concluded, it will not develop a sense of brand affinity among consumers.

I generally agree – programs, beyond being transactional, need to connect emotionally. If organizations only think of loyalty in the form of a program, then they overlook the long-term goal, which is to attain an emotional connection between the customer and the brand. This connection is what cultivates loyalty and ensures that the customer will continue to frequent that brand, even in the face of meaningful competitive alternatives.

Part of doing this involves loyalty program design and approach, but it also requires that the program operator think contextually about its customers and how they use the brand’s product and services. When an organization successfully uses its data to personalize the customer experience, it stands a better chance of connecting with that customer at a deeper, more complex level.

In his article, Maulik implies that rewards may be the root of evil, but there’s no question that in today’s hyper-competitive environment, marketers need to consider a number of short- and long-term consumer motivators as part of their engagement strategy.

Whether it is pricing, sales strategy, promotional programs or your basic loyalty approach (points or benefits based), these motivators should fit the desired brand experience. In fact, they should reinforce and enhance that position, rather than simply act as a me-too strategy driven by the presence of loyalty programs among competitors.

The loyalty operators we will read about in the next decade are those that will give their ambitions the opportunity to explore the full spectrum of customer engagement tools – either self created or at their disposal. For those who aspire to be among them – whatever you do, don’t forget that capturing customer information can only enhance your opportunity to be a better, more relevant marketer. That is the most direct path to emotional loyalty.

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Loyalty Marketing Fundamentals
COLLOQUY/DMA Loyalty Marketing Workshop, Chicago, IL
Jeff Berry