November 17

Is There a Point in Loyalty Programs?

In my current downtime, I have been broadening my knowledge. For instance, I now know how inconsistent my golf swing is, what video games I enjoy, and how good ‘Community’ the TV show is (Really very good as it happens).

I have also been growing my professional knowledge. Reading books, watching seminars, listening to podcasts - that sort of thing. Recently, I got round to reading “The Long and Short of it” by Les Binet and Peter Field.

For those of you who don’t know it, it’s a seminal marketing report that takes an empirical look at what works in terms of how marketing can drive growth for a brand. Along with Byron Sharp’s “How Brands Grow” and the work of the Ehrenberg-Bass Institute it forms a holy trinity of modern marketing thinking.

It’s a hard read though when you’ve spent your career in CRM or Loyalty like me. I’d highly recommend you review it yourself but it basically posits that emotional loyalty to brands is essentially a myth and:

….that behavioural loyalty levels do not differ between brands in a category, except to a small degree, in an entirely predictable way determined by the relative size of the brands.

Loyalty is a misnomer

I have been lucky enough to run, create, advise on and launch Loyalty / Reward programs in the past including the GAME Reward Card, Gamestation Elite, and mymacca’s in Australia. Despite that, I have never believed in the idea of what I would describe as true loyalty being driven by these programs — an emotional attachment to a brand that means customers forsake all others. Anyone who has worked with me knows I even hate the term loyalty program and much prefer reward program.

Image of GAME Reward card app

That’s because these programs are based on the psychological concept of Operant Conditioning — the idea that behaviour which is followed by a reward (a positive reinforcer) is more likely to recur. Think Pavlov and his dog.

Whilst that operant conditioning can to some degree “buy” transactional loyalty, it only really has an effect if everything else between you and a competitor offering is relatively equal.

GAME is not the cheapest for example and the idea of 1 or 2% back in points is not that appealing when the price is 5 or 10 quid less competitive. You wouldn’t travel 10 miles further just to use your Tesco Clubcard if there was a Sainsburys just down the road — convenience trumps a small sum of points.

Loyalty is hard to prove

The other problem is that any transactional loyalty is bloody hard to prove. It’s not like there’s a parallel universe somewhere where your loyalty program does not exist so that you can compare the effects. I mean you can run a trial before launch (and you should) but once it’s live its gets very hard to prove.

I’ve seen data that shows customers who are members are worth more than those who aren’t as proof of value. But beware — it doesn’t prove that customers who join your program will spend more. It just shows that people who like your brand and spend a lot will join a program that gives them a benefit.

What’s the point in having a program?

There are other benefits to a program that are missed in the debate about the efficacy of loyalty programs. I was shown a model years ago by the lovely people at 5One which I have found useful to this day in terms of showing the value of a reward program beyond the idea of operant conditioning so I thought I’d share it.

The Effects model

Effects model diagram

The Marketing Effect

This one is pretty simple. If you have individualised transactional data on your customer’s purchases you can create personalised, relevant communication journeys for them — everything from Welcome programs to Next Best Products to Churn prevention. From those you can extract incremental revenue and margin if you do things well — see here for the beliefs I have developed in my career to help you with that.

The Supplier Effect

If you have a program like this you instantly have valuable data that your partners could find hugely useful. Having worked at a video games publisher and video games specialist retailer I can give a good example of what I mean.

Publishers know who’s playing their games down to an incredible degree — what game modes they’re playing, the number of virtual bullets they have fired, how often they hit home and where on their virtual target, your win/loss record and more.

Gamer in headphones

Photo by Fredrick Tendong on Unsplash

But they don’t know is who is buying their games unlike the retailer with the loyalty program. And they also don’t know for certain (outside research) how valuable those customers are, what formats they have, what other games they have bought, what games they have traded in, what they bought in the same transaction as their product and lots more.

This is all hugely useful and, crucially, valuable. It’s possible therefore to monetise this data and become a useful insight tool for suppliers. It also means you can then go one step further and create customer communication journeys to targeted groups of customers based on those insights and charge suppliers to deliver them. Double whammy.

The Trading Effect

Melbourne shopping mall

Photo by Heidi Fin on Unsplash

This one sounds simple but can be a total pain in the arse. Basically it is using insight, derived from loyalty/reward data to drive an improved customer experience on-line and in-store.

Knowing the who, what, when, where, and how of a person’s transactional history is obviously hugely valuable. Aggregate that by thousands or millions of customers and add on some research to get the “Why?” and you have the raw materials for insight that can be deployed to improve your customer’s lives in-store or online. I won’t go into more detail as my last article here focussed on how how to put the horsepower of insight on to the road.

The Loyalty Effect

This is the effect that operant conditioning can have on transactional loyalty as we discussed earlier in the piece. The one that’s bloody hard to prove the value of.

Additional Effects

There can be additional, specific effects that apply to your business. For example, when we built the business case for the launch of the Gamestation Elite, we added in a Trade-in effect driven by the hopes that providing additional points for trading in old games would drive greater penetration of the activity into our customer base.

Another example is Airline programs making money by selling points for huge margins to partners for said partners to use as incentives to buy their products. Credit card companies offering points on usage is a great example of that.

QANTAS credit cards

However, you might also have fewer effects. For example, if you don’t have many suppliers that sell through you — a retailer who only sells their own products for example — then the Supplier Effect is negligible.

The bottom line

The point is this. You can measure Marketing, Trading, and Supplier effects. Some are harder than others to do and some may require control groups and experimental design but it’s entirely doable. If you can make those effects generate incremental revenue that creates a positive ROI then the loyalty effect is the cherry on top (if it even exists).

If you have or are thinking about launching a reward program, be clear about what you expect of it and the benefits that you think it will give you from the ones outlined here. If you are either:

  1. A low purchase frequency business or;
  2. a pure-play on-line business.

I would really think twice about launching a program but if you have high frequency, bricks and mortar stores, lots of suppliers, and an ability to extract decent insight from data then a reward program can create benefits well beyond the potentially flawed idea of generating loyalty.

related posts: