Do Loyalty Programs Work?
McKinsey recently published a study suggesting that the amount invested in loyalty programs doesn’t pay off in terms of growth or profitability [Making Loyalty Pay:Six Lessons From the Innovators]. Surprising? Not really. As I thought about all of the programs I’ve signed up for…and how many cards are sitting unused in a drawer somewhere…it started to make sense.
From airlines to coffee-shops and every purchase level in between, we are bombarded with offers of loyalty programs. They range from a “10th item free” punchcard to elaborate points-based reward programs, and sometimes come with a range of perks and discounts. But do they all really drive loyalty, or do some equate to a complicated discount? If it’s just a discount, there’s a risk: that kind of “loyalty” only lasts so long before the perceived value of the brand is deflated.
I visit Starbucks most days (sometimes twice, when I need “inspiration”). I have attained Gold Level – their highest rank. I swipe my card/app on every visit. By the definition of these programs, I’m “Loyal”. So why is it that, when I’m in Manhattan I will walk 4 or 5 blocks, passing several Starbucks, to reach Gregory’s Coffee? And in Chicago, I make a beeline for an Intelligentsia bar?
Because the Starbucks card isn’t loyalty, it’s a discount. Despite visiting the same store 80% of the time, there is no feeling of special treatment. I have to ask for my identical order each time; there’s no welcome back, no use of my name – although the baristas are all perfectly friendly. Sometimes the coffee is good, sometimes not so much. So my Starbucks “loyalty” is reduced to 1/12 of a free drink – and a refill if I happen to stick around.
At Gregory’s, Intelligentsia and many other independent coffee shops, the product is primary. The coffee is always excellent; the staff are happy, knowledgeable and helpful. And I couldn’t care less that I’m paying an extra 20 cents for the product, or missing my 1/12 discount. If my loyalty were really to Starbucks, wouldn’t I be more inclined to stop at their ubiquitous shops?
McKinsey offers six elements of success for loyalty programs. From smart data usage, to focusing on the most profitable customers, they provide clear business direction on how to optimize the value. But there are two that really ring true for me
Integrate Loyalty into the Full Experience. Although, sadly, the article cites Starbucks as exemplary here, the point is valid. When people have an emotional or experiential attachment to the product or brand, a loyalty program should amplify that attachment – offer genuine and valuable recognition for their affinity to the brand and give reasons to become an informal brand ambassador. Special treatment, invites to exclusive events, access to product designers…. These things generate loyalty. No discount required.
Solve Customer Pain Points. Reward or engender loyalty by making the process easier for your best customers. What are the pet peeves of your frequent customers? And how can you alleviate it just for them? Airlines used to understand this. A high-level frequent flyer gained access to quiet airport lounges and early boarding privileges – alleviating two major grievances when living on the road. But with the advent of credit card memberships, buy-up options and mergers, it now seems that 80% of people “pre-board” a United plane, the lounges are permanently crowded – and so once again we’re left with the “discount” of frequent flyer miles as the main (diminishing) perk.
As with all recognition programs, the key is to understand your goals; really understand your participants’ needs; and then design a program to maximize the value where these two intersect.