Loyalty in 2023
From a professional perspective, what do you think of when you hear the term "loyalty program"? Chances are that you envision some type of rewards system for customers that is intended to keep them buying for longer. In other words, a customer loyalty program is essentially a customer retention program.
But is that all that loyalty programs could be? Could a loyalty program do more for your brand, stimulating not only retention and wallet share, but also customer acquisition and insight?
Done right, loyalty programs can skyrocket customer lifetime value. Done even better, loyalty programs can take your brand to the next level by directly helping you to increase both mindshare and market share.
Done wrong, however, and they can lower profit margin and actually decrease customer spending, doing little more than bleeding money, time, and opportunity.
So what’s the trick for getting your loyalty program right in the back half of 2023?
First let's talk about what loyalty programs currently are:
At their core, traditional loyalty programs are about finding a way to encourage customers to stay with your brand for a longer period of time by offering rewards in the form of coupons, merchandise, and other products. Effective traditional loyalty programs can accelerate the customer relationship as well, encouraging first and second year customers to act similar to your 10 year customers.
Types of Traditional Loyalty Programs
More often than not, these are what most brands implement early in their journey into loyalty. In short, frequent customers earn points that eventually turn into rewards. Unfortunately, brands tend to over complicate this process and end up losing engagement as customers become frustrated at not being able to understand the value of what they’re earning or how it is they’re even earning it.
A balance between attainable and desirable rewards (a difficult task for most brands) allows you to incentivize continued activity from your customers as they strive to earn the next level of rewards. By using the psychology of gamification, tiered loyalty programs can often keep customers engaged for longer, but the risk is that elusive balance between rewards and the activities needed to earn them.
While the general idea of a loyalty program is to LOWER the barrier between customers and brands, sometimes it can be valuable to put an artificial wall up, one that will reward those who take the active step to with a valuable benefit. Think of Amazon Prime as an example. By paying a fee, Amazon Prime customers not only gain perks unavailable to other customers, they now feel the desire to spend more to justify the annual cost of their membership.
No, we don’t mean trading dollars for something else of financial value. Sometimes a loyalty program can be as simple as finding a philanthropic or sociopolitical goal that strongly resonates with the company’s customers, and allowing those customers' purchases to contribute towards that goal. Native is well known for offering very few discounts, but their loyalty program allows their customers to have trees planted in exchange for their purchases.
Pair your own brand with another which provides value to your customers. Credit cards and airline miles are the most common to do this. Earn points for your purchases and exchange them for flights to Hawaii? Yes please! A primary difficulty with these kinds of programs lies in the cross company logistics, assuming both brands can find offerings of value to both their customer bases.
Earn entries into sweepstakes or contests of various sorts. McDonalds does this with their Monopoly contest each year. The primary issue with these programs is finding the balance between fun and effort. Customers must feel that the process is rewarding in and of itself, which is not an easy task for a brand to accomplish.
An effective traditional loyalty program is a powerful thing to have. A mere 5% reduction in churn can increase profitability by as much as 95%. Thus, a small movement in loyalty and retention can drive incredible results.
At the same time, loyalty programs are expensive to implement and operate. The cost of the technology, the cost of managing the program, and the cost of the discounts and rewards disbursed to consumers all add up to a substantial expense. It's no wonder that, on average, loyalty programs actually fail at growing a company's bottom line, resulting in lowered margins and decreased YOY growth.
So how can you make sure that your brand isn't relegated to the disappointing average? How do you make sure that your loyalty efforts are successful?
For starters, it's important to recognize a simple but critical fact: most loyalty programs are simply not all that they could be. In order to get a higher return on your loyalty efforts, it's crucial that your brand stimulate multiple dimensions of customer value, evolving beyond the limited paradigm of simply trying to stimulate customer retention. Customers can and are eager to do so much more for your brand.
It's 2023–Loyalty Programs Must Evolve
At a high level, a modern customer loyalty effort should serve to predictably boost every single one of the following:
Customer Wallet Share
Most loyalty programs only seek to address the first of these (customer lifetime). If they're broader, sometimes they'll take into account the second (customer wallet share). Still, however, this falls far short of what could and should be happening with your loyalty program. Your loyalty program shouldn't even be focused exclusively on your established customers – in fact, your loyalty program should be a primary driver of customer acquisition for your company, enabling you to expand your market share and overpower your competitors by using your own customers to take theirs through viral word-of-mouth.
In order to boost all of these and ensure that your loyalty efforts are successful, it's important to move your thinking beyond the simple idea of "reward customers for purchasing". Customers were always going to purchase anyhow – that's quite literally what makes them customers. Buy 10 get 1 free isn’t true loyalty; it’s not really even an incentive. If anything, it’s just a discount program, so all that's really happening is couponing in a slightly different form (another topic for another article). In fact, in one study by McKinsey, 52% to 82% of customers who join loyalty programs actually spend less overall after joining due to the impact of the discounts involved.
Simply enough, value exchange between you and your customers must be mutual. Your loyalty efforts can be a massive mover for your brand, but only when it is properly aligned with your long term goals and strategies. Implementing a loyalty program just because you think you should is a surefire way to waste time and money.
How to Drive Value Exchange?
First of all, you need to establish alignment with your customers. Recognize who they are, what they love, and what they are capable of, and align their activity with your company goals and your brand. A good loyalty program needs to serve everyone involved: the customers, the brand, the stakeholders, and even the people who have never heard of you, but will soon.
Second, you must ensure ease of use with regard to your loyalty platform. Someone on your team is going to have to own this strategy, often many people. Not only does the program have to be easy to manage, it has to be easy to explain to the VPs and C-suite in a way that aligns with their strategic planning. And of course, more important than anything else, it has to be appealing for the customer to use or they simply won't use it. A loyalty program that is actually fun and engaging for a customer must go far beyond the simplistic and endlessly recycled process of simply giving them a coupon to and/or for buying something.
Finally, you must reward positive behavior. Your loyalty program should incentivize your customers to take the actions that you want them to. They should know that they’re getting a reward, what the reward is, and how to earn it, all at a glance. The easier or more fun it is to earn, the more likely they are to take the action. Reward-based loyalty programs lie in the gap between the customer’s perceived value of something and your cost to provide it. Innovative loyalty programs take it one step further and take into account the customer's perceived value of their own activities when there’s no dollar amount attached to what you’re asking of them.
Ultimately, the goal is to deepen the relationship between brand and customer, stimulating customers to also be value creators for your brand and not simply value consumers. "Loyalty" as a general concept must evolve beyond the simple perspective of customer retention. Customers today are more interconnected than ever before, allowing them to be tremendously influential over each other and your market at large. Loyalty programs that recognize and utilize that fact are the way of the future, and brands that seek to remain competitive will have no choice but to accept and act on that knowledge.
How to plan for loyalty in today's market
Again, we strongly urge you to begin conceptualizing your customers as value creators, not simply value consumers. Your "Eureka!" moment should have you recognizing that, at scale, your customers are your single most powerful team for helping you accomplish your brand and company goals. With that in mind, consider how you can leverage your customer relationships to help you achieve said goals. And it's important to note that a good and sustainable loyalty program isn't simply a one-way street. Your customers will create massive value for you, but you also create even more value for them, creating an experience that is fun, engaging, and mutually rewarding for brand and customer alike. Additionally, you must find a means to implement a loyalty program that is flexible enough to suit your brand’s specific needs, and adaptable enough to be right there with you seamlessly as your goals evolve. If you want your customers to engage with anything other than their wallets, you need to align a long term vision and, critically, realize that when you do something innovative, you’ll need to bring your customers along for the ride, training them as you train yourself and your staff with an entirely new program and means of interacting.
Lifetime value has traditionally been a function of purchase over time. We propose there’s exponentially more value to your customers than getting them to open their wallets. Their social influence, their insights, the whole of what and who they are in the modern world, all form a much greater picture than simple spending patterns. The Customer Value Trinity should be taken into account for all customer facing activity, but in no place is it more important than loyalty. To get them to act as more than purchasing agents, you have to treat them as more than purchasing agents.
Consider what your customers want from you - Of course they want your current product or service. But what else do they want? Are your customers only looking for discounts? JCPenny tried that… it’s not going well. That’s simply a race to the bottom. Today, customers are more socially aware, harder to please, and motivated by excitement and connection. They want their actions to have meaning in some capacity, so they want yours to have meaning too. In short, they want their relationships with the brands they support to go beyond simply purchasing. And for the sake of your brand's growth and success in an increasingly competitive landscape, so do you. Spend some time with your customers and find out what they want out of the brands they frequent. Find out what they want from YOUR brand, and build a loyalty program that caters to that.