Loyalty Programs Don’t Drive Loyalty; Customer Experience Does
Last month I kicked-off a conference with a customer experience management masterclass workshop in which I said that customer loyalty is not the result of a loyalty programs but of great customer experiences. Given it was a loyalty conference attended mainly by loyalty program managers, the statement raised some eyebrows but participants were eager for some recent data by which to compare loyalty programs with their peers’ across industries.
Since then, Forrester published “The State of Loyalty Programs 2013”. I thought the new findings would provide a good occasion to share an updated comparison between loyalty programs and customer experience as drivers of customer loyalty.
In an effort to understand the focus and strategies of loyalty programs, Forrester surveyed 50 loyalty program marketers from multiple industries including retail, travel, financial services and media and entertainment. Not a large sample size but the results, even taken broadly, definitely call into question the effectiveness of loyalty programs and also identified a potential lack of clarity in direction or purpose for many of them.
First, in order to measure their effectiveness, we have to understand what the objectives of loyalty programs are.
In the Forrester study, loyalty marketers stated the top three business objectives for customer loyalty programs are customer retention (70%); customer engagement (64%); and revenue (34%).
These are sensible objectives but they should be those of the entire organization, not of a loyalty program. But let’s assume that they are the goals of the overall organization and that the loyalty program is a strategy to achieve them: is it an effective one at that?
Forrester’s study found that on average, only 45% of customers enroll in loyalty programs and only 35% of them redeem awards. This means about only 16% of the customer base is actually using the loyalty programs. That’s a small uptake. But do they create loyalty? Other research suggests not. Another recent study by Deloitte on travel loyalty programs suggests these are not very effective at all at building loyalty and that customers frequently do business with competitors. This is consistent with an earlier 2011 COLLOQUY Cross-Cultural Loyalty Study across industries in which only 17% of U.S. respondents and 12% of Canadian respondents say that loyalty programs are “very influential” in their purchase decisions.
From these recent findings, it appears loyalty programs are struggling to achieve the stated goals of retention, engagement and revenue. On the other hand these are all benefits that companies who focus on the customer experience enjoy.
Numerous studies by Forrester and others consistently show that customer experience strongly correlates to loyalty. Customer experience leaders see a clear advantage over customer experience laggards in customers’ willingness to buy more, reluctance to take their business elsewhere and their likeliness to recommend the organization. Research has also shown that better customer experience drives millions in annual revenue across industries by increased purchases, lower churn and new sales driven by word of mouth. Not only that, but other studies have shown that customers are even willing to pay more for a better customer experience.
Clearly a focus on customer experience improvements is more effective at accomplishing customer behavior and financial goals than loyalty programs in and of themselves are.
How important was customer experience to the loyalty marketers in the Forrester study? Only 14% cited customer experience as an objective. And in spite of this, 50% of respondents saw their loyalty budgets rise in the past 2 years.
Interestingly, according to Forrester, for nearly 60% of firms loyalty is considered a top three strategic priority and 56% of marketers agreed that loyalty has support from all parts of the organization.
Looking at it another way, that means that for almost half of the companies, loyalty is not a priority. That makes you wonder why they keep a loyalty program at all, considering loyalty programs can be costly to manage and increase liability and accounting complexity. Often organizations will cite differentiation from competition, but in many industries (take airlines and banks as examples), loyalty programs are the norm and are almost identical between competitors.
But for those firms who place loyalty high in their priorities, the question is whether a loyalty program is the best way to achieve it.
In the next article, I’ll explain the main issues with loyalty programs and, if they must have one, what companies can do to improve their loyalty program ROI. Much of it has to do with their integration in the overall organization’s customer experience. After all, loyalty programs, as all other touch-points with organizations, are part of the overall customer experience and as such should be integrated in organizations’ overall customer experience management framework.
Tagged: | Customer Experience, Loyalty, Loyalty Programs
David Jacques is Founder and Principal Consultant of Customer input Ltd and a pioneer in the field of Customer Experience Management. He has created the first Framework that brings together cohesively every aspect of Customer Experience Management. He is also passionate about having an in-depth understanding customer values to create emotionally-engaging customer experiences not only at individual interactions but also seamlessly between them.
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Some companies confuse a loyalty program with a marketing program. Giving someone a free sandwich after ten visits doesn’t make a customer loyal. (NOTE: The sandwich is just a metaphor for any perk a company gives away in exchange for frequent visits or use.) Give the customer an excellent experience every time and you won’t need to give away the free sandwich. Loyalty is an emotion that ties the company to the customer, and that comes from the way the customer is treated.
Hi Shep, that’s true, thanks for the comment. A real loyalty program (one that aims at creating emotionally-bonded customers who return) could be the name given to a company-wide customer experience management program. But to most companies Loyalty Program is a reward system (often a points one) and operates somewhat independently, is not integrated in the organizations’ overall experience. I think this will change as the need for seamless interactions between channels is getting better understood. And eventually the best loyalty programs will actually not even be noticeable, they will just be integrated seamlessly.
I came across this article this morning after a few shares on LinkedIn. Really enjoyed it – bookmarked your blog into my favorites!
Totally agree. The term ‘Loyalty Program’ has become synonymous with a commoditised points based ‘me too’ program. Loyalty or ‘creating more, long term, valuable relationships with customers’ is the business goal and if some kind or mechanic that uses a value exchange to affect customer behaviour is going to work – it MUST be part of a broader customer experience initiative. A retailer who thinks that they can simply ‘buy’ their customer’s hearts with points could may well get stuck with a margin eroding program that drives no definable benefit – they need to think how it fits with a broader strategy.
I agree with most of the points. however, when the product/service are commodities or possoes very little differences, the loyalty program can play a role on deciding where you want to spend your dollars. Most of the domestic flight in the US are quite miserable (yes I know about Virgin America and Southwest) but the fact is that I can’t see a lot of differences between American, United or Delta. So, at the end, I concentrate my purchases where I have my loyalty points.In this scenario (and with cell phone carriers as well, for example) the loyalty program can be a good barrier to avoid shifting to a competitor and generate repeated purchases..
As in most things in life and business, loyalty programs have never and never will be an end to the means. They’re simply part of (perhaps the final spice) the sauce. There are good basic business reasons to implement them but I think the point of your article can be quickly narrowed to the question of what comes first: the chicken or the egg?!
Loyalty programs have historically been moderately successful at generating “loyal like behavior) which is very different from customer loyalty (see Will’s comments above). As loyalty managers have started to understand this, they are focusing on delivering an enhanced customer experience based on customer value; not a bad strategy as far as it goes. Unfortunately it does not go very far, because in the case of airlines and hotels, very often in order to develop an “enhanced” experience for high value customers, they need to “dis-enhance” the experience for everyone else. Known in the business as decontenting, this strategy is the main driver of the downward spiral in customer service across the board.
There are so many good points mentioned in these comments. Definitely a me too loyalty program is not the overriding factor when a customer decides where to shop. Instead, It takes a differentiated and compelling customer experience that provides a true value proposition that is clearly understood and appreciated by the customer to keep them coming back. Not the loyalty program iits self.
In my view there are two good reasons why one would consider implementing a loyalty type program however. The first would be to supplement an already great customer experience. A program that enhances and reinforces a great customer experience can effectively contribute to the overall effort of customer retention. When a program is used to emphasize key elements of the value proposition a loyalty program then becomes a valuable part of the overall experience and not a me to program. Think about how the genius bar at the apple store contributes to the overall experience.
A second reason and i believe the reason that most programs get started is because companies are trying to find a way to identify and segment customers using transaction information. In fact this is probably the reason that many programs become me too programs. The focus is on tracking customer shopping information and then using it to increase the customer spend. So in the end the so called loyalty program is not really focused on creating an emotional connection with the customer which is what it takes to create a closer loyal bond with the customer. Instead its really about encouraging that next purchase. And that usually is brought about by some kind of sale offer or discount.
So in the end most programs aren’t designed to create true customer loyalty but are merely put in place to buy customer information and use it to increase sales.
Don’t get me wrong. I am not saying these kinds of programs are bad thing. Every business needs to know who their customers are and how to best serve their needs. And implementing one of these kind of program is often the only way a comapny can gain the needed information and insights. In the end this kind of program that can help capture the needed data can be very beneficial to both customer and company but only if the data is used in the right way (used to create a better customer experience).
My point here is simple. You can’t buy loyalty. It has to be earned. One should not expect the use a customer data collection program alone to create true customer loyalty. As pointed out by David and others here, loyalty is built on offering a great customer experience that is appreciated by the customer. Over time this is what creates true loyalty. A data collection program if integreated into a loyalty building experience can be a useful part but only as a supplement to the overall experience. Otherwise the so called loyalty program is really nothing more than an advertising vehicle meant to fill the customers inbox and mailbox with me to offers. How does one build loyalty with that?
Excellent article David, and some great comments following.
In my experience many executives have compartmentalised ‘loyalty’ into defined customer loyalty programs, affinity programs or customer service programs. And ne’er the twain shall meet. This keeps marketers and senior execs trapped by boundaries that are not set in nature but in organisational processes.
Look across those boundaries and you can start creating a customer loyalty program that authentically connects with customers in a holistic and even reciprocal way.
Awakening businesses to those boundaries that have been taken for granted might be the first step. Which will lead to your concept of an integrated customer experience management program.
Good article. I’ve found that Loyalty Programs have plateaued and companies have shifted more to Customer Retention programs focusing on increasing touchpoints and putting more emphasis on building a a positive customer experience. They are using customer’s positive responses and integrating within their online mediums, Facebook, Twitter, website videos, etc and enhanced positioning based on customer driven perceptions.